Thursday April 18, 2024

6.4.4 Testamentary Lead Trust

Testamentary Lead Trust

Calculating the Charitable Tax Deduction: To illustrate how the deduction is calculated, consider Jane Donor who creates a testamentary family four-layer lead trust on June 1, 2005.

A charitable lead trust (CLT) is a powerful planning strategy for moving assets through to heirs. However, parents often raise the question: How long should parents delay the inheritance?

Calculating the Charitable Tax Deduction

Four-Layer Testamentary Lead Trust without Family Limited Partnership


Charitable Lead Annuity Trust
Donor:	Jane Donor	Gift Amount:	$1,000,000	Gift Date:	1/31/2018

Beneficiary:	Family	Term of Years:	5

Payment Frequency:	Annually	Annuity Trust Initial Percentage		6.0%

(Payments at End of Selected Period)

(A) Annuity Trust Payout:

$60,000

(A)

AFR: 2.4%

(B) Factor:

4.6592

(B)

Term of Years: 5

IRS Pub. 1457, Table B

(C) Adjustment for Time of Payment:

1.0000

(C)

(IRS Pub. 1457, Table K)

End of Period
1	Annual	1.0000
2	Semi-Annual	1.0060
3	Quarterly	1.0090
4	Monthly	1.0110

(D) Adjusted Factor:

4.6592

(D)

Line(B) x Line(C)

(E) Present Value of Annuity:

$279,552

(E)

Line(D) x Line(A)

(Charitable Deduction)

(F) Amount Transferred to Trust:

$1,000,000

(F)

(G) Line(F) Less Line(E):

$720,448

(G)

PRESENT VALUE OF REMAINDER INTEREST

(Taxable Transfer) [above refers to one five-year trust; below refers to three separate trusts, one of which is calculated above, not "layers"]

	Term of Years	Char. Ded.	Taxable Transfer
First Layer	5	$279,552	$720,448
Second Layer	10	$527,850	$472,150
Third Layer	15	$748,374	$251,626

The deduction worksheet illustrates the required information under Treasury rules for calculating a deduction. The top section lists the donor, gift amount, gift date, noncharitable beneficiary, term of years, payment frequency and initial trust payout percentage.

The second box shows the steps taken to determine the charitable tax deduction for Jane's gift of the first layer. The specific steps of the first trust layer are identified in Lines (A) through (G).

The third box lists the charitable deduction for the first, second and third layers, as they are calculated using the same methodology as the first layer.

(A) To calculate the amount the annuity trust will pay, the annuity trust payout percentage is multiplied by the fair market value of the property transferred to the trust. The annuity trust payout of 6% is multiplied by the $1,000,000 gift, which produces an annuity trust payout of $60,000. This means that charity will receive an annuity of $60,000 annually, regardless of the value of the trust in any given year. The AFR for the current month or either of the two prior months may be used to determine the charitable deduction under Sec. 7520. For a lead trust, the lowest AFR produces a greater deduction, so Jane's gift planner selects a 2.4% AFR.

(B) The annuity factor must be determined to calculate the deduction. The annuity factor for a term of years CLAT is provided in IRS Pub. 1457, Table B. Using the AFR as the interest rate (2.4%) and finding the term of years (5) along the left side of the table, the table shows an annuity factor of 4.6592.

(C) The next step is to determine the time adjustment factor. An adjustment must be made based on the payment frequency selected. The time adjustment factor is found in Pub. 1457, Table K by locating the appropriate AFR (2.4%) along the left side of the table and using the corresponding payment frequency (annually). Here, the time adjustment factor is 1.0000.

(D) The time adjustment factor is multiplied by the annuity factor to calculate the adjusted annuity factor. In the worksheet above, Line (B) is multiplied by Line (C). The annuity factor of 4.6592 is multiplied by Jane's adjustment factor of 1.0000 to arrive at an adjusted annuity factor of 4.6592.

(E) Once the adjusted annuity factor is known, the present value of the annuity must be determined. The fair market value of the property transferred to the annuity trust is multiplied by the adjusted annuity factor. Line (D) is multiplied by Line (A). The adjusted annuity factor of 4.6592 is multiplied by the $60,000 annuity trust payout to produce a present value of $279,552. This amount is also Jane's estate's charitable deduction.

