CHARITABLE TRUSTS FIRST EDITION

Transcription

1 CHARITABLE TRUSTS FIRST EDITION L. WILLIAM SCHMIDT, JR., ESQ. MARGOT SUMMERS EDWARDS, ESQ. CHELSEA L. MAY, ESQ. ANNE AUSTIN ZECKSER, ESQ. Holland & Hart LLP CONTINUING LEGAL EDUCATION IN COLORADO, INC. COLORADO BAR ASSOCIATION DENVER BAR ASSOCIATION

2 CHARITABLE TRUSTS FIRST EDITION ISBN: Published by: CONTINUING LEGAL EDUCATION IN COLORADO, INC Grant Street, Suite 300 Denver, Colorado Phone: (303) Toll-free: (888) Fax: (303) Website: Dawn M. McKnight, Esq. Assistant Executive Director Colorado Bar Association CLE Lisa C. Travis Fischer, J.D. Acquisitions Editor/Manager Colorado Bar Association CLE Kathryn Noble, Esq. Legal Editor Colorado Bar Association CLE John and Lynn Cleveland Subject Index Lindex COLORADO BAR ASSOCIATION CLE CLE in Colorado, Inc. is the nonprofit educational arm of the Colorado Bar Association and the Denver Bar Association Continuing Legal Education in Colorado, Inc. (CBA-CLE) publications are intended to provide current and accurate information about the subject matter covered and are designed to help attorneys maintain their professional competence. Nothing contained in this book is legal advice or other professional advice. Readers are responsible for obtaining advice from their own lawyers or other professional. Publications are distributed with the understanding that CBA-CLE does not render any legal, accounting, or other professional service. The contents of this book do not necessarily reflect the views of the Internal Revenue Service or any other regulating governmental entity. The material in this book represents the opinions and views of the authors, and should not be construed as the views of any of the authors law firms or of Continuing Legal Education in Colorado, Inc. The proper interpretation or application of the material in the book is a matter for the considered judgment of the individual legal practitioner, and CBA-CLE disclaims all liability therefor. As with any legal textbook or other secondary authority, attorneys dealing with specific legal matters should also fully research current, primary authorities. Copyright 2011 by Continuing Legal Education in Colorado, Inc. All Rights Reserved.

3 PUBLISHER S NOTE We are extremely pleased to add Charitable Trusts to our CBA-CLE Trusts and Estates library. In today s difficult economic times, it is more important than ever to help clients to find creative ways to include charitable giving in their estate plans. This book offers extensive coverage of both charitable remainder trusts and charitable lead trusts. The appendices include an array of helpful forms, sample trust documents, and other practical resources. Charitable Trusts is an invaluable resource for practitioners advising clients on these complex gifting issues. We are enormously indebted to the authors, Bill Schmidt, Margot Summers Edwards, Chelsea May, and Anne Austin Zeckser for supporting this project. The authors spent countless hours writing, revising, and polishing their manuscript for this book. We greatly appreciate their responsiveness, dedication, and patience throughout the project s many stages. Writing a book is no small task, and we are grateful to the authors for undertaking this endeavor. We extend our particular thanks to Bill for agreeing to take on the responsibilities of this project in addition to his work on his other excellent publication, Funding the Revocable Living Trust (CLE in Colo. Inc. Supp. 2005). Kathryn Noble, Esq. Legal Editor Colorado Bar Association CLE Dawn M. McKnight, Esq. Assistant Executive Director Colorado Bar Association CLE ACKNOWLEDGMENT Production of Charitable Trusts, First Edition, required the editors to Shepardize the citations used in the book. This research was made possible by a generous contribution from the Colorado Bar Association CLE s technology partner, LEXIS-NEXIS. HOW TO CITE THIS BOOK As the first full citation, you may cite this book as: L. William Schmidt, Jr., et al., Charitable Trusts, First Ed. (CLE in Colo. Inc. 2011). After the first full citation, you may cite this book as: Schmidt, Jr., et al., supra n., at. iii

