CGNA: Chapter 12 - Life Income Assets, Advanced & Additional Resources

This article is an excerpt from the 2018 2nd edition of Charitable Gifts of Noncash Assets, a comprehensive guide to illiquid giving by Bryan Clontz, ed. Ryan Raffin. Published by the American College of Financial Services for the Chartered Advisor in Philanthropy Program (CAP), with generous funding from Leon L. Levy. For a free digital copy of the 2nd edition, click here, and to order a bound copy from Amazon, click here.

Life Income Interests Advanced1

By Michael Parham

Below is an in-depth examination on gifts of life income interests. Life income interest topics are based on Michael Parham’s “I Want It Now! Early Termination of Charitable Remainder Trusts.” For quick take-aways on gifts of life income interests, see Life Income Interests Quick Take-aways. For a review based on that article, see Life Income Interests Intermediate. For an in-depth examination adapted and excerpted from the article, see Life Income Interests Advanced. For further details, see Life Income Interests Additional Resources.

Most other chapters in this book address noncash asset gifts which have a determinable value. The owners donate these assets to a qualifying nonprofit, and oftentimes receive an income stream in return—typically the asset-funded vehicle pays that amount through the income which the asset generates. Imagine instead if the donor already owned an income stream, meaning that the individual had a right or interest in receiving payments for some period of time. This period of time could be for a set number of years, or more likely, for life. What if the donor did not need the income interest, and decided to donate it to charity? How would the parties complete the gift?

This section examines a number of different types of income interest, including charitable remainder trusts, gift annuities, charitable lead trusts, and pooled-income funds. It discusses how they are structured, and how the donor and charity might go about completing the gift together. It also addresses the all-important tax aspects of these gifts.

Donation of Income Interests By Early Termination of Charitable Remainder Trusts

Quick Refresher—What is a Charitable Remainder Trust?

A charitable remainder trust is a trust that holds assets and pays an amount for a term of years or lifetime to an income recipient. The income recipient can be the person who donated the assets to the trust, the donor’s spouse, or a third party. The donor receives a charitable income tax deduc- tion at the time the trust is funded, and if the payments end at the donor’s death, there is no estate tax liability. At the end of the trust term, whatever assets remain in the trust pass to charity. The donor can name the charity in the trust or can designate it in some other way.

The payments can be a set amount each year—either a fixed dollar amount or percentage of the value of the assets on transfer to the trust. This type of charitable remainder trust is known as a charitable remainder annuity trust (CRAT). The payments can also be based on the value of the trust assets as of a certain day each year. This type of charitable remainder trust is known as a charitable remainder unitrust (CRUT).

A third option is for the trust to pay the lesser of the net income or a fixed percentage of the trust assets as valued on a certain day each year. The trust can also contain a provision that allows for increased payments, if the income generated for a certain year exceeds the fixed percentage amount. This type of charitable remainder trust is known as a net income with make-up charitable remainder unitrust (NIMCRUT).

Another variation is the flip charitable remainder unitrust (FLIP-CRUT). In this case, the trust only begins operating as a CRUT following a predetermined trigger event. Typically, this will be the sale of the underlying asset placed in trust. After the trust receives the proceeds from sale, it distributes income to the named beneficiaries just as a normal CRUT would, and the nonprofit receives the remainder interest. See the case study in chapter 9 for an example of a FLIP-CRUT funded with an automobile.

Why Terminate Charitable Remainder Trusts Early

There are two basic motivations for terminating a charitable remainder trust early. The first is when the remainder charity needs money immediately. The assets contained in a charitable remainder trust are a good source of funds that a charity can tap without requiring the donor to write a check. The second case is when the income beneficiaries no longer need some or all of the income, or conversely, wish to receive their portion as a lump sum immediately. By terminating a NIMCRUT,
a beneficiary who had only been receiving the net income from the trust each year could instead receive one lump-sum payment.