(F) The amount transferred to the trust is the amount of cash or the fair market value of the property contributed. The funding amount of Jane's CLT is $1,000,000 cash.

(G) Finally, the present value of the annuity is subtracted from the fair market value of the annuity trust property. Line (E) is subtracted from Line (F). The resulting number equals the charitable deduction. The $1,000,000 funding amount less the $279,552 present value produces a remainder interest to family of $720,448.

The second and third layers are calculated the same way because they are also annuity trusts. However, the fourth layer is calculated with a different formula, because it is a unitrust. Note also that the factor come from Pub. 1458, rather than Pub. 1457, because this is a unitrust.

Charitable Lead Unitrust
Donor:	Jane Donor	Gift Amount:	$1,000,000	Gift Date:	1/31/2018
Beneficiary:	Family	Term of Years:	20
Payment Frequency:	Annually	(Payments at End of Selected Period)

(A) Unitrust Percentage:	6.0%	(A)

(B) Factor:	0.976562	(B)

IRS Pub. 1458, Table F
AFR of the Month: 2.4%
(C) Factor for Adjusted Payout Rate	5.859	(C)

(D) Nearest Table Rate Below (C)	5.8%	(D)

(E) Factor at Line (D) Rate	0.302704	(E)

IRS Pub. 1458, Table D
(F) Nearest Table Rate Above (C)	6.0%	(F)

(G) Factor at Line (F) Rate	0.290106	(G)

IRS Pub. 1458, Table D
(H) Line (E) Minus Line (G)	0.012598	(H)

(I) Line (C) Minus Line (D)	0.059%	(I)

(J) Line (I) Divided by 0.2%	0.295	(J)

(K) Line (H) Times Line (J)	0.003716	(K)

(L) Line (E) Minus Line (K)	0.298988	(L)

(M) Line (L) Times Gift Amount	$298,988	(M)

Present Value Remainder - Taxable Transfer
(N) Gift Amount Less Line (M)	$701,012	(N)

PRESENT VALUE OF INCOME INTEREST
(Charitable Deduction)

	Term of Years	Char. Ded.	Taxable Transfer
Fourth Layer	20	$701,012	$298,988

Paragraphs (A) through (N) below explain the steps taken to determine the charitable tax deduction for Jane's gift of the fourth layer.

(A) The unitrust payout percentage is shown here. Jane has chosen 6.00%.

(B) The factor for the adjusted payout rate is found in Pub. 1458, Table F. The AFR for the current month or either of the two prior months may be used to determine the charitable deduction under Sec. 7520. For a lead trust, a lower AFR will produce a greater deduction, so Jane's gift planner selects a 2.4% AFR. Locate the table corresponding to the 2.4% AFR selected. The left half of the table contains the number of months between the valuation and the first payout. Locate the proper period in this box. The right side of the table corresponds to the selected payment frequency. Find the frequency selected (annually). The number that conforms to both the valuation and the frequency is the Table F factor (0.976562).

(C) The adjusted payout rate is calculated by multiplying the unitrust percentage shown in Line (A) by the adjusted payout rate factor shown in Line (B). For Jane's unitrust, multiply 6.00% by 0.976562 to produce 5.859%.

(D) Pub. 1458, Table D lists the factors for the remainder interests in a unitrust based on a term of years. The IRS publishes a factor in Table D only for every 0.2% increments. Accordingly, Table D does not list an adjusted payout rate of 5.859%. Therefore, the nearest table rate below 5.859% must be found. Locate the appropriate chart in Table D using the adjusted payout rate of 5.859%. The nearest rate below 5.859% is 5.8%. This number is found in the top row of the chart.

(E) Once the nearest rate below has been found (5.8%), locate the term of years (20) in the years column along the left side of the chart. Here, the corresponding factor under a 5.8% payout for 20 years is 0.302704.

(F) Pub. 1458, Table D lists the factors for the remainder interests for a term certain. The IRS publishes a factor in Table D only for every 0.2%. Accordingly, Table D does not list an adjusted payout rate of 5.859%. Therefore, the nearest table rate above 5.859% must be found. Locate the appropriate chart in Table D using the adjusted payout rate of 5.859%. The nearest rate above 5.859% is 6.0%. This number is found in the top row of the chart.