4 COLORADO BAR ASSOCIATION CLE Colorado Bar Association CLE (CBA-CLE) is the nonprofit educational arm of the Colorado and Denver bar associations. We strive to produce high-quality CLE programs and legal publications at competitive prices, with substantial member discounts. However, we are also financially independent from the bar associations and self-supporting. We receive no membership dues or other unearned revenue from the CBA or DBA. Nearly all of our income derives from program registration fees and from sales of books, audio and video homestudy courses, and course manuals. Every year, hundreds of Colorado lawyers and judges volunteer their time and expertise to help us produce these educational resources for our members. Without this generous contribution of talent, CBA-CLE could not fulfill its mission. CBA-CLE Board of Directors July 2010 to June 2011 Denver Bar Association Appointments Colorado Bar Association Appointments Richard I. Zuber Barbara Blumenthal Robert A. Holmes Baird B. Brown Michael T. Mihm E. David Griffith J. Marcus Painter Honorable Terry Ruckriegle Kristin Rozansky Deanna L. Westfall Gregory James Smith Eugene Zuspann, II Charles C. Turner CBA-CLE Staff B. Gary Abrams Executive Director Evan Brown Manager of Media and Web Development Ellen Buckley, Esq Legal Editor Lisa M. Cordova Program Coordinator Mary Dilworth Marketing Manager Lisa C. Travis Fischer, J.D Acquisitions Editor/Manager Terri L. Fonseca Customer Service Priscilla S. Fulmer, Esq Program Attorney Alli Gerkman, Esq Manager of Online Content and Development Susan Hoyt Legal Editor Darlene M. Johnson Managing Editor Lori L. Krupske Finance Manager Deb Marnocha Desktop Publisher Dawn M. McKnight, Esq Assistant Executive Director Jo McWilliams Order Fulfillment/Shipping Ryan Morris Program Coordinator/Data Specialist Kathryn Noble, Esq Legal Editor Heidi A. Ray, Esq Program Attorney Julie Lynn Revers Program Administrator Adrian Romero-Sosa Technical Producer Nicoll Stapleton Marketing Assistant Kenneth Sudduth Customer Service Kristen Wolfe Publications Assistant iv

5 PREFACE HISTORICAL PERSPECTIVE: ONE AUTHOR S PERSONAL REMINISCENCE It is an unfortunate reality that many of our colleagues do not counsel their clients on the benefits of charitable giving. I was once such a trusted advisor. You can skip this preface because it will not be instructive for the proper drafting of charitable trusts, but you may nevertheless find it an interesting footnote about how I was introduced to what has become the magic of charitable giving. In the early 80s, I was retained by a Dallas law firm to assist with the formation of their estate planning practice. For the next two years, I travelled to Dallas each week and gained a great deal of experience planning for community property clients. Shortly after commencing this venture, I was called by Gordon M. Caswell, who was the President of Baylor Health Care System Foundation. He was nationally known as a fundraising giant. He had seen an announcement of my recent venture into Texas and wanted to stop by and introduce himself. Soon after exchanging pleasantries, Gordon asked how often my clients made charitable gifts as part of their estate plans. I replied (mimicking the typical reaction of my clients when I ventured to ask) that most of them believed charity started at home. Accordingly, I had made few testamentary charitable devises. To this, Gordon responded, I guess I am wasting my time. You are not as good an estate planning lawyer as I have been told (or words to that effect). After recovering from the initial surprise of such a candid comment, I can remember thinking this was a strange way for someone wanting me to give him money to endear a newcomer to Dallas. But then, Gordon asked for a favor that forever changed my attitude about charitable giving. He suggested that I give him 10 minutes to show me how a charitable remainder trust (CRT) works. Willing to do anything that would get him out of my office, I consented. He took out his flipchart, worn from many such demonstrations, and began to explain the many advantages of the CRT. I was interested but not convinced I could sell it to many clients. As we parted company, Gordon made one last request: Promise that you will explain this to the next new client you meet, and then tell me their reaction. I agreed. The next new client was already impatiently waiting in the lobby. As fate would have it, this was an unpleasant, elderly widow lady who already had her estate plan sketched on a note pad, which she handed me to review. After a painful conversation where I had to tell her that many of the things she wanted were either illegal or unenforceable, I then asked if she would give me 10 minutes to explain an idea that had just been explained to me. Looking at her watch and mumbling something I mercifully could v