There are several tax issues related to the early termination of charitable remainder trusts. In addition, charitable remainder trusts are subject to the private foundation rules. Because of this, the rules relating to the termination of private foundations come into play.

Income tax issues include the value of the charitable deduction, if any, that the person terminating the trust will receive. If the person is going to receive a lump-sum payment, there is also the question of how the IRS will tax the payment: as ordinary income or capital gain. Gifts to charity qualify for the gift tax charitable deduction under Code Section 2522. When the parties terminate a trust, there is the question of whether this would generate any gift tax.

If the parties only terminate a portion of the trust, there is the question of whether the remainder of the trust would continue to qualify as a charitable remainder trust. Also, the private foundation rules bring up the questions of whether the partial termination would require payment of the excise tax under Code Section 507, whether the self-dealing rules under Code Section 4941 and following would apply, and whether the partial interest rule under Code Section 170(f ) would be violated.

Different Ways to Terminate

There are two main ways to terminate a charitable remainder trust to donate the existing income interest, in part or in whole. For purposes of these materials, they will be referred to as total termination and partial termination. The parties to a charitable remainder trust can also terminate it on a pro rata basis, but this simply means that beneficiaries all receive the present value of their existing interest—so the charity is not actually receiving a gift of an income interest.

• Total termination refers to the situation where the donor or income beneficiary agrees with the trustee and charitable remainder beneficiaries to completely shut down the trust and distribute any remaining assets to the charities.
• Partial termination happens when the donor or income beneficiary agrees with the trustee and charitable remainder beneficiaries that only a portion of the trust will be terminated and that the remainder of the trust will continue to make payments as before. The partial termination means smaller distributions since a portion of the trust assets have been transferred to charity.

Total Termination

In 1986, the IRS issued Revenue Ruling 86-60, which subsequent private letter rulings frequently reference in dealing with terminations of charitable remainder trusts.2 To qualify for the deductions, the donors must either relinquish or exercise any discretionary powers they may hold. For example, if the donor has the power to change the charitable remainder beneficiary, he will have to irrevocably name a charity as the beneficiary. If he has the power to revoke the income interest of a successor income beneficiary, he will have to exercise this power.

What kind of income tax deduction will there be? Depending on how much the value of assets in the trust appreciate and what the 7520 rate will be at the time the donors terminate the trust, the combined value of the two deductions could total more than the amount of the original gift.3

A wrinkle on this method was set forth in Private Letter Ruling 200152018. In this case, the donor (Taxpayer) established a CRUT with trust assets distributed to Academy upon Taxpayer’s death. Later, Taxpayer proposed to transfer his unitrust interest in the trust to Academy in exchange for a charitable gift annuity. The IRS approved this transaction, with some interesting tax results.

The IRS ruled that Taxpayer would be entitled to a charitable income tax deduction to the extent that the present value of Taxpayer’s unitrust interest on the transfer date exceeded the present value of the annuity payments made by Academy on the same date. It also allowed a charitable gift tax deduction on the excess value of the unitrust interest on the date of transfer over the value of the annuity payments on the date of transfer.

However, the IRS ruled that upon the transfer of his unitrust interest in the trust to Academy in exchange for the annuity, the Taxpayer would have long-term capital gain in the amount of the value of the annuity. In other words, the Service would treat termination of the CRUT in exchange for the gift annuity as a sale of a capital asset (although undistributed capital gains on trust assets were not included in income). The Taxpayer’s basis would be deemed zero pursuant to Code section 1001(e)(1).

Partial Termination

Termination of a charitable remainder trust does not have to be an all-or-nothing deal. The IRS has allowed the partial termination of a trust which would allow for the donation to charity of a portion of a charitable remainder trust, with the balance continuing as before.4 By terminating a portion of the charitable remainder trust, the charity who was the remainder beneficiary received immediate dollars.

The partial terminations are carried out in two basic ways. One method is for the donor to assign an undivided percentage of the trust to the charity. Another method is to divide the trust into two separate trusts with the donor then disclaiming the unitrust interest. Both methods are discussed in this section.

