Thursday March 28, 2024

6.7.1 Life or Lives Unitrust

Life or Lives Unitrust

Calculating the Charitable Income Tax Deduction:  The regulations accompanying Sec. 664 outline the method for determining the charitable deduction for a CRUT.
A charitable remainder unitrust (CRUT) pays a fixed percentage for a life or lives. Reg. 1.664-3(a)(5)(i). In most circumstances, the income is paid to the donor for life, or to the donor and spouse for their lives. The donor typically is the income recipient of a one-life unitrust, while a donor and spouse typically receive income from a two-life trust. However, it is permissible to create a trust for a donor and child, nephew, niece, other relative or friend or a charity. A recipient charity may receive a part of the unitrust payout, so long as there is at least one non-charitable income recipient.

Calculating the Charitable Income Tax Deduction


Unitrust for Life

The regulations accompanying Sec. 664 outline the method for determining the charitable deduction for a CRUT. The fair market value of the contributed property, the corresponding trust payout rate, the applicable federal rate (AFR), the beneficiary's age and the payment frequency are all needed to perform the deduction calculation.

While Crescendo incorporates information from IRS Pub. 1458 in its software, it is helpful for gift planners to know how the deduction calculation would be performed if they had to look up all factors. To illustrate this, consider John Donor who creates a CRUT on June 1, 2017 with his favorite charity. John is 68 years old. The fair market value of the property transferred to the CRUT is $100,000. John's trust has a payout rate of 5.0%. The AFR for the month of June is 2.4%: however, using the highest rate allowable will give John a larger charitable deduction. Thus, John chooses April's 2.6% rate. John has selected quarterly payments. Using this information and IRS Pub. 1458, the charity's gift planner creates the following charitable deduction worksheet.

           
Remainder Unitrust for One Life
Election: Sec. 7520(a) election made using April 2.6% AFR
  Donor: John Donor Gift Amount: $100,000 Gift Date: 6/1/2017
  1st Person: John Donor Birth Date: 6/1/1949 Age*: 68
  Payment Frequency:   Quarterly              (Payments at End of Selected Period)
  Age* - Year changes at six months from birth date.
 
  (A) Unitrust Percentage: 5.0% (A) 
  (B) Factor: 0.984111 (B) 
         IRS Pub. 1458, Table F    
         AFR of the Month:   2.6%    
  (C) Factor for Adjusted Payout Rate 4.921% (C) 
  (D) Nearest Table Rate Below (C) 4.8% (D) 
  (E) Factor at Line (D) Rate 0.50147 (E) 
         IRS Pub. 1458, Table U(1)    
  (F) Nearest Table Rate Above (C) 5.0% (F) 
  (G) Factor at Line (F) Rate 0.48854 (G) 
         IRS Pub. 1458, Table U(1)    
  (H) Line (E) Minus Line (G) 0.01293 (H) 
  (I) Line (C) Minus Line (D) 0.121% (I) 
  (J) Line (I) Divided by 0.2% 0.605 (J) 
  (K) Line (H) Times Line (J) 0.00782 (K) 
  (L) Line (E) Minus Line (K) 0.49365 (L) 
  (M) Line (L) Times Gift Amount $49,365 (M) 
         Present Value Remainder - Charitable Deduction    
  (N) Tax Bracket and Savings    35% $17,278 (N) 


The charitable deduction worksheet provides John's personal data, information about his CRUT and the calculations used to compute his charitable deduction and tax savings. The first box delineates general information about John, including his name, age, payment frequency, gift date and gift amount. This information is used in calculating the charitable tax deduction.

The second box shows the steps taken to determine the charitable tax deduction for John's gift. The steps are identified in paragraphs (A) through (N) below.

(A) The unitrust payout percentage is shown here. John has chosen 5%, so 5% is shown here.

(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 unitrust, a higher AFR will produce a greater deduction, so John's gift planner selects April's 2.6% AFR. Locate the table corresponding to the 2.6% AFR selected. The left half of the table contains the number of months between the valuation and the first payout in the first full taxable year. Locate the proper period in this box (at least 3, but less than 4). The right side of the table corresponds to the selected payment frequency. Find the frequency selected (quarterly). The number that conforms to both the valuation and the frequency is the Table F factor (0.984111).

(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 John's unitrust, multiply 5.00% by 0.984111 to produce 4.921%.