(G) Once the nearest rate above has been found (6.0%), locate the term of years (20) in the years column along the left side of the chart. Here, the corresponding factor under a 6.0% payout for 20 years is 0.290106.

Next, the interpolation between 5.8% and 6.0% must be determined. Lines (H) through (K) compute the interpolation for the 5.859% rate.

(H) The factor for the 6.0% rate (0.290106) is subtracted from the factor for the 5.8% rate (0.3002704) to produce 0.012598. In short, Line (G) is subtracted from Line (E).

(I) Next, the 5.8% nearest below rate shown in Line (D) is subtracted from the 5.859% adjusted payout rate shown in Line (C) to give the range between the two rates of 0.059%.

(J) Because Table D shows rates only in intervals of 0.2%, Line (I), or 0.059%, is divided by 0.2% to produce the factor differential percentage of 0.295.

(K) To find the interpolation result, Line (H) (0.012598) is multiplied by Line (J) (0.295). The result is 0.003716.

(L) Subtracting the interpolation result of 0.003716 shown in Line (K) from the factor from the nearest rate below shown in Line (E) produces an IRS deduction factor of 0.298988.

(M) The present value of the remainder interest can then be calculated by multiplying the IRS deduction factor of 0.298988 by the $1,000,000 gift amount. The resulting present value of the remainder interest, or today's value of the remainder interest to family based on the 20-year term of the trust, is $298,988.

(N) Finally, the present value of the income interest, which is the same as the charitable deduction, can be calculated by subtracting the $298,988 present value of the remainder interest from Jane's original gift of $1,000,000. Thus, Jane's estate will receive a charitable deduction of $701,012 in the year the trust is created.

The above information can be found in the charitable deduction worksheet accompanying the testamentary lead trust proposal in Crescendo Software Program 59. An explanation of each item can be found in the professional advisor text.

Generation-Skipping Transfer Taxes for Four-Layer Testamentary Lead Trust without Family Limited Partnership


Charitable Lead Unitrust
Generation-Skipping Transfer Taxes
Donor:	Jane Donor	Gift Amount:	$1,346,855	Gift Date:	1/31/2018

Distribution Year:	2038	Return %:	7.50%	Pmt. %:	6.00%

(A) Percentage of Trust Given to:	100.00%	(A)

Grandchildren or Skip Persons
(B) GSTT Initial Trust Corpus:	$1,000,000	(B)

Line (A) Times Gift Amount
(C) Charitable Estate Tax Deduction	$701,012	(C)

(From Deduction Worksheet)
(D) Taxable Transfer	$298,988	(D)

(E) Allocated GSTT Exemption	$298,988	(E)

GSTT Exemption $11,200,000
(F) Remaining GSTT Exemption	$10,901,012	(F)

(G) Applicable Fraction (Lines E/(B-C))	1.000000	(G)

(Exemption/(Trust-Char. Ded))
(H) Inclusion Ratio (1-App. Fraction)	0.000000	(H)

(I) Maximum Transfer Tax Rate In 2038	40.0%	(I)

(J) GSTT Rate (Line (H) x (I))	0.00%	(J)

(K) Estimated Final GSTT Corpus	$1,346,855	(K)

After 20.00 Year Term
(L) Estimated GSTT	$0	(L)

(M) Estimated Principal to Family	$1,346,855	(M)

(Total Distribution Minus Line (L))

Term	Exemption	Ex. Remain	GST Tax	Family
20	$298,988	$10,901,012	$0	$1,346,855

Note: Unitrust Inclusion Ratios are calculated at the inception of the trust (See Sec. 2642(a)). GSTT is paid at termination based upon the value at that termination date. This analysis calculates corpus and GSTT based upon estimated earnings rate.

Paragraphs (A) through (M) below explain the steps taken to determine the generation-skipping transfer taxes (GSTT) for layer four of Jane's four-layer lead trust.

(A) The percentage of trust assets given to grandchildren or skip persons is shown here. Jane has chosen to give 100% of the trust to her grandchildren after the 20-year term for the fourth layer expires.