Assignment Method

A good example of the “assignment” method is Private Letter Ruling 9550026. In this case, a married couple were the income beneficiaries of a NIMCRUT which made unitrust payments to the husband and wife jointly and would continue to make payments to the survivor of them. Upon the death of the survivor, the trust would distribute its assets to University. Each spouse had the right by will to revoke the other spouse’s interest in trust as to his or her community property interest in the trust.

Six years after establishment of the trust, University needed ready cash, so the couple proposed to make a gift of a 20 percent undivided partial interest in the unitrust payment to University. Each spouse would disclaim his or her contingent right to receive the other’s unitrust interest after the spouse’s death by executing a valid disclaimer. Then, the couple would make a gift of a 20 percent undivided interest in the unitrust payment to University by execution and delivery of an irrevocable assignment valid under state law. The gifted 20 percent interest would merge with the remainder interest, leaving University with a 20 percent undivided interest in the entire trust assets, and an undivided remainder interest in the other 80 percent of the trust.

The IRS ruled that the couple were entitled to charitable income and gift tax deductions for the value of the undivided interest in the unitrust payment transferred to University. The IRS stated that although the couple did not contribute their entire interest in the property, the gift still qualified as an undivided portion of the entire interest since they contributed 20 percent of their income interest in the trust. The IRS also said that the taxpayers’ statement that they did not divide their interest in the property to avoid the partial interest rules was creditable, in part because of the six-year period between their creation of the trust and the proposed contribution.

In addition, the IRS ruled that the gift of the undivided partial interest in the unitrust would not disqualify the trust as a unitrust. Also, they ruled that the couple would not realize capital gain and that the value of the gift under Code Section 170 (for income tax purposes) and Section 2522 (for gift tax purposes) would be the present value of the right to receive annual payments per the terms of the trust.

Division Method

A good example of the “division” method is found in Private Letter Ruling 200140027. Taxpayer had established a standard unitrust which provided that on the death of the Taxpayer, the trustee was to distribute all principal and income of the trust among certain charities it named. However, Taxpayer reserved the right to change the amounts or percentages which the trust would distribute or could designate other charitable organizations for distributions.

The trustee proposed to divide the trust into two separate trusts, Trust A and Trust B, on a fractional basis of 85 percent and 15 percent respectively. The provisions of the trust would govern both Trust A and Trust B. Taxpayer would irrevocably designate a charity as the remainder beneficiary of Trust B. Taxpayer would then assign to the charity his unitrust interest in the assets segregated as Trust B.

Under local law, Taxpayer’s release of his unitrust interest accelerated the charity’s succeeding interest. Under state law, the segregation of assets into Trust B, the designation of charity as the remainder beneficiary of Trust B, and the assignment to charity of the unitrust interest in Trust B would result in a merger of the unitrust and remainder interests in Trust B. Hence, the charity would be entitled to an outright distribution of the Trust B corpus.

The IRS allowed a charitable deduction and stated that the value of the gift would be the present value of the right to receive unitrust payments. Upon the irrevocable designation, the Taxpayer’s transfer of the remainder in Trust B became a completed gift. The Service allowed a charitable gift tax deduction, because the Taxpayer’s transfer to charity was a transfer, not in trust, of every interest and right the Taxpayer owned in the property. Finally, the IRS ruled that although Trust B terminated, Trust A would continue to qualify as a charitable remainder unitrust.

Self-Dealing

Charitable remainder trusts are subject to the same rules as private foundations. One of those rules is the one against “self-dealing.” Before the IRS will approve, they must determine whether the early termination could result in a greater allocation of trust assets to the income beneficiary, to the detriment of the charitable beneficiary, than would a termination at the income beneficiary’s death as the trust agreement provides.

