Charitable remainder trusts
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Transcript of Charitable remainder trusts
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts
Professor Russell JamesTexas Tech University
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts
1. Introduction
Professor Russell JamesTexas Tech University
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Donor CRT Charity
Initial Transfer
Anything Left at Death
5% of trust assets
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments during life
or lives
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments for 20 years
Donor CRT Charity
Initial Transfer
Anything Left at Death
$1,000 Per Year for Life
Donor CRT Charity
Initial Transfer
Anything Left at Death
5% of trust assets
Donor CRT Charity
Initial Transfer
Anything Left at Death
5% of trust assets
The donor creates the rules in a Charitable Remainder Trust, but once created it is irrevocable
Donor CRT Charity
Initial Transfer
Anything Left at Death
5% of trust assets
Donor CRT Charity
Initial Transfer
Anything Left at Death
5% of trust assets
Donor CRT Charity
Initial Transfer
Anything Left at Death
5% of trust assets
?
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
I would like to use $50,000
per year from my assets.
The rest, I want to go to my favorite
charity.
I want to control my
own investments and spend
about 5% of my assets each year.
After death I want it all to go to charity.
I want to retire today, but my pension
doesn’t start paying for 9 more years. I want to give assets to charity, but I still
need $65,000 per year for 9 years.
However, the
biggestreason for donors to use Charitable Remainder Trusts is…
Tax Benefits
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts
1. Introduction
Professor Russell JamesTexas Tech University
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts
2. Tax Benefits
Professor Russell JamesTexas Tech University
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
With a charitable gift in a will, there is no income tax deduction
There are no capital gains taxes when a donor makes a transfer to a CRT
A CRT is itself a nonprofit entity and pays no capital gains tax when it sells
appreciated property
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
A client holds low-basis appreciated assets that
generate little income (e.g., developable land or small
business growth stock). How can she convert to
diversified income-generating investments?
Option 1: Sell it. Pay the capital gains tax. Invest the remaining amount.
$1,000,000 zero basis asset $238,000 tax (23.8% federal)
$762,000 left to invest
Option 1: Even worse in many states
$1,000,000 zero basis asset $339,350 tax (33.935% Calif. + Fed.)
$660,650 left to invest
Option 1: Or with certain assets
$1,000,000 zero-basis art$408,706 tax (40.87% Calif. + Fed.)
$591,294 left to invest
Option 1: Or certain holding periods
$1,000,000 zero-basis short-term capital gain
$509,280 tax (50.928% Cal. + Fed.)
$490,720 left to invest
Note that gifts of short-term capital
gain are deductible only at basis
Option 2: Transfer to a CRT
$1,000,000 zero-basis asset_____$0 tax (CRT pays no tax)
$1,000,000 left to invest
You can produce more income
with $1,000,000
Than with $762,000 or $660,650 or $591,294 or
$490,720
CRT Advantages
• Immediate income tax deduction
• No capital gains tax on transfer to CRT
• No capital gains tax when CRT sells
• Lifetime income
CRT Concern?
• Remainder goes to charity not to family
How can we address this limitation?
Inheritance replacement by purchasing ILIT life insurance with tax deduction or
part of payments
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts
2. Tax Benefits
Professor Russell JamesTexas Tech University
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts3. Calculating Deductions
Tax rules for CRTs
Charitable deduction
is the value of
what you give less the value of what you get
back (CRT payments)
$100,000 Cash─ Value of CRT payments
Charitable Deduction
Donor gives
$100,000
CRT pays age 55 donor
$4,000 per year for life
$4,000
Payment
$100,000Cash
Tax deduction is amount gifted less value of
annuity/unitrust payments
What is the value of CRT payments?
Find the §7520 rate http://www.irs.gov/Businesses/Small-Businesses-&-Self-
Employed/Section-7520-Interest-Rates
Multiply payment by annuity factor in IRS Pub. 1457
http://www.irs.gov/Retirement-Plans/Actuarial-Tables
Value of CRAT payments
Find the §7520 rate http://www.irs.gov/Businesses/Small-Businesses-&-Self-
Employed/Section-7520-Interest-Rates
Choose current or one of last
two month’s rate
$4,000/year CRAT age 55
donor on 1/31/15
Section 7520 Interest Rates
Valuation Month
120% of Applicable Federal Midterm Rate
Section 7520 Interest Rate
Revenue Ruling
November 2014 2.28 2.2 Rev. Rul.
