425 ALI-ABA Course of Study Estate Planning for the Family Business Owner Cosponsored by the ABA Section of Real Property, Trust and Estate Law - ABA Section of Taxation July 9-11, 2008 Boston, Massachusetts Charitable Remainder Trusts Reference Outline By Jeffrey N. Myers Jason R. Mahon Michael V. Bourland Bourland, Wall & Wenzel, P.C. Fort Worth, Texas
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427 CHARITABLE REMAINDER TRUSTS TABLE OF CONTENTS INTRODUCTION...1 I. WHAT IS A CHARITABLE REMAINDER TRUST (CRT), IN GENERAL...1 II. TAX ADVANTAGES OF A CHARITABLE REMAINDER TRUST...1 A. CRT Is Income Tax Exempt...1 B. Estate, Gift and Income Tax Deduction...1 III. LEGISLATIVE HISTORY...1 THE CODE, THE REGULATIONS AND THE RULINGS...1 I. GENERAL RULES APPLICABLE TO DEDUCTIONS OF GIFTS TO CRTS...1 A. Income...1 1. GENERAL RULE...1 2. EXCEPTION...1 B. Gift/Estate...2 1. GENERAL RULE...2 2. EXCEPTION...2 II. CITES - INCOME TAXATION OF SECTION 664 CHARITABLE REMAINDER TRUSTS...2 A. Distributions to Recipients of Annuity Amount or Unitrust Amount...2 B. Distributions to Charities...2 C. Taxation of CRT...2 III. CITES - DEFINITIONS OF CHARITABLE REMAINDER ANNUITY TRUSTS/CHARITABLE REMAINDER UNITRUSTS...2 A. General Rules Applicable to Both...2 B. Charitable Remainder Annuity Trusts ( CRAT )...2 C. Charitable Remainder Unitrusts ( CRUT )...2 IV. CITES - CALCULATION OF FAIR MARKET VALUE OF REMAINDER INTEREST...2 V. CITES - EXCISE TAX/PRIVATE FOUNDATION RULES...2 VI. VII. CITES - FILING OF RETURNS...2 CITES - RULINGS - APPROVED FORMS...2 A. Charitable Remainder Annuity Trust ( CRAT )...2 B. Charitable Remainder Unitrust ( CRUT )...3 REQUIREMENTS OF A CHARITABLE REMAINDER TRUST...3 I. IN GENERAL...3 A. Definitions...3 II. CHARITABLE REMAINDER ANNUITY TRUST ( CRAT ) VS. CHARITABLE REMAINDER UNITRUST ( CRUT )...3 A. CRAT...3 B. CRUT...3 1. FOUR TYPES OF CRUTS...3 C. No Hybrids...5 D. Comparison of CRATs and CRUTs...5 1. ADDITIONAL CONTRIBUTIONS...5 2. DISTRIBUTIONS IN KIND...6 III. QUALIFYING THE CRT UNDER SECTION 664...6
428 A. Valid Trust and Irrevocable Trust...6 B. The Annuity Amount and Unitrust Amount...6 1. THE AMOUNT...6 2. SHORT TAXABLE YEARS...6 3. INCORRECT PAYMENTS...7 4. REDUCTION OF ANNUITY AMOUNT OR UNITRUST AMOUNT..7 5. BEGINNING DATE FOR PAYMENT OF ANNUITY AMOUNT OR UNITRUST AMOUNT...7 C. Term of Payment of Annuity Amount and Unitrust Amount...8 1. THE TERM...8 2. ACCELERATION OF TERM...8 3. SHORT TERM CRTS...8 D. Recipient of Annuity Amount and Unitrust Amount...10 1. NAMED RECIPIENTS...10 2. AT LEAST ONE NOT A CHARITY...10 3. ALL INDIVIDUALS MUST BE LIVING...10 4. POWER TO SPRINKLE RETAINED BY TRUSTEE WHO WAS GRANTOR...10 5. POWER TO REVOKE BY WILL...10 6. AUTOMATIC TERMINATION OF SUCCESSIVE OR CONCURRENT RECIPIENT INTEREST IN THE EVENT OF DIVORCE...10 E. Charitable