Friday April 26, 2024
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6.7.3 Life Plus Term of Years Charitable Remainder Unitrust
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A unitrust may be created for one or more lives plus a term not exceeding 20 years. However, this is permissible only if all current and successor income recipients are living at the trust's inception and the trust will terminate upon the earlier of the demise of all income recipients or the expiration of the term of years. In effect, the trust is created for one or two lives plus the lesser of the lives of the successor income recipients or the stated term of years. Reg. 1.664-3(a)(5)(ii).
Calculating the Charitable Deduction for One Life Plus a Term of Years
The regulations accompanying Sec. 664 outline the method for determining the charitable deduction for a one or two life plus term of years charitable remainder unitrust (CRUT). The fair market value of the contributed property, the corresponding trust payout rate, the applicable federal rate (AFR), the beneficiary's age, the selected term of years 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 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, John has chosen April's rate of 2.6% for a larger deduction. John has selected quarterly payments and a term of one life plus 20 years. John names his daughter, age 48, and his granddaughter, age 20, as his successor annuity recipients. 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 One Life Plus Term of 20 Years |
| Election: Sec. 7520(a) election made using April 2.6% AFR |
| Note: All income recipients must be named and living when trust created. |
| Donor: |
John Donor |
Gift Amount: |
$100,000 |
Gift Date: |
6/1/2017 |
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| Beneficiary: |
John Donor |
Birth Date: |
06/01/1949 |
Age: |
68 |
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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: 2.6% |
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| (C)Adjusted Payout Rate (A x B of Income Recipients) |
4.9206% |
(C) |
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| (D) Life Plus Term Factor (D) |
0.18389 |
(D) |
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| (E) Line (D) Times Gift Amount |
$18,389 |
(E) |
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| Present Value of Remainder Interest |
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| (F) Tax Bracket and Savings 35% |
$6,603 |
(F) |
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The charitable deduction worksheet provides 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 and birth date, the gift amount, gift date, 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 (F) 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 4.9206%.
(D) The life plus term factor produces an IRS deduction factor of 0.18389.
(E) The present value of the remainder interest can then be calculated by multiplying the IRS deduction factor of 0.18389 by the $100,000 gift amount. The resulting present value, or today's value of the income stream to John, his daughter and granddaughter based on the projected duration of the trust, is $18,389.
(F) Finally, the tax savings John will receive can be calculated by multiplying the $18,389 present value of the remainder interest by John's tax bracket (35%). Thus, John will receive tax savings of $6,436 for creating the trust.
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