Friday April 26, 2024
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6.7.4 Education Unitrust
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The education unitrust is an excellent charitable remainder unitrust (CRUT) application that allows a donor to provide for the college education of a child, nephew, niece, grandchild or other person. An education trust typically pays a fairly high amount for a term of four or five years.
It is most advantageous to fund the unitrust with appreciated property or stock. The donor will receive an income tax deduction equal to the present value of the remainder interest and bypass capital gain when the trust sells the asset and diversifies.
Unless the donor retains a testamentary right of revocation, he or she is making a gift to the beneficiary student or students in the year the trust is created. The gift is equal to the total gift value less (1) any marital deduction, (2) the annual exclusion for each student and (3) the charitable income tax deduction, which is 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 an education unitrust. 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 CRUT on January 3, 2006 to pay the income to his niece and nephew for a term of 20 years for their educations. The fair market value of the property transferred to the CRUT is $100,000, and the property has a basis of $20,000. The trust has a payout rate of 5.0%. John has selected January's rate of 2.6% for a larger charitable deduction. John has selected quarterly payments for his niece and nephew. Using this information and IRS Pub. 1458, the charity's gift planner creates the following charitable deduction worksheet.
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| Charitable Remainder Unitrust - Term of Years |
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| Donor: |
John Donor |
Gift Amount: |
$100,000 |
Gift Date: |
01/03/2018 |
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| Beneficiary: |
Niece and Nephew |
Term of Years (20 or fewer): |
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 for Adjusted Payout Rate |
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) |
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) |
0.015400 |
(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 Interest
Income Tax Charitable Deduction |
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| (N) Tax Bracket and Savings 24% |
$8,750 |
(N) |
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| IRS Gift Tax Return Information -- IRS Form 709 |
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Gift: |
Total Gift Value |
$100,000 |
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Less: |
Marital Deduction |
$0 |
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Annual Exclusions* |
$30,000 |
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Charitable Gift Tax Deduction |
$36,457 |
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2018 Taxable gift |
$33,543 |
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| * The annual exclusion per donor per donee is available for each person with an unrestricted right to receive current trust income. Future, contingent or restricted rights to income do not qualify. See Reg. 25.2503-3(b). |
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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, the gift amount, gift date, the beneficiaries' names, 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 January'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 F Table 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 0.003003 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) Finally, the tax savings can be calculated by multiplying the $36,457 present value of the remainder interest by John's tax bracket (24%). Thus, John will receive tax savings of $8,750 for creating the trust.
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