Tuesday April 16, 2024
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6.7.2 Term of Years Unitrust
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A charitable remainder unitrust (CRUT) may be created for a term of years not exceeding 20. With a term of years CRUT, it is permissible to name a class of income recipients. Reg. 1.664-3(a)(3)(i). For example, a donor can create a CRUT with the income distributed among grandchildren. A donor may also grant an independent trustee the power to "sprinkle" or allocate among grandchildren. Rev. Rul. 77-285. A term of years CRUT also can be created to benefit charity. The charity may receive part of the unitrust income, as long as there is at least one non-charitable income recipient. The donor of a term of years CRUT receives a charitable income tax deduction based on the present value of the remainder interest.
Calculating the Charitable Tax Deduction
The regulations accompanying Sec. 664 outline the method for determining the charitable deduction for a term of years CRUT. The fair market value of the contributed property, the corresponding trust payout rate, the applicable federal rate (AFR) 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 have to look up all factors. To illustrate this, consider John Donor who creates a charitable remainder unitrust on June 1, 2017 to pay the income to his son for a term of 20 years. The fair market value of the property transferred to the CRUT is $100,000. The trust has a payout rate of 5.0%. The AFR for the month of June is 2.4%; however, the April rate of 2.6% is chosen to produce a higher charitable deduction. John has selected quarterly payments for his son. Using this information and IRS Pub. 1458, the charity's gift planner creates the following charitable deduction worksheet.
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| Remainder Unitrust for Term of 1-20 Years |
| Election: Sec. 7520(a) election made using April 2.6% AFR |
| Donor: |
John Donor |
Gift
Amount: |
$100,000 |
Gift
Date: |
6/1/2017 |
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| Beneficiary: |
Son |
Term of Years: |
20 |
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| Payment
Frequency: Quarterly (Payments at End of Selected Period) |
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| (A) Unitrust Percentage: |
5.0% |
(A) |
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| (B) Factor: |
0.984111 |
(B) |
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| IRS Pub.
1458, Table F |
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| AFR of the
Month: 5.2% |
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| (C) Factor for Adjusted Payout Rate |
4.921% |
(C) |
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| (D) Nearest Table Rate Below (C) |
4.8% |
(D) |
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| (E) Factor at Line (D) Rate |
0.373886 |
(E) |
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| IRS Pub.
1458, Table D |
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| (F) Nearest Table Rate Above (C) |
5.0% |
(F) |
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| (G) Factor at Line (F) Rate |
0.358486 |
(G) |
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| IRS Pub.
1458, Table D |
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| (H) Line (E) Minus Line (G) |
0.0154 |
(H) |
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| (I) Line (C) Minus Line (D) |
0.121% |
(I) |
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| (J) Line (I) Divided by 0.2% |
0.605 |
(J) |
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| (K) Line (H) Times Line (J) |
0.009317 |
(K) |
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| (L) Line (E) Minus Line (K) |
0.364569 |
(L) |
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| (M) Line (L) Times Gift Amount |
$36,457 |
(M) |
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| Present Value Remainder - Charitable Deduction |
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| (N) Tax Bracket and Savings 35% |
$12,760 |
(N) |
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The charitable deduction worksheet shows John's personal data, information about his unitrust and the calculations used to compute his charitable deduction and tax savings. The first box shows John's name, the gift amount, gift date, the beneficiary's name, the term of years chosen and the payment frequency. 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 5.00%.
(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 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 for 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 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%. Accordingly, Table D 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 D 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 the term of years (20) in the years column along the left side of the chart. Here, the corresponding factor under a 4.8% payout for 20 years is 0.373886.
(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 4.921%. Therefore, the nearest table rate above 4.921% must be found. Locate the appropriate chart in Table D 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 the term of years (20) in the years column along the left side of the chart. Here, the corresponding factor under a 5.0% payout for 20 years is 0.358486.
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 (0.358486) is subtracted from the factor for the 4.8% rate (0.373886) to produce 0.01540. 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 D shows 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) (0.001540) is multiplied by Line (J) (0.605). The result is 0.009317.
(L) Subtracting the interpolation result of 0.009317 shown in Line (K) from the factor from the nearest rate below shown in Line (E) produces an IRS deduction factor of 0.364569.
(M) The present value of the remainder interest can then be calculated by multiplying the IRS deduction factor of 0.364569 by the $100,000 gift amount. The resulting present value, or today's value of the remainder interest to charity based on the projected duration of the trust, is $36,457.
(N) The tax savings of $12,760 is the charitable deduction multiplied by John's tax bracket of 35%. John can save $12,760 in income taxes.
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