(B) To determine the amount of the initial trust, Line (A) is multiplied by the initial trust corpus used to fund the fourth layer. Thus, 100% multiplied by $1,000,000 produces $1,000,000.

(C) Line (C) shows the charitable estate tax deduction for the fourth layer unitrust calculated in the prior worksheet in Line (N). Here, Jane's charitable deduction for the unitrust is $701,012.

(D) The taxable transfer is simply the amount calculated in the prior worksheet in Line (M). Here, Jane's taxable transfer, or the present value of the remainder interest given to family, is $298,988.

(E) The allocated GSTT exemption is determined by using the lesser of the amount shown in Line (D) above or the GSTT exemption for the year of the gift. Jane's trust is funded in 2018, so the GSTT exemption is $11,200,000. Here, $298,988 is less than $11,200,000, so $298,988 is used.

(F) To calculate the remaining GSTT exemption, the amount shown in Line (E) above is subtracted from the GSTT exemption for the year of the gift. Jane's trust is funded in 2018, so $298,988 is subtracted from the 2018 GSTT exemption limit of $11,200,000. $11,200,000 less $298,988 produces $10,901,012. This means that Jane may still give $10,901,012 to grandchildren or skip persons without incurring a generation-skipping transfer tax.

(G) The applicable fraction is determined by dividing the allocated GSTT exemption in Line (E) by the difference of (C) minus Line (B). Here, $298,988 is divided by $1,000,000 less $701,012. In other words, $298,988 is divided by $298,988 to produce 1.

(H) The inclusion ratio is calculated by subtracting the applicable fraction from 1. Here, 1 minus 1 is 0.

(I) The maximum transfer tax rate in 2038 is estimated to be 40%. Line (I) lists this as a decimal, or 0.55.

(J) The GSTT rate is calculated by multiplying the inclusion ratio shown in Line (H) by the maximum transfer tax rate shown in Line (I). Thus, 0 multiplied by 0.4 is 0.

(K) The estimated final GSTT corpus after the 20-year term is calculated by multiplying the value of the corpus at the end of the selected term (20) by the percentage to grandchildren (100%) shown in Line (A) to produce a result of $1,346,855. This amount is calculated on the Lead Trust Principal and Income Growth worksheet.

(L) The estimated GSTT is calculated by multiplying the estimated final GSTT corpus shown in Line (K) by the GSTT rate shown in Line (J). Thus, $1,346,855 multiplied by 0 is 0.

(M) Last, the estimated principal to Jane's family is calculated by subtracting the estimated GSTT in Line (L) from the estimated final GSTT corpus shown in Line (K). Here, $1,346,855 less 0 is $1,346,855. Therefore, Jane's family will receive an estimated $1,346,855 after the 20-year term.

Four-Layer Testamentary Lead Trust with Family Limited Partnership

While Crescendo incorporates information from IRS Pub. 1457 in its software, it is helpful for gift planners to know how the deduction calculation would be performed if they have to look up all factors. To illustrate this, consider Jane Donor who died on January 31, 2018 creating a testamentary family four-layer lead trust with a family limited partnership on January 31, 2018. The value of the partnership used to fund the annuity is $4,000,000, but will be discounted by 30% because it is a family limited partnership and thus, there is a lack of marketability. The value used to fund the four layers is $4,000,000. The first layer, an annuity trust funded with $1,000,000, is for a term of three years, has a payout rate of 6.0% and will make annual payments. The second layer, an annuity trust funded with $1,000,000, is for a term of six years, has a payout rate of 6.0% and will make annual payments. The third layer, an annuity trust funded with $1,000,000, is for a term of nine years, has a payout rate of 6.0% and will make annual payments. The fourth layer is a unitrust funded with $1,000,000, is for a term of 12 years, has a payout rate of 6.0% and will make annual payments. As mentioned above, each of the $1,000,000 lead trusts will be discounted by 30%. Thus, while $1,000,000 will be entered for each lead trust, the 30% discount will show the trust value at $700,000. (The Crescendo program does the discounting automatically when the FLP discount option is selected. It will also adjust the payment rate appropriately.) Using this information and IRS Pub. 1457, the charity's gift planner creates the following charitable deduction worksheet.