(D) Pub. 1458, Table U(1) lists the factors for the remainder interests in a unitrust based on one life. The IRS publishes a factor in Table U(1) only for every 0.2%. Accordingly, Table U(1) does not list an adjusted payout rate of 4.921%. Therefore, the nearest table rate below 4.921% must be found. Locate the appropriate chart in Table U(1) using the adjusted payout rate of 4.921%. The nearest rate below 4.921% is 4.8%. This number is found in the top row of the chart.

(E) Once the nearest rate below has been found (4.8%), locate John's age (68) in the age column along the left side of the chart. Here, the corresponding factor under a 4.8% payout for a 68-year old is 0.50147.

(F) Pub. 1458, Table U(1) lists the factors for the remainder interests in a unitrust based on one life. The IRS publishes a factor in Table U(1) only for every 0.2%. Accordingly, Table U(2) does not list an adjusted payout rate of 4.921%. Therefore, the nearest table rate above 4.921% must be found. Locate the appropriate chart in Table U(1) using the adjusted payout rate of 4.921%. The nearest rate above 4.921% is 5.0%. This number is found in the top row of the chart.

(G) Once the nearest rate above has been found (5.0%), locate John's age (68) in the age column along the left side of the chart. Here, the corresponding factor under a 5.0% payout for a 68-year old is 0.48854.

Next, the interpolation between 4.8% and 5.0% must be determined. Lines (H) through (K) compute the interpolation for the 4.921% rate.

(H) The factor for the 5.0% rate (0.48854) is subtracted from the factor for the 4.8% rate (0.50147) to produce 0.01293. In short, Line (G) is subtracted from Line (E).

(I) Next, the 4.8% nearest below rate shown in Line (D) is subtracted from the 4.921% adjusted payout rate shown in Line (C) to give the range between the two rates of 0.121%.

(J) Because Table U(1) shows rates only at 0.2% intervals, Line (I), or 0.121%, is divided by 0.2% to produce the factor differential percentage of 0.60500.

(K) To find the interpolation result, Line (H) (0.01293) is multiplied by Line (J) (0.605). The result is 0.00782.

(L) Subtracting the interpolation result of 0.00782 shown in Line (K) from the factor from the nearest rate below shown in Line (E) produces an IRS deduction factor of 0.49365.

(M) The present value of the remainder interest can then be calculated by multiplying the IRS deduction factor of 0.49365 by the $100,000 gift amount. The resulting present value of the remainder interest is $49,365. The present value of the income stream to John is $50,635 ($100,000 less $49,365).

(N) Finally, the tax savings can be calculated by multiplying the $49,365 present value of the remainder interest by John's tax bracket (35%). Thus, John may receive tax savings of $17,278 in the year he creates the trust.

Unitrust for Two or More Lives

Assuming the same information as above for John Donor and adding his wife Jane as a trust beneficiary, the calculation of John's charitable deduction for a two-life unitrust is shown below.

           
Remainder Unitrust for Two Lives
Election: Sec. 7520(a) election made using April 2.6% AFR
  Donor: John Donor Gift Amount: $100,000 Gift Date: 6/1/2017
  1st Person: John Donor Birth Date: 6/1/1949 Age*: 68
  2nd Person: Jane Donor Birth Date: 6/1/1952 Age*: 65
  Payment Frequency:   Quarterly              (Payments at End of Selected Period)
  Age* - Year changes at six months from birth date.
 
  (A) Unitrust Percentage: 5.0% (A) 
  (B) Factor: 0.98411 (B) 
         IRS Pub. 1458, Table F    
         AFR of the Month:   2.6%    
  (C) Factor for Adjusted Payout Rate 4.921% (C) 
  (D) Nearest Table Rate Below (C) 4.8% (D) 
  (E) Factor at Line (D) Rate 0.367 (E) 
         IRS Pub. 1458, Table U(2)    
  (F) Nearest Table Rate Above (C) 5.0% (F) 
  (G) Factor at Line (F) Rate 0.35259 (G) 
         IRS Pub. 1458, Table U(2)    
  (H) Line (E) Minus Line (G) 0.01441 (H) 
  (I) Line (C) Minus Line (D) 0.121% (I) 
  (J) Line (I) Divided by 0.2% 0.605 (J) 
  (K) Line (H) Times Line (J) 0.00872 (K) 
  (L) Line (E) Minus Line (K) 0.35828 (L) 
  (M) Line (L) Times Gift Amount $35,828 (M) 
         Present Value Remainder - Charitable Deduction    
  (N) Tax Bracket and Savings    35% $12,540 (N) 


The first box delineates general information about John and Jane, including their names, ages, payment frequency, gift date and gift amount. This information is used in calculating the charitable tax deduction.