2014-28December
2014 2.06 2.0 Rev. Rul. 2014-31
January 2015 2.10 2.2 Rev. Rul.
2015-1
Nov 2.2%Dec 2.0%Jan 2.2%
Value of annuity
Section 7520 Interest Rates
Valuation Month
120% of Applicable Federal Midterm Rate
Section 7520 Interest Rate
Revenue Ruling
November 2014 2.28 2.2 Rev. Rul.
2014-28December
2014 2.06 2.0 Rev. Rul. 2014-31
January 2015 2.10 2.2 Rev. Rul.
2015-1
Find the §7520 rate
2.2%http://www.irs.gov/Businesses/Small-Businesses-&-Self-
Employed/Section-7520-Interest-Rates
$4,000/year age 55 donor on 1/31/15
For the lowest annuity
valuation [highest
charitable deduction]
select
Jan. 2.2%
Table S - Based on Life Table 2000CMInterest at 2.2 Percent
Age Annuity Life Estate Remainder Age Annuity Life Estate Remainder0 36.1979 0.79635 0.20365 55 18.6808 0.41098 0.589021 36.2496 0.79749 0.20251 56 18.2157 0.40074 0.599262 36.0655 0.79344 0.20656 57 17.7494 0.39049 0.609513 35.8711 0.78916 0.21084 58 17.2826 0.38022 0.619784 35.6693 0.78473 0.21527 59 16.8149 0.36993 0.63007
Find the §7520 rate
2.2%www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section-
7520-Interest-Rates
Multiply annual payment by annuity factor in IRS Pub. 1457
$4,000 X 18.6808www.irs.gov/Retirement-Plans/Actuarial-Tables
$4,000/year age 55 donor on 1/31/15
Find the §7520 rate
2.2%www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section-
7520-Interest-Rates
Multiply annual payment by annuity factor in IRS Pub. 1457
$4,000 X 18.6808www.irs.gov/Retirement-Plans/Actuarial-Tables
Value of annuity
$74,723
If annuity pays more
than annually, add adjustment factor from
Table K
$4,000/year age 55 donor on 1/31/15
$100,000Cash
Donor gives
$100,000
CRAT pays age 55 donor
$4,000 per year for life
$4,000
Annuity
$100,000 Cash─ $74,723 Annuity
$27,277 Deduction
$100,000Cash
Donor gives
$100,000
CRUT pays age 55
donor 5% per year for life
5% of CRUT
Payment
CRUT calculation process
Section 1 Table U(1) - Based on Life Table 2000CM
Adjusted Payout Rate
Age 4.2% 4.4% 4.6% 4.8% 5.0% 5.2% 5.4% 5.6% 5.8% 6.0%
55 .37183 .35635 .34166 .32773 .31450 .30194 .29001 .27868 .26791 .25768
56 .38390 .36841 .35370 .33971 .32642 .31378 .30175 .29032 .27943 .26907
57 .39618 .38069 .36596 .35194 .33859 .32588 .31377 .30224 .29125 .28077
5% per year age 55 donor on 1/31/15 with
annual payments on
1/31
Multiply transfer by remainder interest factor in IRS Pub. 1458
$100,000 X .31450www.irs.gov/Retirement-Plans/Actuarial-Tables
Charitable deduction
$31,450
CRUT deduction calculation
If payments other than annual given immediately after annual valuation, calculate adjusted payout rate (APR) as payout rate X table F (www.irs.gov/Retirement-Plans/Actuarial-Tables)
reduction using appropriate §7520 rate. If factor for adjusted payout rate (APR) is not on unitrust table, use:
Factor above APR –[(factor below APR –factor above APR) X ((APR-rate below APR)/.002 )]
CRUT calculation for differing payments
Donor CRT Charity
Anything Left at Death
Payments During Life
Initial Transfer
Rule: 10% of present value minimum to
charity
Reality: Share of CRT assets
to charity, <2%
Split interests trusts, filing year 2011, IRS Statistics of Income
The IRS tax deduction is actuarially too large because CRT donors live longer
Annuity purchasers live longer (i.e., sick
people don’t buy lifetime annuities)
Wealthy people live longer (CRT donors are very wealthy)
Charitable bequest donors live longer
See: James, R.N., (2013) American Charitable bequest demographics.