The IRS will not allow early termination unless the donors can show that the early termination cannot be reasonably expected to cause the charity to receive less than it would have if the trust had remained in effect for the duration. Although there is no way to answer this question definitively, the IRS has stated that the question can still be answered in a positive manner. To do this, the income beneficiary must demonstrate he has no knowledge of a medical condition or other circumstance likely to result in a shorter life expectancy than that set forth in Table V of Section 1.72-9 of the Regulations.5

In a number of Private Letter Rulings, the income beneficiaries provided sworn evidence that they had no physical condition that would cause them to have a shorter than normal life expectancy. Affidavits of this type appear in all of the relevant Private Letter Rulings. Basically, the income beneficiary has to be in decent health. If the income beneficiary has, or has had, any condition that could shorten his or her life expectancy, then the IRS will not allow early termination with a pro rata distribution. The penalty for early termination that does not meet IRS approval would be the enforcement of a “termination tax.” Code Section 507 imposes the termination tax on certain private foundation terminations.

Private Letter Ruling 200324035 stated, in language that has been repeated in later Private Letter Rulings, that the donor’s proposed early termination would not constitute an act of self-dealing because all of the following factors were present: state law allowed the early termination; all beneficiaries favored the early termination; the trustees would use the regulations formula for deter- mining the present values of the income and remainder interests in a charitable remainder trust; the income beneficiaries’ physicians had conducted examinations of the income beneficiaries and stated under penalty of perjury that they found no medical conditions expected to result in shorter than average longevity (under Section 1.72-9); the income beneficiaries had signed similar statements; and any distribution of assets in kind would be made in a pro rata manner.6

Early Termination of Charitable QTIP Trust

A charitable QTIP trust for married couples can be more flexible than charitable remainder trust planning. A charitable QTIP is simply a QTIP trust that has a charity as the remainder beneficiary. A spouse can establish it either during life or at death for the benefit of the other spouse. The trust pays no less than the net income to the spouse for life. It could also contain a provision for distribution of principal to the spouse in the trustee’s discretion. The trust would meet all the rules to qualify as a QTIP trust, but does not have to qualify as a charitable remainder trust, because the trust qualifies for both the unlimited marital deduction during the spouse’s life and the charitable deduction at the spouse’s death.7

An example may be helpful. Decedent died, survived by Spouse. During her life, Decedent and Spouse transferred their respective 50 percent interests in certain community property to a revocable trust which terminated on Decedent’s death. On termination of the trust, Decedent’s 50 percent interest in the trust passed to Trust B, a trust which Decedent created during her lifetime. Under Decedent’s will, the residue of her estate was likewise distributable to Trust B.

Trust B provided that the trustee was to distribute the trust residue to a “Marital Trust.” However, there was a provision that any part of the Marital Trust for which the trustee did not make a QTIP election would pass to a third trust (Trust C).

Under the terms of the Marital Trust, Spouse was to receive for his life the net income of the trust and as much principal as the trustee distributed in the trustee’s discretion for the Spouse’s support and medical care. On Spouse’s death, the trust would distribute certain tangible assets to designated persons and organizations, with the balance of the Marital Trust property passing to charity.

Spouse was the trustee of the Marital Trust as well as executor of Decedent’s estate. The Spouse proposed that he, as trustee of the Marital Trust, petition the local probate court for an order dividing the Marital Trust into two trusts, Marital Trust 1 and Marital Trust 2. In all respects, the terms of Marital Trust 1 and Marital Trust 2 would be identical to the terms of the Marital Trust. Marital Trust 1 would receive all tangible personal property, all of the business, and possibly some cash and marketable securities.

Marital Trust 2 would receive only publicly traded securities and cash. The division order would not transfer a fractional interest in any asset to Marital Trust 2. The Spouse would make a QTIP election over all property of Marital Trust 1 and Marital Trust 2.

The court order would provide that if Spouse transferred his income interest in Marital Trust 2 to charity, that Marital Trust 2 would terminate and the Marital Trust 2 property would be distributed outright to charity. Accordingly, Spouse would then give his income interest in Marital Trust 2 to charity.