6 Charitable Trusts not understand, she consented. When I told her this related to a strategy called a charitable remainder trust, she rose and began to walk out. I pleaded for her to grant me the brief explanation so that I could discharge my promise to a prominent Dallas fund-raiser. She sat back down but looked very angry. I stumbled through the explanation as best as I could remember it. At the conclusion, my new client pointed a sharp finger in my direction. I waited for the worst. Her response: Young man, why has someone in this firm not explained this to me before? This is the perfect solution for the sale of some prime real estate I have owned for years but have been reluctant to sell for tax reasons. How quickly can you prepare one of those what do you call it? I was not sure I had explained it properly, so my reaction was: Maybe I should go over this again more thoroughly just to make sure you understand. She understood perfectly. And Gordon Caswell understood perfectly. Since that time, I have realized that clients depend on their advisers to evaluate their financial condition and make meaningful recommendations that will allow them to support their communities especially when their innate philanthropic nature can be satisfied without sacrificing the economic interests of their families. I hesitated to ask clients about gifts to charity because I shared their belief that it came down to charity versus family. Besides, I was afraid that their charitable planning goals would require that I learn how to properly advise them and then prepare the necessary legal documentation to successfully implement those goals. Those of you reading this book did not require a Gordon Caswell to inspire and taunt you to become versed in the need to understand charitable planning. Hopefully, you will find in the pages that follow a few important ideas that will allow you to navigate this wonderful area of tax law. In the process, you will be able to share with your clients the satisfaction of making meaningful contributions to the many wonderful causes that make America the greatest experiment in the history of mankind. Bill Schmidt, Esq. April 2011 vi

7 ABOUT THE AUTHORS L. William Schmidt, Jr., Esq. Of Counsel Holland & Hart LLP th St., Ste Denver, CO (303) Mr. Schmidt has extensive experience in many areas of trust and estate law. He helps clients develop and implement plans for their estates and has experience preparing wills, revocable and irrevocable trusts, special needs trusts, life insurance trusts, family partnerships, charitable trusts, and charitable foundations. He also has experience with business estate planning, premarital agreements, and probate. Mr. Schmidt is admitted to practice in Colorado and Texas and before the U.S. District Court, the U.S. Court of Appeals (10th Circuit), and the U.S. Tax Court. He has been listed in Best Lawyers in America and Colorado Super Lawyers, and was named a Five Star Wealth Manager by 5280 Magazine. Mr. Schmidt is also a recipient of the Denver Foundation Philanthropic Leadership Award (2004) and the Bonfils Blood Center Foundation Leadership Award (2007). He is a member of the Denver, Colorado, and American bar associations. Mr. Schmidt has also been active in the Rocky Mountain Estate Planning Council (founder and past-president), the Denver and Centennial Estate Planning Councils, the American College of Trust and Estate Counsel (fellow and past Colorado state chair), and the Denver Planning Giving Roundtable (past member of board of directors). He received his juris doctorate degree from the University of Michigan Law School and his bachelor of science degree from the University of Colorado. vii