Charitable Lead Annuity Trust
Donor:	Jane Donor	Gift Amount:	$700,000	Gift Date:	1/31/2018

Beneficiary:	Family	Term of Years:	3

Payment Frequency:	Annually	Initial Trust %:	8.57 %

Annuity Trust Initial Percentage:

8.57%

(A) Annuity Trust Payout:

$59,990

(A)

AFR: 2.4%

(B) Factor:

2.8616

(B)

Term of Years: 3

IRS Pub. 1457, Table B

(C) Adjustment for Time of Payment:

1.0000

(C)

(IRS Pub. 1457, Table K)

End of Period
1	Annual	1.0000
2	Semi-Annual	1.0060
3	Quarterly	1.0090
4	Monthly	1.0010

(D) Adjusted Factor:

2.8616

(D)

Line(B) x Line(C)

(E) Present Value of Annuity:

$171,667

(E)

Line(D) x Line(A)

(Charitable Deduction)

(F) Amount Transferred to Trust:

$700,000

(F)

(G) Line(F) Less Line(E):

$528,333

(G)

PRESENT VALUE OF REMAINDER INTEREST

(Taxable Transfer)

	Term of Years	Char. Ded.	Taxable Transfer
First Layer	3	$171,667	$528,333
Second Layer	6	$331,541	$368,458
Third Layer	9	$480,436	$219,564

The deduction worksheet illustrates the required information under Treasury rules for calculating a deduction. The top section lists the donor, gift amount, gift date, charitable beneficiary, term of years, payment frequency and initial trust payout percentage.

The second box provides the steps taken to determine the charitable tax deduction for Jane's gift of the first layer. The specific steps of the first trust layer are identified in Lines (A) through (G).

The third box lists the charitable deduction for the second and third layers, as they are calculated using the same methodology as the first layer.

(A) To calculate the amount the annuity trust will pay, the annuity trust payout percentage is multiplied by the fair market value of the property transferred to the trust. Because Jane has selected a family limited partnership lead trust, the assets will be discounted and then the units will be transferred to the lead trust. The growth and income will be based upon the discounted lead trust values. The program automatically adjusts the payout percentage to match the payout for the non-discounted funding amount. Here, Jane has chosen 6.00% on a $1,000,000 annuity trust amount. Therefore, the payout would be $60,000. In order to pay the same amount on a $700,000 annuity trust, the payout percentage is adjusted to the nearest hundredth of a percent, or 8.57%, to produce a payout of $59,990. This means that charity will receive an annuity of $59,900 annually, regardless of the value of the trust in any given year. The AFR for the current month or either of the two prior months may be used to determine the charitable deduction under Sec. 7520. For a lead trust, the lowest AFR produces a greater deduction, so Jane's gift planner selects a 2.4% AFR.

(B) The annuity factor must be determined to calculate the deduction. The annuity factor for a term of years CLT is provided in IRS Pub. 1457, Table B. Using the AFR as the interest rate (2.4%) and finding the term of years (3) along the left side of the table, the table shows an annuity factor of 2.8616.

(C) The next step is to determine the time adjustment factor. An adjustment must be made based on the payment frequency selected. The time adjustment factor is found in Pub. 1457, Table K by locating the appropriate AFR (2.4%) along the left side of the table and using the corresponding payment frequency (annually). Here, the time adjustment factor is 1.0000.

(D) The time adjustment factor is multiplied by the annuity factor to calculate the adjusted annuity factor. In the worksheet above, Line (B) is multiplied by Line (C). The annuity factor of 2.8616 is multiplied by Jane's adjustment factor of 1.0000 to arrive at an adjusted annuity factor of 2.8616.

(E) Once the adjusted annuity factor is known, the present value of the annuity must be determined. The fair market value of the property transferred to the annuity trust is multiplied by the adjusted annuity factor. Line (D) is multiplied by Line (A). The adjusted annuity factor of 2.8616 is multiplied by the $59,900 annuity trust payout to produce a present value of $171,667. This amount is also Jane's estate's charitable deduction.

(F) The amount transferred to the trust is the amount of cash or the fair market value of the property contributed. The funding amount of Jane's CLT is $700,000 cash.