The IRS ruled as follows:

1. For estate tax purposes, the court’s division of the Marital Trust into two trusts funded with specific assets would not make either Marital Trust 1 or Marital Trust 2 ineligible for Spouse’s QTIP election.
2. For estate tax purposes, both Marital Trust 1 and Marital Trust 2 were eligible for the QTIP election, and would not lose eligibility as a result of the court order authorizing Spouse to make a gift of his income interest in Marital Trust 2 to charity.
3. For gift tax purposes, Spouse’s gift of his income interest in Marital Trust 2 qualifies for the gift tax charitable deduction.
4. For gift tax purposes, the Spouse would be treated as making a gift of the remainder interest in Marital Trust 2 when he makes a gift of his income interest in Marital Trust 2 and Spouse’s gift of the remainder interest would qualify for the gift tax charitable deduction.
5. For gift tax purposes, Spouse’s gift of his income interest in Marital Trust 2 would not result in gift tax treatment of any part of Marital Trust 1.
6. For income tax purposes, Spouse’s gift of his income interest in Marital Trust 2 would qualify for an income tax charitable deduction.

The IRS also ruled that dividing the Marital Trust into Marital Trust 1 and Marital Trust 2 and contributing the spouse’s interest in Marital Trust 2 was not a transfer of a fractional interest, but was a transfer of an undivided portion of his entire interest in the Marital Trust.

Charitable Gift Annuities Structure and Timing

When considering donations of income interests in charitable gift annuities, there is one key structural consideration. CGAs usually make distributions for the lifetime of one or two annuitants, although income for a term of years can be contractually arranged with a “commuted” annuity that squeezes lifetime payments into a shorter time period.8 Regardless of whether there are one or two annuitants, the CGA has a basis which regulations allocate between gift and sale portion (meaning it gets bargain sale treatment). The gift amount creates the immediate tax deduction, while the sale portion is deductible only if and when the annuitant gives income to charity.9

To qualify as a CGA, the agreement must leave at least ten percent of the present value of contributed assets to charity.10 The American Council on Gift Annuities recommends rates that leave a projected average of 50 percent to charity.11 The charity calculates present value based on interest rates and mortality tables at the time the parties create the annuity. Regulations exist in the form of state securities and insurance laws, as well as best practices and guidance that the ACGA publishes. These regulations and guidelines typically mean that the donor should utilize a qualified advisor’s services in creating a CGA.

Donation of Charitable Gift Annuity Income Interest

Oftentimes, the CGA contract will limit the ability of the annuitant to transfer or otherwise assign the income interest to any party other than the charity. This makes the donation of the income interest somewhat simpler, since there is only one possible charitable recipient. Of course, an annuitant could simply donate annuity distributions as she receives them, and then deduct the donated amounts. However, this is a somewhat clunky arrangement and, and the donor would have to repeat it with each year’s tax return. Hence many donors would prefer to simply donate the entire interest.

Donation of the CGA income stream is simple from the recipient charity’s point of view. It gets to keep whatever funds were left. This means the unreturned amounts of the initial contribution, along with any excess amount the annuity generated (interest, dividends, appreciation).

To complete the transaction, the charity should first enter into an agreement with the donor, and then give the donor written acknowledgement of the donation.12 The parties should reduce the agreement to writing with the donor assenting to the termination of payments and acknowledging that the charity will retain the remaining amounts. The acknowledgement should contain the present value of the annuity payments, and should indicate that regulations may limit the donor’s deduction to unreturned investment (which typically should be lower than the present value).

As the charity’s acknowledgement suggests, the donor and former annuitant’s calculation of her tax deduction is less clear. Although a deduction is certainly available, the IRS has not clearly established which amounts the donor should consider including.13 It is tempting to simply treat the deduction the same way as a gift of a CRT income interest, but the IRS views annuity income amounts differently. The Service treats portions of the distributions above the donor’s proportionate basis as ordinary income.14 As a result, many advisors will limit donor deductions to unreturned investment in the contract.