Remainderman...11 1. IRREVOCABLE CHARITABLE REMAINDERMAN...11 2. PRESENT VALUE OF CHARITABLE REMAINDER INTEREST...11 3. CONCURRENT/SUCCESSIVE REMAINDERMEN...12 4. ALTERNATE CHARITABLE REMAINDERMAN...12 5. SUBSTITUTION OF ALTERNATE CHARITY BY GRANTOR...12 6. EARLY DISTRIBUTION OF CORPUS...12 7. OTHER PAYMENTS...12 F. Private Foundation Restrictions...12 G. Taxes, Debts and Expenses...14 1. DEATH TAXES...14 2. DEBTS AND EXPENSES OF DECEDENT-TESTAMENTARY CRTS...14 H. Trustee...14 1. GRANTOR AS TRUSTEE...14 2. CHARITABLE REMAINDERMAN AS TRUSTEE...15 3. GRANTOR S RIGHT TO REMOVE AND REPLACE TRUSTEE...15 I. Avoidance of Grantor Trust Imposition...15 J. Taxable Year...15 TAX CONSEQUENCES OF A CRT...16 I. INCOME TAX CONSEQUENCES...16 A. Income...16 1. INCOME TO RECIPIENT OF ANNUITY AMOUNT OR UNITRUST AMOUNT...16 2. DISTRIBUTIONS TO CHARITY...17 3. TAXATION OF CRT...17 B. Donor s Income Tax Deduction...19 1. REMAINDERMAN IS A PUBLIC CHARITY...19 2. REMAINDERMAN IS A PRIVATE FOUNDATION...20
429 II. III. 3. FURTHER LIMITS APPLICABLE TO HIGH INCOME TAXPAYERS...21 4. SUBSTANTIATION OF THE CHARITABLE GIFT...21 5. FEDERAL RETURN FILINGS REQUIRED FOR A CRT...24 GIFT TAX CONSEQUENCES...24 A. Who is the Recipient of the Annuity Amount or Unitrust Amount...24 1. JUST THE DONOR...24 2. THE DONOR AND HIS SPOUSE...24 3. SOMEBODY OTHER THAN THE DONOR S SPOUSE...25 ESTATE TAX CONSEQUENCES...25 A. Inter Vivos CRATs and CRUTs...25 1. DONOR WAS RECIPIENT OF ANNUITY AMOUNT OR UNITRUST AMOUNT...25 B. Testamentary CRAT or CRUT...26 1. SPOUSE IS SOLE RECIPIENT...26 2. SPOUSE AND OTHERS ARE RECIPIENTS...26 3. SOMEBODY OTHER THAN SPOUSE IS RECIPIENT...26 FUNDING OF CRTs...26 I. INTRODUCTION...26 A. Primary Advantage 1 of a CRT...26 B. Primary Advantage 2 of a CRT...27 C. Primary Disadvantage of a CRT...27 II. MARKETABLE SECURITIES...27 A. Low Basis Highly Appreciated Marketable Securities...27 III. TAX EXEMPT SECURITIES...27 IV. REAL ESTATE...27 A. Unencumbered Real Estate...27 1. PERSONAL RESIDENCE...27 2. NON-PERSONAL RESIDENCE REAL ESTATE...27 B. Encumbered Real Estate...27 1. UNRELATED BUSINESS TAXABLE INCOME...28 V. SUBCHAPTER S STOCK...28 A. Contribution of the Stock...28 B. Contribution of the Assets of S Corporation by the S Corporation...28 1. LEGALLY BINDING OBLIGATION...28 2. UNRELATED BUSINESS TAXABLE INCOME...28 VI. REGULAR C CORPORATION...29 A. Excess Business Holdings...29 B. Legally Binding Obligation...29 C. Self-Dealing...29 D. Unrelated Business Taxable Income...29 VII. LIMITED LIABILITY COMPANY...29 VIII. OPTIONS...30 A. Old Position of Service - PLR 9240017...30 1. USE OF OPTION TO FUND CRT...30 B. New Position of Service...30 1. PLR 9417005...30 2. PLR 9501004...30 IX. OTHER ASSETS USED TO FUND CRTS...30 A. Qualified Retirement Plan Benefits...30 1. WITHDRAWING THE PLAN ASSETS AND THEN USING ASSETS