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Accelerate Your Charity’s CRT Interest

Planned Giving Today

Originally Published in Planned Giving Today.


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Not all of the IRS’s rulings on charitable remainder trusts are bad news these days.  The Service recently issued Private Letter Ruling 9550026, in which it provided charities and donors with a road map for successfully accelerating a portion of the charity’s interest in a CRUT.  The plan permits a donor to let a share of the CRUT assets pass to the charity “early.”  For charities with a pressing need for funds, and for donors who find they don’t need all the income they thought they would when they created the trust, the ruling provides some welcome relief and guidance.

Here is the situation the ruling considered:  The donors (husband and wife) had established a 9 percent “net income only” CRUT in 1989, for their joint lives, and for the survivor’s life.  They named a university as remainderman.  Each spouse reserved the right to revoke the other spouse’s interest in the share of trust assets donated by that spouse.

Later, the university approached the couple to contribute to a building project, and the couple decided to let a 20 percent portion in the CRUT past early to the university.  They also hoped for an additional charitable deduction for the gift.  To be on the safe side, they decided to seek a private letter ruling before going forward.

The attorneys developed a plan to accomplish this goal, which involved the following steps.  First, each spouse would sign a “disclaimer,” under which each renounced the right to receive the other’s unitrust interest after the other’s death.  Next, the spouses would give a 20 percent undivided interest in their right to receive trust payments, using an irrevocable assignment instrument which was valid under the law of their state.  Under trust law principles, the gift of the 20 percent “income” interest would merge with 20 percent of the university’s remainderman interest.

Next, the donors and the university would consent to the partial distribution of the 20 percent CRUT assets to the university, free from trust, to be used for the building project.  As many CRUT forms provide, the assets distributed to the university would be “fairly representative of the relative bases of the various assets in the trust.”

The Service approved this plan, and ruled that the gift would entitle the donors to an income tax deduction for the value of the 20 percent undivided “income” interest.  The Service defined this value as the present value of the right to receive annual payments equal to 9 percent of the value of 20 percent of the trust assets, beginning on the date of the transfer of the gift to the university, and ending on the date of the second spouse’s death.  To make this calculation, it will be necessary to consult IRS Publication 1458, Actuarial Values Beta Volume, and follow the other technical steps in the calculation as set forth in the ruling.

The Service viewed this favorable ruling as a logical extension of Rev. Rul. 86-60, 1986-1 C.B. 302, in which it had ruled that a grantor/beneficiary’s transfer of his or her entire annuity interest in a charitable remainder annuity trust to the charitable remainderman qualifies for a charitable deduction.  If a deduction is available for a gift of a grantor’s entire interest in a charitable remainder trust, then a deduction should also be available for a gift of an undivided portion of a grantor’s interest in such a trust, the Service concluded.

The Service also believed the spouses’ representation that they had not created the CRUT with the purpose of avoiding the rules governing gifts of partial interests, as six years had elapsed before the proposed transfer of the 20 percent interest.

Originally Published in Planned Giving Today (April 1996)

IRS Circular 230 Disclosure: To the extent this message contains tax advice, the U.S. Treasury Department requires me to inform you that any such advice, whether in the body of the message or in any attachment, is not intended or written by my firm to be used, and cannot be used by any taxpayer, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code. Advice from my firm relating to tax matters may not be used in promoting, marketing or recommending any entity, investment plan or arrangement to any taxpayer.

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