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Recent Commentary

DAF Sells Corporate Stock to Donor's Son

Thursday, February 22, 2024
Highlights Historical

Intra-family transfer of closely held stock through donor advised fund avoids recognition of gain.

Visual Planned Giving - Chapter 12 - Charitable Remainder Trusts

Sunday, December 31, 2023

In the twelfth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James explores charitable remainder trusts (or "CRTs") and the rules governing each. CRTs offer both a wide range of benefits to correspond with a donor's goals and significant tax savings. They differ from CGAs because they are created by the donor, not the charity. The charitable remainder beneficiary of the CRT may not even know of its existence until it receives a check for the remaining assets after the death of the last income beneficiary. CRTs can last for one or more lives in being, or a term of years, not to exceed 20. To qualify as a CRT, the present value of the charitable remainder must be at least 10% at the creation of the trust.

There are two types of CRTs, the Charitable Remainder Annuity Trust (or "CRAT") and the Charitable Remainder Unitrust (or "CRUT"). Like a CGA, the CRAT pays a fixed sum to the annuitant each year. One difference is the annuity payments in the Charitable Remainder Annuity Trust are backed by the trust's assets, not the charity's assets. Thus, if the trust's assets are exhausted due to poor investments or the income beneficiaries' longevity, payments will cease. On the other hand, if a charity goes bankrupt, it won't be able to make the CGA payments.

Because the CRT is a tax-exempt entity, it can receive appreciated assets, sell them without incurring taxes, and make new investments. Income taxes will only be realized when the donor receives distributions. This leaves the CRT with more money to invest, which results in a higher income payout to the non-charitable beneficiary in the case of a CRUT or a longer stream of annuity payments in the case of a CRAT. Ultimately, the charity receives a larger sum upon the death of the last to die of the income beneficiaries due to the tax-exempt nature of the trust. CRTs offer flexibility not available with other forms of planned giving. Regardless of the complexity, one fundamental purpose is to swap a remainder interest for a charitable deduction and avoid taxes on the sale of the appreciated assets.

Some donors may be concerned with a premature death of all income beneficiaries, which would result in few income payments to the family unit. These donors typically consider using the income tax savings generated by the deduction to purchase life insurance to benefit heirs.

Income payments are taxed on a "worst in, first out" basis. Distributions are made first from ordinary income, second from capital gains (net short-term capital gain and then net long-term capital gain), third from tax-exempt income, and finally, fourth from a tax-free return of principal. If the CRT receives unrelated business income, it is subject to a 100% tax on this income.

In addition to the 10% remainder test, CRATs must pass a 5% probability of exhaustion test. Because income payments do not decrease when the trust asset value drops, as with a CRUT, there is a greater chance of the CRAT running out of funds. If the trust was exhausted, the donor would receive a charitable deduction, even though nothing passed to charity. Accordingly, a CRAT will be disqualified unless the chances of exhaustion of corpus are lower than 5%. With very low 7520 rates, CRATs will only qualify for the oldest donors. Fortunately, in 2016, IRS provided an alternative solution. A CRAT failing the 5% test will nonetheless qualify, if it requires termination, with all remaining assets passing to charity, whenever the assets fall to an amount less than 10% of the present value of the initial contribution.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series to help his readers understand Chapter 12 and the entire book.

Rate for Charitable Calculations Rises to 5.0%

Friday, February 16, 2024
Rates / Tables / Statistics

In Rev. Rul. 2024-04, the Service announced the Section 7520 rate for March will rise to 5.0%. The average rate for 2023 was 4.88%, while the average for 2024 is 5.00%.

IRS Updates Applicable Federal Rates for March 2024

Thursday, February 15, 2024

The IRS has announced the Applicable Federal Rates for March 2024, including the Section 7520 rate of 5.0%.