The second box shows the steps taken to determine the charitable tax deduction for John's gift. The steps are identified in lines (A) through (N).

(A) The unitrust payout percentage is shown here. John has chosen 5%, so 5% is shown here.

(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 unitrust, a higher AFR will produce a greater deduction, so John's gift planner selects April's 2.6% AFR. Locate the table corresponding to the 2.6% AFR selected. The left half of the table contains the number of months between the valuation and the first payout in the first full taxable year. Locate the proper period in this box (at least 3, but less than 4). The right side of the table corresponds to the selected payment frequency. Find the frequency selected (quarterly). The number that conforms to both the valuation and the frequency is the Table F factor (0.984111).

(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 John's unitrust, multiply 5.00% by 0.984111 to produce 4.921%.

(D) Pub. 1458, Table U(2) lists the factors for the remainder interests in a unitrust based on two or more lives. The IRS publishes a factor in Table U(2) only for every 0.2%. Accordingly, Table U(2) does not list an adjusted payout rate of 4.921%. Therefore, the nearest table rate below 4.921% must be found. Locate the appropriate chart in Table U(2) using the adjusted payout rate of 4.921%. The nearest rate below 4.921% is 4.8%. This number is found in the top row of the chart as the adjusted payout rate.

(E) Once the nearest rate below has been found (4.8%), locate the oldest person's age (68) in the age column along the left side of the chart and then find the corresponding entry for the youngest person (65). Here, the corresponding factor under a 4.8% payout for a 68-year old and a 65-year old is 0.367.

(F) Pub. 1458, Table U(2) lists the factors for the remainder interests in a unitrust based on two or more lives. The IRS publishes a factor in Table U(2) only for every 0.2%. Accordingly, Table U(1) does not list an adjusted payout rate of 4.921%. Therefore, the nearest table rate above 4.921% must be found. Locate the appropriate chart in Table U(2) using the adjusted payout rate of 4.921%. The nearest rate above 4.921% is 5.0%. This number is found in the top row of the chart as the adjusted payout rate.

(G) Once the nearest rate above has been found (5.0%), locate the oldest person's age (68) in the age column along the left side of the chart and then find the corresponding entry for the youngest person (65). Here, the corresponding factor under a 5.0% payout for a 68-year old and a 65-year old is 0.35259.

Next, the interpolation between 4.8% and 5.0% must be determined. Lines (H) through (K) compute the interpolation for the 4.921% rate.

(H) The factor for the 5.0% rate (0.35259) is subtracted from the factor for the 4.8% rate (0.367000) to produce 0.01441. In short, Line (G) is subtracted from Line (E).

(I) Next, the 4.8% nearest below rate shown in Line (D) is subtracted from the 4.921% adjusted payout rate shown in Line (C) to give the range between the two rates of 0.121%.

(J) Because Table U(1) shows rates only at 0.2% intervals, Line (I), or 0.121%, is divided by 0.2% to produce the factor differential percentage of 0.605.

(K) To find the interpolation result, Line (H) (0.01441) is multiplied by Line (J) (0.605). The result is 0.00872.

(L) Subtracting the interpolation result of 0.00872 shown in Line (K) from the factor from the nearest rate below shown in Line (E) produces an IRS deduction factor of 0.35828.

(M) The present value of the remainder interest can then be calculated by multiplying the IRS deduction factor of 0.35828 by the $100,000 gift amount. The resulting present value of the remainder interest is $35,828. The present value of the income stream is $64,172 ($100,000 less $35,828).

(N) Finally the tax savings can be calculated by multiplying the $35,828 present value of the remainder interest by John's tax bracket (35%). Thus, John may receive tax savings of $12,540 in the year he creates the trust.

Unitrust for Life with a Guaranteed Number of Years

A unitrust may also be created for a life with a guaranteed number of years. If the income beneficiary passes away before the guaranteed number of years, the unitrust payments continue for the guaranteed term and are paid to the designated successor beneficiary. While this ensures an income stream for a set number of years, the donor receives a smaller charitable deduction because the unitrust may continue after the income beneficiary's life. In the following example, John establishes a unitrust for his life with a 20-year guarantee.

Using the same donor information as above, the gift planner creates the following charitable deduction worksheet.

           
Remainder Unitrust for One Life
Election: Sec. 7520(a) election made using April 2.6% AFR
  Donor: John Donor Gift Amount: $100,000 Gift Date: 6/1/2017
  1st Person: John Donor Birth Date: 6/1/1949 Age*: 68
  Payment Frequency:   Quarterly              (Payments at End of Selected Period)
  Age* - Year changes at six months from birth date.
 