Despite this limitation, Tax Court holdings have long held that annuity contracts are capital assets, which suggests the deduction may be more than simply unreturned investment.15 Indeed, “a portion of the increase in the FMV of the annuity may be attributable to factors other than the accrual of interest or a buildup in the underlying value of the annuity.”16These include changes to interest rates, mortality assumptions, credit condition, and other external factors. Arguably the donors should characterize these amounts as capital gain; donors should consult with their tax advisors to determine the appropriate deductible amounts.

Bequest of Income Interest in a Charitable Lead Trust

A charitable lead trust (CLT) is similar to a CRT, but with the donor and charity reversing roles. As a result, there is no lifetime income interest for the donor to contribute—the charity already is the income beneficiary. This means that to donate an income interest, the setup must be different than with CRTs or CGAs.

From the charity’s perspective, it should approach donors with a proposal for a bequest that cre- ates a CLT, ideally funding the trust with income-producing assets. Very wealthy donors in particular may be amenable to this gift structure, for two important reasons. First, CLTs remove assets from the estate, which lowers the estate tax by creating a tax deduction.17Secondly, the assets in the remainder can pass to the CLT’s named beneficiaries (typically the donor’s heirs) tax free. Indeed, the Waltons use CLTs for this purpose, as did the late Jacqueline Kennedy Onassis.18

The charity should work with the donor to create the CLT in the donor’s will, putting it either in annuity or unitrust form (CLAT or CLUT—again similar to remainder trusts). The term of the trust should generally run for 10, 15, or 20 years.19 The charity will receive annuity payments for that time period, either in a set dollar amount or as a set percentage amount. Unlike CRTs, the CLT does not have any minimum or maximum payout requirements. Nonetheless, the trust will still owe the charity annuity payments of some sort, so the asset will either need to be income-producing or the trustee must sell and reinvest it. In both cases, the donor will likely want trust assets to produce a return that beats the governmental applicable federal rate (AFR). Arranged correctly, with favorable interest rates and sufficient appreciation, the CLT can be a winning vehicle for all parties involved.

Pooled-Income Funds

The oft-ignored pooled-income fund (PIF) is another possible source for donations of income inter- ests. In some ways, it may actually be better suited to donation than the others discussed above. PIFs are a split-interest gift, where the donor transfers underlying assets to a public charity. The charity pools those assets together with others donated to the fund, splitting management costs and income produced proportionally among members of the PIF.20 On the death of each beneficiary, their proportionate remainder passes to the charity. Donors receive a tax deduction when they first transfer the assets for the present value of the projected remainder interest—calculated from the beneficiary’s actuarially-determined remaining lifespan.

If a donor decides he no longer needs the income interest, one option is to donate the income outright.21 PIF income interests have a significant advantage here, particularly over CGAs—the income interest is a capital asset with zero basis. This means that the income tax deduction the donor receives will be the full present value of the interest minus the deduction he already took.

The charity will likely need to enter into a written agreement with the donor, and provide an acknowledgement, as described for CGA income donations above. The charity will then own the donor’s interest in the PIF outright via the income and remainder interests merging.

Of course, rather than an outright gift of the income interest, the donor may want a differently structured income stream—either in CRT or CGA form.22 A CRT may be impractical from the charity’s perspective, since PIFs tend to have lower account values than CRTs. This may make it difficult to justify administrating a CRT which the donor funds with income from a PIF.

However, a CGA may work. One major hurdle to converting the income from a PIF to a CGA is that the recommended ACGA rates (discussed above) will result in a significant drop in income for donors. As a result, the charity may need to issue the CGA at rates much higher than the ACGA recommends. The charity must carefully weigh whether it can depart from normal CGA best practices, and whether it is advisable to do so given the risk. However, in the event that the charity does issue a CGA or even CRT, it must comply with normal regulations on those planned giving vehicles.

