SPLIT-INTEREST CHARITABLE GIFTS: WHAT YOU NEED TO KNOW ABOUT CLTS AND CRTS

Transcription

1 SPLIT-INTEREST CHARITABLE GIFTS: WHAT YOU NEED TO KNOW ABOUT CLTS AND CRTS Prepared for State Bar of Texas Intermediate Estate Planning & Probate Course June9,2014 John R. Strohmeyer

2 THE CHARITABLE DEDUCTION A transfer to or for the use of a charitable organization Benefitted Organizations Public Charities Supporting Organizations Donor-Advised Funds Private Foundations Operating and Non-Operating Substantiation of gifts greater than $250 IRC 170(f)(8) Gifts of partial interests are generally not eligible for the charitable deduction IRC 170(f)(3)(A) 2

3 THE CHARITABLE DEDUCTION CALCULATION Cash or property with gain? IRC 170(e) Percentage limitation IRC 170(b) 50% of Contribution Base IRC 170(b)(1)(A) 30% of Contribution Base IRC 170(b)(1)(B) Contribution Base IRC 170(b)(1)(G) 2% floor on miscellaneous deductions IRC 67 Limitation on overall deductions IRC 68 Amounts that cannot be deducted currently are carried forward to the next taxable year IRC 170(d) 3

4 SPLIT-INTEREST TRUSTS Types Charitable Lead Trusts IRC 170(f)(2)(B) Charitable Remainder Trusts IRC 170(f)(2)(A) Pooled Income Funds IRC 642(c)(5) Interests Lead Interest Remainder Interest 4

5 CHARITABLE REMAINDER TRUSTS Lead interest benefits non-charitable beneficiary IRC 664(d) Remainder interest benefits IRC 170(c) Organization IRC 664(d) Structured as either an annuity interest or a unitrust interest Treas. Reg (a)(2) Not subject to Income Tax IRC 664(c) Subject to some of the Private Foundation Rules IRC 4947(a)(2) 5

6 CHARITABLE REMAINDER TRUSTS Tax Character of Distributions to Non-Charitable Beneficiaries Amounts of income (other than gains, and amounts treated as gains, from the sale or disposition of capital assets) to the extent that the CRT has such income for the current year or undistributed income for prior years IRC 664(b)(1) Capital gains to the extent that the CRT has undistributed capital gain for the current year or prior years IRC 664(b)(2) Other income to the extent of that other income for the current year or prior years IRC 664(b)(3) Distributions of corpus IRC 664(b)(4) 6

7 CRATS Lead interest must be a sum certain IRC 664(d)(1)(A) Remainder interest must be paid to or for the use of an IRC 170(c) organization IRC 664(d)(1)(C) Valuation of remainder interest IRC 664(d)(1)(D), 7520 Tax Consequences Income Tax: Deduction IRC 170(f)(2)(A) Gift Tax: Deduction IRC 2522(c)(2)(A) Estate Tax: Deduction IRC 2055(e)(2)(A) GST Tax: an IRC 170(c) organization and donor are in the same generation IRC 2651(f)(3) 7

8 Lead interest must annually pay a fixed percentage of the net fair market value of trust assets IRC 664(d)(2)(A) Remainder interest must be paid to or for the use of an IRC 170(c) organization IRC 664(d)(2)(C) Valuation of remainder interest IRC 664(d)(2)(D), 7520, Treas. Reg CRUTS 8

9 Tax Consequences Income Tax: Deduction IRC 170(f)(2)(A) Gift Tax: Deduction IRC 2522(c)(2)(A) Estate Tax: Deduction IRC 2055(e)(2)(A) GST Tax: Not applicable IRC 2651(f)(3) Alternate Payment Schemes CRUTS NICRUT Net Income CRUT Treas. Reg (a)(1)(i)(b)(1) NIMCRUT Net Income Makeup CRUT Treas. Reg (a)(1)(i)(b)(2) Flip CRUT Changes from NICRUT or NIMCRUT to standard CRUT on a triggering event Treas. Reg (a)(1)(i)(b)(3) 9

10 CHARITABLE LEAD TRUSTS Lead interest benefits IRC 170(c) Organization IRC 170(f)(2)(B) Remainder interest benefits non-charitable beneficiary Structured as either an annuity interest or a unitrust interest Treas. Reg A-6(c)(1) Must be a grantor trust IRC 170(f)(2)(B) Subject to some of the Private Foundation Rules IRC 4947(a)(2) 10

