CHARITABLE REMAINDER TRUST GIFT PLANNING.... including the FULL-MONTY CRUT CONRAD TEITELL, LL.B., LL.M*

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1 CHARITABLE REMAINDER TRUST GIFT PLANNING... including the FULL-MONTY CRUT by CONRAD TEITELL, LL.B., LL.M* American Law Institute-American Bar Association June 27, 2002 WARNING: MAY CAUSE DROWSINESS *A principal in the Connecticut- and Florida-based law firm of Cummings & Lockwood, resident in the firm s Stamford office. He is an adjunct visiting professor at the University of Miami School of Law and holds an LL.B. from Columbia University Law School and an LL.M. from New York University Law School. Conrad Teitell 2002

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3 CHARITABLE REMAINDER TRUST GIFT PLANNING... including the FULL-MONTY CRUT TABLE OF CONTENTS I. CHARITABLE REMAINDER UNITRUSTS (CRUTS) AND ANNUITY TRUSTS (CRATS) A. High-speed overview 1 B. The FLIP-CRUT 3 C. Capital gain NIM-CRUTs post-transfer-to-the-trust capital gain allocation to income ok but not pre-transfer-to-the-trust gain 9 D. Adding a flip provision to existing NIM-CRUTs and patching up existing defective FLIP-CRUTs 12 E. Scrivener's error route to STAN-CRUT from NIM-CRUT or NI-CRUT 15 F. Annual valuation of CRUT with unmarketable assets 16 G. After year-end grace period for STAN-CRUT and CRAT payments 19 H. Four-tier payment rule also applies to NIM-CRUTs and NI-CRUTs confirmation of 1972 regulation 23 I. Valuing gift to family member who is a successor beneficiary of a NIM-CRUT or NI-CRUT 24 J. NIM-CRUTS that invest in deferred annuities and controlled partnerships 26 K. Five problem issues watch your step 27 L. CRUTs and CRATs must meet 10% minimum remainder interest (10% MRI) and 50% maximum annual payout (50% MAP) requirements 29 M. Unitrusts and annuity trusts are exempt from taxation. IRC 664(c) 41 N. Governing instrument requirements 41 O. Income tax aspects. 47 P. Caveat 47

4 Q. Capital gain 48 R. Major benefits of charitable remainder unitrusts and annuity trusts 48 S. Gift tax rules including marital deduction rules 49 T. Estate tax rules including marital deduction rules 54 U. Q-TIP/CRUT COMBO a better plan 57 V. Imperfectly operated charitable remainder annuity trust disqualified 60 W. Tax-exempt unitrusts and annuity trusts. 66 X. Gift of remaining life interest after gift of remainder interest, thereby accelerating charitable remainder 67 Y. Collapsing a CRUT and dividing assets between beneficiary and charitable remainder organization 70 Z. Collapsed NI-CRUT OK if income beneficiary healthy 72 AA. Swap of CRUT life interest for gift annuity 74 BB. CLAT trustee removed and surcharged failure to diversity. Implications for charitable remainder trusts too 75 i CC. H and W sever the knot and their CRUT 78 DD. Abusive CRT regulations (T.D. 8926, I.R.B. 492, issued 2/5/01) 80 EE. Income redefined for CRTs, PIFs, other trusts proposed regs 82 FF. The proposed regulations 84 GG. Charitable remainder unitrusts 85 HH. Pooled income funds 86 II. What to do (or not do) now 87 JJ. Reforming defective CRTs

5 88 KK. Requirements for IRS to accept a faulty CRT s reformation IRC 2055(e)(3) deciphered 89 LL. Reforming a defective CRT a primer 90 MM. Tale of CRT that couldn t be reformed to satisfy IRS 91 NN. Will contest settlement saves deduction 92 OO. Prohibited contribution returned CRUT saved 93 II. POOLED INCOME FUNDS A. The basics 94 B. Gift tax rules including marital deduction rules 96 C. Estate tax rules including marital deduction rules 99 D. Planning considerations 102 E. Reforming defective pooled income funds to qualify for tax benefits 107 F. Combining identical pooled income funds 107 G. Pooled funds of merging charities 108 H. The Philanthropy Protection Act of III. GIFT OF REMAINDER IN PERSONAL RESIDENCE OR FARM A. Basics 109 B. Gift tax rules including marital deduction rules 110 C. Estate tax rules including marital deduction rules 112 D. Planning considerations 116 IV. CHARITABLE GIFT ANNUITIES A. Basics 120 B. Gift tax charitable deduction

6 123 C. Estate tax charitable deduction gift annuities created during donor's lifetime 125 D. Gift annuities by will 127 E. Planning considerations 128 F. Philanthropy Protection Act of 1995 (P.L ) 129 G. The deferred payment gift annuity 130 ii V. USING TREASURY TABLES TO VALUE SPLIT-INTEREST GIFTS A. Background 134 B. The tables' components interest and mortality 137 C. The two-month lookback 139 D. Making the election to use the two-month lookback 139 E. Wrinkle for charitable remainder annuity trusts the "5% probability" test 140 F. Pooled income funds 140 G. Wrinkle for charitable gift annuities 140 VI. SPECIMEN AGREEMENTS SPECIMEN CHARITABLE REMAINDER UNITRUST STAN-CRUT, ONE-LIFE 142 NIM-CRUT, TWO-LIFE, DONOR'S SEPARATE PROPERTY 149 FLIP-CRUT, TWO-LIFE, DONOR'S SEPARATE PROPERTY 157 SPECIMEN CHARITABLE REMAINDER ANNUITY TRUST