(G) Finally, the present value of the annuity is subtracted from the fair market value of the annuity trust property. Line (E) is subtracted from Line (F). The resulting number equals the value of the gift to Jane's family. The $700,000 funding amount less the $171,667 present value produces a remainder interest to family of $528,333.

The second and third layers are calculated the same way because they are also annuity trusts. However, the fourth layer is calculated with a different formula, because it is a unitrust. Note that the calculation used Pub. 1458, rather than Pub. 1457, because it is a unitrust.


Charitable Lead Unitrust
Donor:	Jane Donor	Gift Amount:	$700,000	Gift Date:	01/31/2018

Beneficiary:	Family	Term of Years:	12

Payment Frequency: Annually (Payments at End of Selected Period)

(A) Unitrust Percentage:	8.57%	(A)

(B) Factor:	0.976562	(B)

IRS Pub. 1458, Table F
AFR of the Month: 2.4%
(C) Factor for Adjusted Payout Rate	8.369	(C)

(D) Nearest Table Rate Below (C)	8.2%	(D)

(E) Factor at Line (D) Rate	0.358189	(E)

IRS Pub. 1458, Table D
(F) Nearest Table Rate Above (C)	8.4%	(F)

(G) Factor at Line (F) Rate	0.348936	(G)

IRS Pub. 1458, Table D
(H) Line (E) Minus Line (G)	0.009253	(H)

(I) Line (C) Minus Line (D)	0.169%	(I)

(J) Line (I) Divided by 0.2%	0.845	(J)

(K) Line (H) Times Line (J)	0.007819	(K)

(L) Line (E) Minus Line (K)	0.350370	(L)

(M) Line (L) Times Gift Amount	$245,259	(M)

Present Value Remainder - Taxable Transfer
(N) Gift Amount Less Line (M)	$454,741	(N)

PRESENT VALUE OF INCOME INTEREST
(Charitable Deduction)

	Term of Years	Char. Ded.	Taxable Transfer
Fourth Layer	12	$454,741	$245,259

Paragraphs (A) through (N) below explain the steps taken to determine the charitable tax deduction for Jane's gift of the fourth layer.

(A) The unitrust payout percentage is shown here. Because Jane has selected a family limited partnership lead trust, the assets will be discounted and then the units will be transferred to the lead trust. The growth and income will be based upon the discounted lead trust values. The program automatically adjusts the payout percentage to match the payout for the non-discounted funding amount. Here, Jane has chosen 6.00% on a $1,000,000 unitrust amount. In order to pay the same amount on a $700,000 unitrust, the payout percentage is adjusted to the nearest hundredth of a percent, or 8.57%.

(B) The factor for the adjusted payout rate is found in Pub. 1458, Table F. The AFR for the current month or either of the two prior months may be used to determine the charitable deduction under Sec. 7520. For a lead trust, a lower AFR will produce a greater deduction, so Jane's gift planner selects a 2.4% AFR. Locate the table corresponding to the 2.4% AFR selected. The left half of the table contains the number of months between the valuation and the first payout. Locate the proper period in this box. The right side of the table corresponds to the selected payment frequency. Find the frequency selected (annually). The number that conforms to both the valuation and the frequency is the Table F factor (0.952381).

(C) The adjusted payout rate is calculated by multiplying the unitrust percentage shown in Line (A) by the adjusted payout rate factor shown in Line (B). For Jane's unitrust, multiply 8.57% by 0.976562 to produce 8.369%.

(D) Pub. 1458, Table D lists the factors for the remainder interests in a unitrust based on a term of years. The IRS only publishes a factor in Table D for every 0.2%. Accordingly, Table D does not list an adjusted payout rate of 8.369%. Therefore, the nearest table rate below 8.369% must be found. Locate the appropriate chart in Table D using the adjusted payout rate of 8.369%. The nearest rate below 8.369% is 8.2%. This number is found in the top row of the chart.

(E) Once the nearest rate below has been found (8.2%), locate the term of years (12) in the years column along the left side of the chart. Here, the corresponding factor under a 8.2% payout for 12 years is 0.358189.