  (A) Unitrust Percentage: 5.0% (A) 
  (B) Factor: 0.984111 (B) 
         IRS Pub. 1458, Table F    
         AFR of the Month:   2.6%    
  (C) Factor for Adjusted Payout Rate 4.921% (C) 
  (D) Nearest Table Rate Below (C) 4.8% (D) 
  (E) Factor at Line (D) Rate 0.34925 (E) 
         IRS Pub. 1458, Table U(1)    
  (F) Nearest Table Rate Above (C) 5.0% (F) 
  (G) Factor at Line (F) Rate 0.33404 (G) 
  (H) Line (E) Minus Line (G) 0.01521 (H) 
  (I) Line (C) Minus Line (D) 0.121% (I) 
  (J) Line (I) Divided by 0.2% 0.605 (J) 
  (K) Line (H) Times Line (J) 0.00920 (K) 
  (L) Line (E) Minus Line (K) 0.34005 (L) 
  (M) Line (L) Times Gift Amount $34,005 (M) 
         Present Value Remainder - Charitable Deduction    
  (N) Tax Bracket and Savings    35% $11,902 (N) 


The charitable deduction worksheet provides John's personal data, information about his annuity and the calculations used to compute his charitable deduction and tax savings. The first box delineates general information about John, including his name, age, payment frequency, gift date, gift amount and the guaranteed term he has chosen. This information is used in calculating his charitable tax deduction.

The second box shows the steps taken to determine the charitable tax deduction for John's gift. The steps are identified in lines (A) through (N) below.

(A) The unitrust payout percentage is shown here. John has chosen 5%, so 5.0% is shown.

(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 unitrust, a higher AFR will produce a greater deduction, so John's gift planner selects April's 2.6% AFR. Locate the table corresponding to the 2.6% AFR selected. The left half of the table contains the number of months between the valuation and the first payout in the first full taxable year. Locate the proper period in this box (at least 3, but less than 4). The right side of the table corresponds to the selected payment frequency. Find the frequency selected (quarterly). The number that conforms to both the valuation and the frequency is the Table F factor (0.984111).

(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 John's unitrust, multiply 5.00% by 0.984111 to produce 4.921%.

Because the IRS does not publish a table for a life or lives with a guaranteed number of years, Lines (D) through (G) are calculated by an internal formula in the Crescendo program.

(D) The nearest table rate below 4.921% is 4.8%.

(E) The factor for a 4.8% payout for a 68-year old for a life plus a term of 20 years is 0.34925.

(F) The nearest table rate above 4.921% is 5.0%.

(G) The factor for a 5.0% payout for a 68-year old for a life plus a term of 20 years is 0.33404.

Next, the interpolation between 4.8% and 5.0% must be determined. Lines (H) through (L) compute the interpolation for the 4.921% rate.

(H) The factor for the 5.0% rate (0.33404) is subtracted from the factor for the 4.8% rate (0.34925) to produce 0.01521. In short, Line (G) is subtracted from Line (E).

(I) Next, the 4.8% nearest below rate shown in Line (D) is subtracted from the 4.921% adjusted payout rate shown in Line (C) to give the range between the two rates of 0.121%.

(J) Because the factors were calculated using rates only in intervals of 0.2%, Line (I), or 0.121%, is divided by 0.2% to produce the factor differential percentage of 0.605.

(K) To find the interpolation result, Line (H) (0.01521) is multiplied by Line (J) (0.605). The result is 0.00920.

(L) Subtracting the interpolation result of 0.00920 shown in Line (K) from the factor from the nearest rate below shown in Line (E) produces an IRS deduction factor of 0.34005.

(M) The present value of the remainder interest can then be calculated by multiplying the IRS deduction factor of 0.34005 by the $100,000 gift amount. The resulting present value of the remainder interest is $34,005. The present value of the income stream to John is $65,995 ($100,000 less $34,005).

(N) Finally, the tax savings can be calculated by multiplying the $34,005 present value of the remainder interest by John's tax bracket (35%). Thus, John may receive tax savings of $11,902 in the year he creates the trust.

Lesser of Life or Term of Years Unitrust

A unitrust also may be created for the lesser of a life or a term of years. For example, a unitrust created for the lesser of a term of 20 years or donor's life will terminate if the donor passes away prior to the 20 year term, with the remainder distributed to charity at that time. A lesser of life or term of years unitrust results in a larger charitable deduction than a straight term of 20 years, because it is possible that the income recipient will pass away prior to the expiration of the term. The lesser of lives or term of years deduction worksheet is found in the "Worksheets" section of the Crescendo software as Worksheet 30. Once in the worksheet, select the UT Maximum Years Plan.