11 Lead interest must be a guaranteed annuity interest Treas. Reg A-6(c)(1), 1.170A-6(c)(2)(i) Remainder interest may be held in trust or paid outright to non-charitable beneficiary Valuation of remainder interest Treas. Reg CLATS 11

12 CLATS Tax Consequences Income Tax: Deduction IRC 170(f)(2)(B) Gift Tax: Deduction IRC 2522(c)(2)(B) Estate Tax: Deduction 2055(e)(2)(B) GST Tax: Inclusion ratio determined at termination of lead interest IRC 2642(e) Elect out of automatic exemption using Form

13 Lead interest must be a guaranteed unitrust interest Treas. Reg A-6(c)(1), 1.170A-6(c)(2)(ii) Remainder interest may be held in trust or paid outright to non-charitable beneficiary Valuation of remainder interest Treas. Reg A- 6(c)(3)(ii) analogizing to Treas. Reg (e)(6) CLUTS 13

14 Tax Consequences Income Tax: Deduction, unless circumstances show charity may not receive beneficial enjoyment IRC 170(f)(2)(B); Treas. Reg A-6(c)(3)(iii) Gift Tax: Deduction 2522(c)(2)(B) Estate Tax: Deduction 2055(e)(2)(B) GST Tax: GST exemption may be allocated at trust funding CLUTS 14

15 PRIVATE FOUNDATION RULES IRC 4941 Self-Dealing Transactions, including sales and exchanges, leases, loans, furnishing services or facilities, compensation, between an IRC 4946(a)(1) Disqualified Person and the CLT IRC 4943 Excess Business Holdings Holding greater than 20% interest in enterprise owned by an IRC 4946(a)(1) Disqualified Person IRC 4944 Jeopardy Investments Investments that jeopardize carrying out exempt purpose IRC 4945 Taxable Expenditures Amounts paid to carry on propaganda or influence legislation 15

16 REPORTING Form 1041 U.S. Income Tax Return for Estates and Trusts Form 1041-A U.S. Information Return Trust Accumulation of Charitable Amounts Form 4720 Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code Form 5227 Split-Interest Trust Information Return Form 8282 Donee Information Return (Sale, Exchange, or Other Disposition of Donated Property) Form 8283 Noncash Charitable Contributions 16

17 Split-Interest Charitable Trusts: What You Need to Know About CRTs and CLTs Charitable Remainder Annuity Trusts IRS Revenue Procedures and Forms John R. Strohmeyer Porter Hedges LLP 1. Rev. Proc Inter Vivos for One Life: 2. Rev. Proc Inter Vivos for Term of Years: 3. Rev. Proc Inter Vivos for Two Lives, Consecutive Interests: 4. Rev. Proc Inter Vivos for Two Lives, Consecutive and Concurrent Interests: 5. Rev. Proc Testamentary for One Life: 6. Rev. Proc Testamentary for Term of Years: 7. Rev. Proc Testamentary for Two Lives, Consecutive Interests: 8. Rev. Proc Testamentary for Two Lives, Consecutive and Concurrent Interests: Charitable Remainder Unitrust 1. Rev. Proc Inter Vivos for One Life: 2. Rev. Proc Inter Vivos for Term of Years: 3. Rev. Proc Inter Vivos for Two Lives, Consecutive Interests: 4. Rev. Proc Inter Vivos for Two Lives, Consecutive and Concurrent Interests: 5. Rev. Proc Testamentary for One Life: v1 1

18 6. Rev. Proc Testamentary for Term of Years: 7. Rev. Proc Testamentary for Two Lives, Consecutive Interests: 8. Rev. Proc Testamentary for Two Lives, Consecutive and Concurrent Interests: Charitable Lead Trusts 1. Rev. Proc Inter Vivos Grantor and Non-Grantor Charitable Lead Annuity Trust: 2. Rev. Proc Testamentary Charitable Lead Annuity Trust: 3. Rev. Proc Inter Vivos Grantor and Non-Grantor Charitable Lead Unitrust: 4. Rev. Proc Testamentary Charitable Lead Unitrust: Split-Interest Trust Information Return 1. Form 4720 Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code: 2. Instructions for Form 4720: 3. IRS Form 5227: 4. Instructions for Form 5227: 5. Form 8282 Donee Information Return (Sale, Exchange, or Other Disposition of Donated Property): 6. Form 8283 Noncash Charitable Contributions: 7. Instructions for Form 8283: 8. Form 8283-V Payment Voucher for Filing Fee Under Section 170(f)(13): v1 2