(F) Pub. 1458, Table D lists the factors for the remainder interests for a term certain. The IRS only publishes a factor in Table D for every 0.2%. Accordingly, Table D does not list an adjusted payout rate of 8.369%. Therefore, the nearest table rate above 8.369% must be found. Locate the appropriate chart in Table D using the adjusted payout rate of 8.369%. The nearest rate above 8.369% is 8.4%. This number is found in the top row of the chart.

(G) Once the nearest rate above has been found (8.4%), locate the term of years (12) in the years column along the left side of the chart. Here, the corresponding factor under a 8.4% payout for 12 years is 0.348936.

Next, the interpolation between 8.2% and 8.4% must be determined. Lines (H) through (K) compute the interpolation for the 8.369% rate.

(H) The factor for the 8.4% rate (0.348936) is subtracted from the factor for the 8.2% rate (0.367666) to produce 0.009253. In short, Line (G) is subtracted from Line (E).

(I) Next, the 8.2% nearest below rate shown in Line (D) is subtracted from the 8.369% adjusted payout rate shown in Line (C) to give the range between the two rates of 0.169%.

(J) Because Table D only shows rates in intervals of 0.2%, Line (I), or 0.169%, is divided by 0.2% to produce the factor differential percentage of 0.845.

(K) To find the interpolation result, Line (H) (0.009253) is multiplied by Line (J) (0.845). The result is 0.007819.

(L) Subtracting the interpolation result of 0.007819 shown in Line (K) from the factor from the nearest rate below shown in Line (E) produces an IRS deduction factor of 0.350370.

(M) The present value of the remainder interest can then be calculated by multiplying the IRS deduction factor of 0.350370 by the discounted $700,000 gift amount. The resulting present value of the remainder interest, or today's value of the remainder interest to family based on the 12-year term of the trust is $245,259.

(N) Finally, the present value of the income interest, which is the same as the charitable deduction, can be calculated by subtracting the $245,259 present value of the remainder interest from Jane's original discounted gift of $700,000. Thus, Jane will receive a charitable deduction of $454,741 in the year the trust is created.

The above information can be found in the charitable deduction worksheet accompanying the testamentary lead trust proposal in Crescendo Software Program 59. An explanation of each item can be found in the professional advisor text.

Generation-Skipping Transfer Taxes for Four-Layer Testamentary Lead Unitrust with Family Limited Partnership


Charitable Lead Unitrust
Generation-Skipping Transfer Taxes
Donor:	Jane Donor	Gift Amount:	$837,032	Gift Date:	1/31/2018

Distribution Year:	2030	Return %:	10.71%	Pmt %:	8.57%

(A) Percentage of Trust Given to:	100.00%	(A)

Grandchildren or Skip Persons
(B) GSTT Initial Trust Corpus:	$700,000	(B)

Line (A) Times Gift Amount
(C) Charitable Estate Tax Deduction	$454,741	(C)

(From Deduction Worksheet)
(D) Taxable Transfer	$245,259	(D)

(E) Allocated GSTT Exemption	$245,259	(E)

GSTT Exemption $11,200,000
(F) Remaining GSTT Exemption	$10,954,741	(F)

(G) Applicable Fraction (Lines E/(B-C))	1.000000	(G)

(Exemption/(Trust-Char. Ded))
(H) Inclusion Ration (1-App. Fraction)	0.000000	(H)

(I) Maximum Transfer Tax Rate In 2030	40.0%	(I)

(J) GSTT Rate (Line (H) x (I))	0.00%	(J)

(K) Estimated Final GSTT Corpus	$837,032	(K)

After 12.00 Year Term
(L) Estimated GSTT	$0	(L)

(M) Estimated Principal to Family	$837,032	(M)

(Total Distribution Minus Line (L))

Term	Exemption	Ex. Remain	GST Tax	Family
12	$245,259	$10,954,741	$0	$837,032

Paragraphs (A) through (M) below explain the steps taken to determine the generation-skipping transfer taxes (GSTT) for layer four of Jane's four layer lead trust.

(A) The percentage of trust assets given to grandchildren or skip persons is shown here. Jane has chosen to give 100% of the trust to her grandchildren after the 12-year term for fourth layer expires.