           
Remainder Unitrust for Lesser of One Life or 20 Years
Election: Sec. 7520(a) election made using April 2.6% AFR
  Donor: John Donor Gift Amount: $100,000 Gift Date: 6/1/2017
  Beneficiary:   John Donor           
  Payment
  Frequency:
  Quarterly    (Payments at End of Selected Period)
 
  (A) Unitrust Percentage: 5.0% (A) 
  (B) Factor: 0.984111 (B) 
         IRS Pub. 1458, Table F    
         AFR of the Month:   5.2%    
  (C) Factor for Adjusted Payout Rate 4.921% (C) 
  (D) Nearest Table Rate Below (C) 4.8% (D) 
  (E) Factor at Line (D) Rate 0.52610 (E) 
  (F) Nearest Table Rate Above (C) 5.0% (F) 
  (G) Factor at Line (F) Rate 0.51299 (G) 
  (H) Line (E) Minus Line (G) 0.01311 (H) 
  (I) Line (C) Minus Line (D) 0.121% (I) 
  (J) Line (I) Divided by 0.2% 0.605 (J) 
  (K) Line (H) Times Line (J) 0.00793 (K) 
  (L) Line (E) Minus Line (K) 0.51817 (L) 
  (M) Line (L) Times Gift Amount $51,817 (M) 
         Present Value Remainder - Charitable Deduction    


The deduction worksheet illustrates the required information under the Treasury rules for calculating a deduction. The heading lists the donor's name, gift amount, gift date, income recipient's name, birth date and age and the payment frequency.

(A) The unitrust payout percentage is shown here. John has chosen 5.0%, so 5.0% is shown.

(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 unitrust, a higher AFR will produce a greater deduction, so John's gift planner selects April's 2.6% AFR. Locate the table corresponding to the 2.6% AFR selected. The left half of the table contains the number of months between the valuation and the first payout in the first full taxable year. Locate the proper period in this box (at least 3, but less than 4). The right side of the table corresponds to the selected payment frequency (quarterly). The number that conforms to both the valuation and the frequency is the Table F factor (0.984111).

(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 John's unitrust, multiply 5.00% by 0.984111 to produce 4.921%.

Because the IRS does not publish a table for the lesser of a life or lives and term of years, Lines (D) through (G) are calculated by an internal formula in the Crescendo program.

(D) The nearest table rate below 4.921% is 4.8%.

(E) The factor for a 4.8% payout for a 68-year old for a life or a term of 20 years is 0.52610.

(F) The nearest table rate above 4.921% is 5.0%.

(G) The factor for a 5.0% payout for a 68-year old for a life or a term of 20 years is 0.51299.

Next, the interpolation between 4.8% and 5.0% must be determined. Lines (H) through (K) compute the interpolation for the 4.921% rate.

(H) The factor for the 5.0% rate (0.51299) is subtracted from the factor for the 4.8% rate (0.52610) to produce 0.01311. In short, Line (G) is subtracted from Line (E).

(I) Next, the 4.8% nearest below rate shown in Line (D) is subtracted from the 4.921% adjusted payout rate shown in Line (C) to give the range between the two rates of 0.121%.

(J) Because the factors were calculated using rates only in intervals of 0.2%, Line (I), or 0.121%, is divided by 0.2% to produce the factor differential percentage of 0.605.

(K) To find the interpolation result, Line (H) (0.01311) is multiplied by Line (J) (0.605). The result is 0.00793.

(L) Subtracting the interpolation result of 0.00793 shown in Line (K) from the factor from the nearest rate below shown in Line (E) produces an IRS deduction factor of 0.51817.

(M) The present value of the remainder interest, which is the same as the charitable deduction, can then be calculated by multiplying the IRS deduction factor of 0.51817 by the $100,000 gift amount. The resulting present value, or today's value of the remainder interest to the charity based on the projected duration of the trust, is $51,817.

Private Letter Rulings

PLR 200444003 Trust Granted Additional Time to Deduct Charitable Gifts:   Gary Grantor created Trust during his lifetime. Upon his death, Trust was to distribute the entire trust principal in equal shares to eight of the ten named beneficiaries. Eight of the 10 named beneficiaries are charitable organizations described in Sec. 170(c). Gary died and Trust began to fulfill its obligations under the trust document.


      Quiz-Basic



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