Life Income Interests Additional Resources

Below are further details on gifts of life income interests. Life income interest topics are based on Michael Parham’s “I Want It Now! Early Termination of Charitable Remainder Trusts.” For quick take-aways on gifts of life income interests, see Life Income Interests Quick Take-aways. For a review based on that article, see Life Income Interests Intermediate. For an in-depth examination adapted and excerpted from the article, see Life Income Interests Advanced. For further details, see Life Income Interests Additional Resources.

For a discussion of practical considerations pertaining to early termination, see Fogt, A. (October, 2013), “Turning Planned Gifts in Current Dollars,” Partnership for Philanthropic Planning 9, http://my.pppnet.org/library/85161/1/NCPP13_Fogt.pdf.

For a broad analysis of many remainder trust and gift annuity issues, see Teitell, C. (2010), “Charitable Giving Tax Pitfalls: Avoiding; Climbing Out; Cyanide Capsule?,” Part- nership for Philanthropic Planning, http://my.pppnet.org/library/41711/1/NCPP2010_ teitell.pdf.

For a legal examination of the termination of charitable gift annuities, see J. Thomas MacFarlane, Esq. to the Council on Michigan Foundations (July 14, 2009), https://www. michiganfoundations.org/sites/default/files/resources/Legal%20Opinion_Termina- tion%20of%20CGA%20Contract%20Payments.pdf.

For a discussion of remainder trust administration and early termination, see Katzen- stein, L. (2012), “Charitable Remainder Trusts: Charity Can Begin at Home,” American Bar Association, http://www.americanbar.org/content/dam/aba/events/real_property_trust_estate/step/2012/materials/rpte_step_2012_07_13_Katzenstein_01_CRATs_and_ CRUTs.authcheckdam.pdf.

For analysis of recent legislative changes to early termination of NICRUTs and NIMCRUTs, see Fox, R.L. (January 25, 2016), “Protecting Americans from Tax Hikes (PATH) Act of 2015 Amends IRC Section 664(e) to Disregard Net Income Limitation Upon Early Termination of NICRUTs and NIMCRUTs; Long-Awaited Change Negates IRS Ruling Position,” Planned Giving Design Center, http://www.pgdc.com/pgdc/protecting-amer- icans-tax-hikes-path-act-2015-amends-irc-section-664e-disregard-income-limitatio.

IRC § 170(f )(2)(B) (allowing income tax deductions for gifts of certain income interests)           

IRC § 2522(c) (allowing gift tax deductions for transfers of interests in the form of remainder interests or annuities)

Rev. Rul. 86-60, 1986-1 C.B. 302 (approving a deduction after assignment of a lifetime CRAT income interest to charity)

Private Letter Ruling 200140027 (approving proposed division of income interest in CRT and assignment to charitable remainderman)

Private Letter Ruling 200438028 (approving early termination of a charitable QTIP) Estate of Washburn, 11 Cal.App. 735 (Cal. Ct. App. 1909) (discussion of merger doctrine)