8 About the Authors Margot Summers Edwards, Esq. Holland & Hart LLP One Boulder Plaza 1800 Broadway, Ste. 300 Boulder, CO (303) Ms. Edwards concentrates her practice on tax and estate planning, wealth transfer planning, and charitable giving techniques. She has particular experience advising clients regarding planning for real estate assets. Ms. Edwards utilizes vehicles such as trusts, limited liability companies, family limited partnerships, and marital agreements to achieve tax savings, as well as to meet family and personal objectives. Prior to joining Holland & Hart, Ms. Edwards clerked for Justice Gregory J. Hobbs Jr. on the Colorado Supreme Court. Ms. Edwards currently serves on the firm s Associates Committee and serves as a member of the board of directors of the Colorado Youth Program. She is a member of the Rocky Mountain Estate Planning Council, the American Bar Association (Taxation and Real Property, Probate and Trust Sections), the Colorado Bar Association (Trust and Estate Section), the Boulder County Bar Association (Trust and Estate Section), and the Colorado Women s Bar Association. She received her juris doctorate degree from the University of Colorado School of Law (Order of the Coif) and her bachelor of science degree from St. John Fisher College (summa cum laude). viii

9 About the Authors Chelsea L. May, Esq. Holland & Hart LLP th St., Ste Denver, CO (303) Ms. May joined Holland & Hart LLP in She is a member of the firm s tax department, specializing in sophisticated wealth transfer planning, business succession planning, and charitable giving techniques. Ms. May has particular experience with the formation and funding of limited liability companies, limited partnerships, irrevocable life insurance trusts, defective grantor trusts, and grantor retained annuity trusts. Prior to law school, Ms. May practiced as a certified public accountant at Ernst & Young, LLP, where she performed audit procedures for businesses ranging from technology start-ups to Fortune 500 companies. She holds a law degree from the University of Colorado (Order of the Coif) and both a bachelor of accountancy and a bachelor of business administration in finance and international business from the University of Oklahoma (summa cum laude). Anne Austin Zeckser, Esq. Holland & Hart LLP th St., Ste Denver, CO (303) [email protected] Ms. Zeckser is a member of the tax department at Holland & Hart LLP. She is in the Private Client Group and focuses her practice on wealth transfer and tax and estate planning. She also has experience in corporate law, including mergers and acquisitions, venture capital financings, and debt financings. Prior to joining Holland & Hart, Ms. Zeckser served as an intern for the Colorado Supreme Court, worked at the American Enterprise Institute for Public Policy Research, and was a research assistant for Carnevale Associates, LLC in Washington, D.C. She is a member of the American, Colorado, and Denver bar associations. Ms. Zeckser received her juris doctorate degree from Boston College Law School and her bachelor of arts degree from Princeton University. ix

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11 TABLE OF CONTENTS Chapter 1 AN OVERVIEW OF CHARITABLE TRUSTS EXHIBITS Exhibit 1A Diagram Of Tax Benefits Of A Charitable Remainder Unitrust Exhibit 1B Diagram Of Tax Benefits Of A Non-Grantor Charitable Lead Trust Exhibit 1C Diagram Of Tax Benefits Of A Grantor Charitable Lead Trust Exhibit 1D Section 7520 Rates ( ) Chapter 2 A TYPICAL CASE FOR A CHARITABLE REMAINDER TRUST A Typical Case For CRT Planning Meeting The Client s Objectives The NIMCRUT Chapter 3 TYPES OF CHARITABLE REMAINDER TRUSTS Introduction Charitable Remainder Annuity Trust (CRAT) Charitable Remainder Unitrust (CRUT) Standard Charitable Remainder Unitrust (STANCRUT) Net Income Charitable Remainder Unitrust (NICRUT) Net Income With Make-Up Charitable Remainder Unitrust (NIMCRUT) Flip Charitable Remainder Unitrust (FLIPCRUT) Testamentary Charitable Remainder Trusts Chapter 4 TAX ASPECTS OF CHARITABLE REMAINDER TRUSTS Overview Income Tax Matters General Rules Income Tax Deduction Limitations Income Tax Status Of A CRT Filing Requirements For A Charitable Income Tax Deduction xi