STEP 1: Using §7520 rate, at what age will the CRAT exhaust? Using a financial calculator solve for n (number of time periods) after entering present value (initial CRAT assets), rate (§7520 rate), payments, and setting future value to 0. The underlying formula is
STEP 2. Is there >5% chance the donor will live that long? (lx@age-of-exhaustion / lx@current-age, using Table 2000CM at www.irs.gov/Retirement-Plans/Actuarial-Tables )
CRAT disqualified if >5% chance of exhaustion due to annuitant longevity
So what happens if it doesn’t qualify as a CRT?
Retained interest gifts are not otherwise deductible. Trust isn’t charitable and pays taxes on any gain or income.
No tax benefits
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts3. Calculating Deductions
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts4. Income Calculation
Professor Russell JamesTexas Tech University
How are distributions from a CRT
taxed?
When the trust makes a payment, it opens the
spigot.
Ordinary income is paid first, then capital gain and
so forth.
Return of PrincipalExempt IncomeCapital
GainOrdinary Income
Donor gives $100,000 of stock ($10,000 basis) to CRT. The CRT sells the stock, buys corporate bonds generating $3,000 of income and municipal bonds generating $2,000 of tax exempt income.
Return of PrincipalExempt IncomeCapital
GainOrdinary Income
Donor gives $100,000 of stock ($10,000 basis) to CRT. The CRT sells the stock, buys corporate bonds generating $3,000 of income and municipal bonds generating $2,000 of tax exempt income.
$10,000
$2,000
$90,000
$3,000
Return of PrincipalExempt IncomeCapital
GainOrdinary Income
What is the tax treatment of a $2,000 distribution?
$10,000
$2,000
$90,000
$3,000
Return of PrincipalExempt IncomeCapital
GainOrdinary Income
What is the tax treatment of a $2,000 distribution?
Recipient pays taxes on:
$2,000 of ordinary income
$10,000
$2,000
$90,000
$3,000
Return of PrincipalExempt IncomeCapital
GainOrdinary Income
What is the tax treatment of a $5,000 distribution?
$10,000
$2,000
$90,000
$3,000
Return of PrincipalExempt IncomeCapital
GainOrdinary Income
What is the tax treatment of a $5,000 distribution?
Recipient pays taxes on:
$3,000 of ordinary income$2,000 of capital gain
$10,000
$2,000
$90,000
$3,000
Return of PrincipalExempt IncomeCapital
GainOrdinary Income
What is the tax treatment of a $10,000 distribution?
$10,000
$2,000
$90,000
$3,000
Return of PrincipalExempt IncomeCapital
GainOrdinary Income
What is the tax treatment of a $10,000 distribution?
Recipient pays taxes on:
$3,000 of ordinary income$7,000 of capital gain
$10,000
$2,000
$90,000
$3,000
Return of PrincipalExempt IncomeCapital
GainOrdinary Income
If CRT ordinary income earnings are always higher than distributions, no capital gain tax will ever be paid.
Return of PrincipalExempt IncomeCapital
GainOrdinary Income
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts4. Income Calculation
Professor Russell JamesTexas Tech University
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts5. Special Trust Types
Professor Russell JamesTexas Tech University
Other charitable remainder
trust combinations
Donor CRT Charity
Initial Transfer
Anything Left at Death
Lesser of trust income or 5% of trust assets
When would you want this limitation?
Suppose you want the trust to hold a
non-income producing asset
A normal payout requirement could
force a sale
land, art, non-dividend or closely-held stock
Donor CRT Charity
Initial Transfer
Anything Left at Death
Lesser of trust income or 5% of trust assets
Past payments are made up
whenever net income is sufficient
NIMCRUTs may be problematic when later returns are consistently less than payout rates.
There isn’t enough income to make normal payouts or make-up past deficiencies.