(B) To determine the amount of the initial trust, Line (A) is multiplied by the discounted initial trust corpus used to fund the fourth layer. Thus, 100% multiplied by the discounted gift of $700,000 produces $700,000.

(C) Line (C) shows the charitable estate tax deduction for the fourth layer unitrust calculated in the prior worksheet in Line (N). Here, Jane's charitable deduction for the unitrust is $454,741.

(D) The taxable transfer is simply the amount calculated in the prior worksheet in Line (M). Here, Jane's taxable transfer, or the present value of the remainder interest given to family is $245,259.

(E) The allocated GSTT exemption for a lead unitrust is determined by using the lesser of the amount shown in Line (D) above or the GSTT exemption for the year of the gift. Jane's trust is funded in 2018, so the GSTT exemption is $11,200,000. Here, $245,259 is less than $11,200,000, so $245,259 is used.

(F) To calculate the remaining GSTT exemption, the amount shown in Line (E) above is subtracted from the GSTT exemption for the year of the gift. Jane's trust is funded in 2018, so $245,259 is subtracted from the 2018 GSTT exemption limit of $11,200,000. $11,200,000 less $245,259 produces $10,954,741. This means that Jane may still give $10,954,741 to grandchildren or skip persons without incurring a generation-skipping transfer tax.

(G) The applicable fraction is determined by dividing the allocated GSTT exemption in Line (E) by the difference of (C) minus Line (B). Here, $245,259 is divided by $1,000,000 less $454,741. In other words, $245,259 is divided by $245,259 to produce 1.

(H) The inclusion ratio is calculated by subtracting the applicable fraction from 1. Here, 1 minus 1 is 0.

(I) The maximum transfer tax rate in 2030 is estimated to be 40%.

(J) The GSTT rate is calculated by multiplying the inclusion ratio shown in Line (H) by the maximum transfer tax rate shown in Line (I). Thus, 0 multiplied by 0.4 is 0.

(K) The estimated final GSTT corpus after the 12-year term is calculated by multiplying the value of the corpus at the end of the selected term (12) by the percentage to grandchildren (100%) shown in Line (A) to produce a result of $837,032. This amount is calculated on the Lead Trust Principal and Income Growth worksheet.

(L) The estimated GSTT is calculated by multiplying the estimated final GSTT corpus shown in Line (K) by the GSTT rate shown in Line (J). Thus, $837,032 multiplied by 0 is 0.

(M) Lastly, the estimated principal to Jane's family is calculated by subtracting the estimated GSTT in Line (L) from the estimated final GSTT corpus shown in Line (K). Here, $837,032 less 0 is $837,032. Therefore, Jane's family will receive an estimated $837,032 after the 12-year term.

Private Letter Rulings

PLR 9840036 Testamentary Lead Trust Drafting Provisions: The testator and spouse desire to establish a lead trust upon the demise of the survivor. The Service rules that the present value of the unitrust interest in a testamentary charitable lead trust will qualify for an estate tax charitable deduction upon the survivor's death. The term of the charitable lead unitrust is to be set at the surviving spouse's death by calculating the amount necessary to produce an initial value for the remainder interest equal to the surviving spouse's available generation-skipping transfer tax exemption. The Service observes that the formula for determining the term of the charitable lead unitrust will be fixed and ascertainable as of the surviving spouse's death. With respect to generation-skipping transfer tax, the charitable lead unitrust will have an exclusion ratio of zero if the appropriate amount of the surviving spouse's exemption is allocated to the trust. Finally, the ordering rules for the payment of the unitrust amount will be disregarded for federal income tax purposes.

Quiz-Basic

6.4.4 Testamentary Lead Trust

Testamentary Lead Trust

Calculating the Charitable Tax Deduction

Four-Layer Testamentary Lead Trust without Family Limited Partnership

Generation-Skipping Transfer Taxes for Four-Layer Testamentary Lead Trust without Family Limited Partnership

Four-Layer Testamentary Lead Trust with Family Limited Partnership

Generation-Skipping Transfer Taxes for Four-Layer Testamentary Lead Unitrust with Family Limited Partnership

Private Letter Rulings

Related Topics on Testamentary Lead Trust