CHARITABLE SPLIT INTEREST TRUSTS

Matt Pugh

Relevant Primary Authority §664 §170 §1.664-1 §1.664-2 §1.664-3 Rev. Proc. 2007-45, 2007-2 CB 89 Rev. Proc. 2008-45, 2008-2 CB 224 LEILA G. NEWHALL UNITRUST v. COMM, 79

AFTR 2d 97-547, 105 F3d 482 (CA-9, 1997), 104 TC 236

What is a Charitable Split Interest Trust?

Provides benefits to a charitable organization and a non-charitable beneficiary The order of who receives first is important

Bears resemblance to normal individual charitable deductions Dollar for dollar deduction Present value of trust assets

Charitable Remainder Trust and Charitable Lead Trust Annuity trust Unitrust

Charitable Remainder Trusts The non-charitable beneficiary

receives the benefits first Remainder is left for the charitable

organization Irrevocable Tax-free entity Inter vivos- in life Testamentary- at death

Charitable Remainder Annuity Trust

6 requirements to qualify as a CRAT 6 items necessary to determine

valuation Annuity value Deduction for charitable contribution

Example problem

CRAT Requirements1. Annuity payment must be no less than annually

The amount must be sum certain % of initial FMV of assets placed in trust

2. Minimum and maximum payout amount Minimum amount is 5% Maximum amount is 50%

3. Who can be a recipient of a CRAT Charitable organization- must comply with §170(c) Non-charitable beneficiary- spouse, child, brother,

etc.

CRAT Requirements4. Prohibited from making other payments to non-

charitable beneficiary5. Time period of a CRAT

Inter vivos or testamentary Length of annuity payment

Life of non-charitable beneficiary or, Period of no more than 20 years

6. Having a permissible remaindermen Must comply with §170(c) If multiple charities listed, they can receive

benefits simultaneously or successively If necessary an alternate charity can be chosen

Requirements for Deduction Valuation

Donor receives a deduction for the present value of the remainder interest

1. Initial FMV of assets in trust

2. Age of beneficiary

3. Annuity payment percentage

4. Frequency of payment

5. §7520 interest rate

6. Annuity factor

CRAT Example

First, calculate the annuity payment ($100,000 x 5.2%)

Multiply the annuity payment by the annuity factor ($5,200 x 13.3935)

To get the deduction subtract annuity value for the FMV of assets ($100,000 - $69,646)

    Life  

Age Annuity Estate Remainder

55 13.3935 0.66968 0.33032

56 13.1536 0.65768 0.34232

57 12.9089 0.64545 0.35455

58 12.6600 0.63300 0.36700

59 12.4064 0.62032 0.37968

   

60 12.1477 0.60739 0.39261

61 11.8844 0.59422 0.40578

62 11.6170 0.58085 0.41915

63 11.3459 0.56729 0.43271

64 11.0711 0.55355 0.44645

Table S- Based on Life Table 2000CM§7520 Interest Rate at 5%

Charitable Remainder Unitrust

Differences in first requirement Unitrust payment: fixed percentage multiplied by FMV of assets valued

annually Allowed to choose the date of valuation Income exception: total of trust income (not greater than unitrust

payment) PLUS excess amount over required unitrust payment Allowed to do a combination of the two

Difference in calculation of deduction Same as CRAT but use the unitrust table in IRS Publication 1458, Table

U

Unrelated Business Taxable Income CRTs are tax-free entities Can cause a large tax liability for the

trust Current Regulation provides an excise tax

on UBTI §512 defines UBTI as gross income

earned by organization that is unrelated to its trade or business

Prior to 2009 the UBTI rule was drastically different

LEILA G. NEWHALL UNITRUST v. COMM, 79 AFTR 2d 97-547, 105 F.3d 482 (CA-9, 1997), 104 TC 236 CRUT endowed three publically traded

limited partnership stocks Income from the stocks were UBTI

Tax Court held and 9th Circuit affirmed Prior to 2009 Reg. §1.664-1(c) states that

if a CRT has UBTI, ALL income from trust is taxed

What impact does this have today?

Charitable Lead Trusts The reverse of a CRT Charity receives first then non-charitable

beneficiary receives remainder Receives a present value deduction for

the annuity or unitrust All trust income is taxed to the donor There isn’t a code section for CLTs

Charitable Lead Annuity Trusts Rev. Proc. 2007-45, 2007-2 CB 89

outlines a sample CLAT Inter vivos- in life Testamentary- at death Grantor- non-charitable beneficiary is the

donor Nongrantor- non-charitable beneficiary is

someone other than donor

Differences between CLAT and CRAT

Taxable entity Use Table B from IRS Pub. 1457 No minimum or maximum payout requirement If Present value of charitable interest exceeds 60%

of total amount in trust, an excess holding tax of 10% will be added (§4943)

Can use a fixed dollar amount instead of percentage Allowed to give extra payments to stated charity

No extra estate and gift tax deduction for extra payments

Entitled to income tax deduction for extra payments

Differences between CLAT and CRAT

If the remainder beneficiary is 2 or more generations apart, CLT subject to generation skipping tax (§2611)

Prohibited from any additional contributions

Non-charitable beneficiary must have a 15% probability of receiving remainder (IRS Pub. 1457)

CLAT Example

Multiply annuity payment by annuity factor ($60,000 x 12.4622) Table B

To get remainder, subtract annuity value from FMV of assets ($1,000,000 - $747,732)

        5.0%      

Years   Annuity   Income Interest   Remainder1   0.9524   0.047619   0.952381  2 1.8594 0.092971 0.9070293 2.7232 0.136162 0.8638384 3.5460 0.177298 0.8227025 4.3295 0.216474 0.783526 6 5.0757 0.253785 0.7462157 5.7864 0.289319 0.7106818 6.4632 0.323161 0.6768399 7.1078 0.355391 0.644609

10 7.7217 0.386087 0.613913 

11 8.3064 0.415321 0.58467912 8.8633 0.443163 0.55683713 9.3936 0.469679 0.53032114 9.8986 0.494932 0.50506815 10.3797 0.518983 0.481017 

16 10.8378 0.541888 0.45811217 11.2741 0.563703 0.43629718 11.6896 0.584479 0.41552119 12.0853 0.604266 0.39573420 12.4622 0.623111 0.376889

Table B-Term Certain §7520 rate of 5%

Charitable Remainder Unitrust Rev. Proc. 2008-46, 2008-2 CB 224

outlines a sample CLUT

Differences between CLAT and CLUT

Pays unitrust amount: stated percentage times FMV of assets valued annually

The amount of the deduction is the present value of unitrust payments

Use Table D of IRS Pub. 1458 Value of FMV of assets can be any day of

the year or average of multiple days Must be consistent year to year

Allowed to have additional contributions

Which Trust Should You Choose?

Tax exempt entity Provides greater benefit

for non-charitable beneficiary

Smaller charitable deduction

Limited contribution % to the annuity or unitrust

Transferring assets to CRTs are more valuable because income is tax free

Taxable entity Provides a greater

charitable deduction Smaller remainder left

to non-charitable beneficiary

No limitations on annuity or unitrust

Better if you are a high income earner

CRT CLT