“Flip CRUT”: A NICRUT/NIMCRUT that converts to a CRUT at a trigger event
NICRUT/NIMCRUT
Standard CRUT
Trigger Event
Common trigger events are sale of hard-to-value property or reaching
retirement age
2015 2016 2017 2018 2019 … Death
Initial Transfer
Anything Remainingat Death
2014
Trig
ger E
vent
Inco
me
up
to
5
%
Inco
me
up
to
5
%
Inco
me
up
to
5
%
5%
5%
2015 2016 2017 2018 2019 … Death
Initial Transfer
Anything Remainingat Death
2014
Trig
ger E
vent
$0
.00
Ex: Trigger is sale of $1,000,000 of non-income producing land funding CRT
$0
.00
$0
.00
$5
0,0
00
$5
1,0
00
CRT “spigot” trustsTrustees flip income off and on at will by investment choice• Commercial deferred annuities*
• Limited partnership interests
• Non-dividend paying growth stocks
• Delay realizing gains (post-transfer capital gain can count as income)
*Limits on this activity currently “under review” by IRS
Conrad Teitell suggests triggering a FLIP-CRUT using a small, but hard-to-market, asset such as one share of closely-held stock
Then trustee sells whenever the flip is desired
Flip when sold
A donor can give part of an undivided interest (e.g., 75% as tenants in common) to a CRT.
Subsequent sale generates capital gain for the retained share, but the contribution generates a tax deduction.
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts5. Special Trust Types
Professor Russell JamesTexas Tech University
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts6. Solutions & Problems
Professor Russell JamesTexas Tech University
Charitable Remainder Trust
Flexible & Expensive
• CRTs are individually created according to the specific desires of each client
Charitable Gift Annuity
Simple & Cheap
• CGAs from a charity are usually identical except for the dollar amount
The flexibility of CRTs
• Unlimited number of public charity or private foundation beneficiaries (income limitations pass through)
• Open choice on payout years and amounts
• Unlimited number of income beneficiaries
• Special restrictions on income beneficiaries allowed (where violation gives income to alternate beneficiary)– Spendthrift trusts
– Match earned income to prevent “trust fund” kids
– Require random drug tests
“Notwithstanding any provision of this Will to the contrary, my grandchildren DAVID PANZIRER and WALTER PANZIRER shall not be entitled to any distributions from any trust established for such beneficiary's benefit under this Will unless such beneficiary visits the grave of my late son JAY PANZIRER, at least once each calendar year, preferably on the anniversary of my said son's death (March 31, 1982) (except that this provision shall not apply during any period that the beneficiary is unable to comply therewith by reason of physical or mental disability as determined by my Trustees in their sole and absolute discretion).”
Leona Helmsley’s Charitable Remainder Unitrust created
in her will includes
What kind of property can a CRT hold?
Subchapter S corporation rules do not allow CRT shareholders
100% excise tax on Unrelated Business Taxable Income (UBTI), where CRT is
running a business (e.g., owning as a sole proprietor or partner) instead of being a
passive investor
Not UBTIDividends, interest, annuities, royalties, rents from real estate, and capital gains, so long as none of them involve debt-financing
UBTINet income from running a hotel, parking lot, convenience store, coin operated laundry
orDebt financed net income
Ex: CRT receives a $1,000,000 home ($100,000 basis). Trustee makes improvements using a $100,000 mortgage (acquisition indebtedness) and sells for $1,200,000.
Result?
Ex: CRT receives a $1,000,000 home ($100,000 basis). Trustee makes improvements using a $100,000 mortgage (acquisition indebtedness) and sells for $1,200,000.
Due to debt financing
$1,000,000 capital gain is UBTI, taxed at 100%, and lost.
Self-Dealing
CRT can’t sell, lease, loan, or allow use of assets by CRT creator, contributor, trustee, or their ancestors, descendents, or spouses
If all parties agree can a
CRT be broken and
distributed?
If all parties agree can a
CRT be broken and
distributed?
IRS has allowed termination & distribution of present value of all interests
PLR 200208039
Donor plans to create CRT with remainder value sufficient to build a building, but charity needs building now. Solutions?
Donor plans to create CRT with remainder value sufficient to build a building, but charity needs building now. Solutions?
CRT may segregate and pledge funds as collateral for a loan taken out by the charity. (Charity can pay off loan with remainder at death.)
PLR 8807082
Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts6. Solutions & Problems
Professor Russell JamesTexas Tech University
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Donor CRT Charity
Initial Transfer
Anything Left at Death
Payments During Life
Charitable Remainder Trusts
Professor Russell JamesTexas Tech University