12 Charitable Trusts 4.3 Gift Tax Consequences Estate Tax Treatment Taxation Of Distributions From CRT EXHIBIT Exhibit 4A Limitations On Charitable Income Tax Deductions Chapter 5 TRUSTEE OF THE CHARITABLE REMAINDER TRUST Who May Serve As Trustee Duties Of The Trustee Chapter 6 DRAFTING A CHARITABLE REMAINDER TRUST Required And/Or Advisable Provisions Trust Must Be Irrevocable Payment To Recipient Designation Of Single Or Joint Recipients Limitation On Payments To Non-Charitable Beneficiaries Additional Contributions To The Trust Valuation Date Adjustment For Incorrect Valuation Valuation Of Unmarketable Assets Distribution Of Remainder To Charity No Investment Restrictions No Payment Of Transfer Taxes From Trust Private Foundation Restrictions Capital Gain Allocation Provision Sample Charitable Remainder Unitrust Chapter 7 TRAPS FOR THE UNWARY: CHARITABLE REMAINDER TRUST Prearranged Sales Property Encumbered By Debt Recourse Mortgage Debt Debt-Financed Property Unrelated Business Taxable Income Definition Of UBTI Exceptions xii

13 Table of Contents 7.4 Self-Dealing Disqualified Persons Prohibited Transactions Exceptions Private Foundation Rules Taxable Expenditures Excess Business Holdings Jeopardizing Investments Percent Minimum Charitable Benefit Rule Percent Probability Of Exhaustion Test Chapter 8 SUITABLE ASSETS FOR A CHARITABLE REMAINDER TRUST Real Estate Securities Publicly Traded Securities Privately Held Securities Installment Sale Contracts Partnership Interests Tangible Personal Property Gold Coins Chapter 9 EARLY TERMINATION OF THE CHARITABLE REMAINDER TRUST WITH DIVISION OF ASSETS TO DONOR AND CHARITY Reasons For Early Termination Internal Revenue Service Rulings On Trust Termination Basic Requirements (PLR ) The Good Health Issue Procedural Matters Private Foundation Issue Income Tax Consequences Of Termination The Four-Tier Rule The Capital Gain Exception To The Four-Tier Rule Valuation Adjustment For NIMCRUTs xiii

14 Charitable Trusts Chapter 10 ADDITIONAL OPTIONS FOR EARLY TERMINATION OF THE CHARITABLE REMAINDER TRUST Alternatives Other Than Division Of Assets Outright Gift To The Charitable Remainderman Sale Of Income Interest To The Charitable Remainderman Exchange For A Charitable Gift Annuity Rescission Need For One s Own Ruling Chapter 11 A TYPICAL CASE FOR A CHARITABLE LEAD TRUST A Typical Case For CLT Planning Meeting The Client s Objectives Tax Advantages Of A CLT Non-Tax Advantages Of A CLT Disadvantages Of A CLT Chapter 12 TYPES OF CHARITABLE LEAD TRUSTS Introduction: What Is A Charitable Lead Trust? Characteristics Common To Both CLATs And CLUTs The Charitable Interest Payment Source Term The Charitable Beneficiary (Or Beneficiaries) The Remainder Interest CLATs The Lead Interest Advantages Of CLATs Disadvantages Of CLATs CLUTs The Lead Interest Advantages Of CLUTs Disadvantages Of CLUTs xiv

15 Table of Contents Chapter 13 GRANTOR CHARITABLE LEAD TRUSTS Introduction Advantages Of A Grantor CLT Income Tax Impact Of Grantor Trust Status Calculating The Income Tax Deduction Tangible Personal Property Distributions Of Excess Income To Charitable Lead Beneficiary Potential For Conversion To A Complex Trust Gift Tax Impact Of Grantor Trust Status Estate Tax Impact Of Grantor Trust Status Triggering Grantor Trust Status Chapter 14 TAX ASPECTS OF CHARITABLE LEAD TRUSTS Overview Income Tax General Rule Source-Ordering Provisions Preparing For The Possibility Of Excess Income Gift Tax Estate Tax Inter Vivos CLTs Testamentary CLTs Generation-Skipping Transfer Tax Chapter 15 TRUSTEE OF THE CHARITABLE LEAD TRUST Who May (And May Not) Serve As Trustee Institutional Trustee Charitable Lead Beneficiary The Donor Or Members Of The Donor s Family Recommendations Regarding Trustees Disinterested Trustee Reasonable Compensation Valuation Of Assets xv