• 1. This chapter excerpts and adapts Parham, M. (2009), “I Want It Now! Early Termination of Charitable Remainder Trusts,” 13 Journal of Gift Planning 5, http://my.pppnet.org/library/000/000/23/s1.pdf.
• 2. Revenue Rulings and Private Letter Rulings addressing total termination include: Rev. Rul 86-60, Private Letter Ruling 9529039 (April 28, 1995), Private Letter Ruling 9721014 (February 19, 1997), Private Letter Ruling 200152018 (September 26, 2001) (CRT terminated in exchange for gift annuity), Private Letter Ruling 200633011 (April 14, 2006), Private Letter Ruling 200631006 (April 14, 2006), and Private Letter Ruling 200802024 (September 14, 2007).
• 3. For example, if Donor established a one-life CRAT at age 75 with $1 million with a 5 percent payout with a 7520 rate of 4.2 percent, his charitable income tax deduction would be $594,680. If he transferred his remaining annuity interest to charity five years later, at age 80, assuming that the current balance of the CRAT was $750,000 and the 7520 rate was still 4.2 percent, his charitable deduction would then be $244,807. Between the two contributions, he would receive a total of $839,487 in charitable income tax deductions. In the meantime, he had received $250,000 in payouts.
• 4. Private Letter Rulings addressing total termination include: Private Letter Ruling 8805024 (November 5, 1987), Private Letter Ruling 9550026 (September 18, 1995), Private Letter Ruling 200140027 (June 29, 2001), Private Letter Ruling 200205008 (February 1, 2002), Private Letter Ruling 200207026 (February 26, 2002), Private Letter Ruling 200524014 (June 17, 2005), Private Letter Ruling 200525008 (June 24, 2005), and Private Letter Ruling 200808018 (February 22, 2008).
• 5. 26 C.F.R. 1.72-9
• 6. Here is a list of Private Letter Rulings that deal with pro rata distribution: (standard valuation) – 200127023 (July 6, 2001), 200314021 (April 4, 2003), 200324035 (June 13, 2003), 200403051 (January 16, 2004), 200616035 (April 21, 2006), (NIMCRUTs—old valuation method) – 200208039 (November 29, 2001), 200304025 (January 24, 2003) (distribution of portion of trust with continu- ation of remainder), 200310024 (December 12, 2002), 200408031 (November 25, 2003), 200525014 (June 24, 2005) (later revoked by Private Letter Ruling 200614032 (April 7, 2006)), (NIMCRUTs—new valuation method) – 200725044 (June 22, 2007), 200733014 (August 17, 2007), 200817039 (April 25, 2008), and 200833012 (August 15, 2008).
• 7. There are two Private Letter Rulings that deal with the early termination of a portion of a Charitable QTIP: 200122025 (June 1, 2001) and 200438028 (September 17, 2004).
• 8. Kallina II, E.J. and Koenig, E. (2010), “Gift of an Income Interest in a Charitable Gift Annuity,” Partnership for Philanthropic Planning 1, https://www.charitableplanning.com/library/documents/1791195.
• 9. Id. at 2.
• 10. Id.
• 11. See the American Council on Gift Annuities, “Gift Annuity Rates,” http://www.acga-web.org/gift-annuity-rates (describing rates and underlying assumptions).
• 12. Memorandum from J. Thomas MacFarlane, Esq. to the Council on Michigan Foundations at 2 (July 14, 2009), https://www.michiganfoundations.org/sites/default/files/resources/Legal%....
• 13. Fogt, A. (October, 2013), “Turning Planned Gifts in Current Dollars,” Partnership for Philanthropic Planning 9, http://my.pppnet.org/ library/85161/1/NCPP13_Fogt.pdf.
• 14. Kallina II, E.J. and Koenig, E. at 2.
• 15. Id. at 3.
• 16. Id. at 2.
• 17. Toce Jr., J.P. et al, Tax Economics of Charitable Giving, 26-8 – 26-12 (2003).
• 18. Mider, Z.R. (September 11, 2013), “How Wal-Mart’s Waltons Maintain Their Billionaire Fortune: Taxes,” Bloomberg, http://www. bloomberg.com/news/articles/2013-09-12/how-wal-mart-s-waltons-maintain-their-billionaire-fortune-taxes.
• 19. Houston, M. (May 11, 2000), “The Charitable Lead Trust: Don’t Forget the Donor!,” Planned Giving Design Center, http://www.pgdc. com/pgdc/charitable-lead-trust-dont-forget-donor.
• 20. Newman, D.W. (May 5, 2003), “Pooled-Income Fund,” Planned Giving Design Center, http://www.pgdc.com/pgdc/ pooled-income-fund.
• 21. Newman, D.W. (January 8, 2000), “Terminating a Pooled-Income Fund,” Planned Giving Design Center, http://www.pgdc.com/pgdc/ terminating-pooled-income-fund.
• 22. Id.