16 Charitable Trusts Chapter 16 DRAFTING A CHARITABLE LEAD TRUST Historical Background A Word Regarding The IRS Forms Recommended Provisions Charitable Deduction Saving Clause Prohibit Commutation Trustees Fees Preparing For The Possibility Of Additional Contributions Preparing For Economic Uncertainty Increase Annuity Amount Year Over Year Selecting The Applicable 7520 Rate Chapter 17 TRAPS FOR THE UNWARY: CHARITABLE LEAD TRUSTS Debt-Financed Property Unrelated Business Taxable Income Definition Of UBTI Exceptions Self-Dealing Disqualified Persons Prohibited Transactions Exceptions Additional Private Foundation Rules Taxable Expenditures Excess Business Holdings Jeopardizing Investments Need For One s Own Ruling Chapter 18 SUITABLE ASSETS FOR A CHARITABLE LEAD TRUST Real Estate Securities Publicly Traded Securities Privately Held Securities Installment Sale Contracts Partnership Interests xvi

17 Table of Contents Chapter 19 CREATIVE CHARITABLE LEAD TRUSTS Introduction CLT + Family Limited Partnership Layered Testementary Lead Trust Combination CLT/CRT Shark Fin CLAT Supergrantor Charitable Lead Trust APPENDICES Appendix A IRS FORM 4720 RETURN OF CERTAIN EXCISE TAXES Appendix B IRS FORM 5227 SPLIT-INTEREST TRUST INFORMATION RETURN Appendix C IRS FORM 8283 NONCASH CHARITABLE CONTRIBUTIONS IRS FORM 8282 DONEE INFORMATION RETURN Appendix D RECEIPT FOR CONTRIBUTION TO CHARITABLE TRUST Appendix E SAMPLE CHARITABLE REMAINDER UNITRUST Appendix F REV. PROC IRS SAMPLE INTER VIVOS CRUT (ONE MEASURING LIFE) Appendix G REV. PROC IRS SAMPLE INTER VIVOS CRAT (ONE MEASURING LIFE) Appendix H REV. PROC IRS SAMPLE INTER VIVOS CRAT (TERM OF YEARS) Appendix I REV. PROC IRS SAMPLE INTER VIVOS CRAT (TWO MEASURING LIVES PAID CONSECUTIVELY) xvii

18 Charitable Trusts Appendix J REV. PROC IRS SAMPLE INTER VIVOS CRAT (TWO MEASURING LIVES PAID CONCURRENTLY AND CONSECUTIVELY) Appendix K REV. PROC IRS SAMPLE TESTAMENTARY CRAT (ONE MEASURING LIFE Appendix L SAMPLE NON-GRANTOR CHARITABLE LEAD ANNUITY TRUST Appendix M SAMPLE GRANTOR CHARITABLE LEAD ANNUITY TRUST Appendix N REV. PROC IRS SAMPLE CHARITABLE LEAD GRANTOR AND NON-GRANTOR ANNUITY TRUSTS Appendix O IRS PRIVATE LETTER RULING EARLY TERMINATION OF CRUT Appendix P IRS PRIVATE LETTER RULING EARLY TERMINATION OF NIMCRUT Appendix Q IRS PRIVATE LETTER RULING EARLY TERMINATION OF CRT Appendix R SAMPLE PRIVATE AGREEMENT TO TERMINATE CRT Appendix S SAMPLE COURT PETITION TO TERMINATE CRT Appendix T LIST OF REV. PROCS. CONTAINING IRS SAMPLE FORMS FOR CHARITABLE REMAINDER ANNUITY TRUSTS Appendix U LIST OF REV. PROCS. CONTAINING IRS SAMPLE FORMS FOR CHARITABLE REMAINDER UNITRUSTS SUBJECT INDEX xviii