Charitable Gifts

<div class="Section1">To qualify as a charitable remainder unitrust, the trust must pay its unitrust amount to the noncharitable beneficiary at least annually. The unitrust amount for fixed percentage CRUTs may be paid within a reasonable time <em>after</em> the close of the year for which it is due if either of the following occur: (a) the character of the unitrust amount in the recipient&rsquo;s hands is income under IRC Section 664(b)(1), (2), or (3); or (b) the trust distributes property (other than cash) that it owned as of the close of the taxable year to pay the unitrust amount, and the trustee elects to treat any income generated by the distribution as occurring on the last day of the taxable year for which the amount is due. Additionally, for fixed percentage CRUTs that were created before December 10, 1998, the unitrust amount may be paid within a reasonable time after the close of the taxable year for which it is due if the percentage used to calculate the unitrust amount is 15 percent or less.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.Treas. Reg. &sect; 1.664(a)(1)(i).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> A charitable contribution is allowable as a deduction only if verified as required under regulations.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A charitable deduction is not allowed for any contribution of a check, cash, or other monetary gift unless the donor retains a bank record or a written communication from the charity showing the name of the charity and the date and the amount of the contribution.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The IRS has issued guidance on how charitable contributions made by payroll deduction may meet the requirements of IRC Section 170(f)(17). The Service clarified that unlike IRC Section 170(g)(8), which only applies to contributions of $250 or more (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8059">8059</a>), IRC Section 170(f)(17) applies to <em>any</em> contribution of a cash, check, or other monetary gift. For a charitable contribution made by payroll deduction, a pay stub, Form W, or other employer-furnished document that sets forth the amount withheld for payment to a donee organization, along with a pledge card prepared by or at the direction of the donee organization, will be deemed to be a written communication from the donee organization for this purpose.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.IRC &sect; 170(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.IRC &sect; 170(f)(17), as added by PPA 2006.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.Notice 2006-110, 2006-51 IRB 1127.<br /> <br /> </div></div><br />

<div class="Section1">Ordinarily, the trust is not taxed on its income.<a href="#_ftn1" name="_ftnref1">¹</a> Under prior law, the trust lost its tax-exempt status for any year in which it had unrelated business taxable income (UBTI). The old rule caused the loss of the CRT&rsquo;s exemption for even one dollar of UBTI. TRHCA 2006 modified the excise tax on unrelated business taxable income of charitable remainder trusts and changed the loss-of-exemption rule. The current law imposes a 100 percent excise tax, but leaves the CRT&rsquo;s exempt status intact.<a href="#_ftn2" name="_ftnref2">²</a> The excise tax is allocated to corpus and does not reduce the taxable income of the trust.<a href="#_ftn3" name="_ftnref3">³</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8100">8100</a> regarding how distributions from a charitable remainder trust are taxed to a beneficiary.<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 664(c)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC &sect; 664(c), as amended by TRHCA 2006.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. Treas. Reg. &sect; 1.664-1.<br /> <br /> </div></div><br />

<div class="Section1">The Service has privately ruled that a taxpayer would not recognize gain or loss as a result of transferring stock from a qualified plan to a charitable remainder unitrust upon his separation from service. Furthermore, the taxpayer would receive an income tax charitable deduction, subject to the income percentage limits, for the contribution of the stock to the CRUT in an amount equal to the fair market value of the stock at the time of the transfer less the value of the taxpayer&rsquo;s remainder unitrust interest.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.See Let. Ruls. 200215032, 200202078, 200038050, 199919039.<br /> <br /> </div></div><br />

<div class="Section1">Split-interest charitable trusts are required to file the form required by the Secretary of the Treasury each year. Historically this has been Form 1041-A, Trust Accumulation of Charitable Amounts. PPA 2006 eliminates the current exception that exempted such trusts from filing the form if all of the net income of the trust was distributed currently. The exception continues to apply to non-charitable trusts that must file Form 1041-A as a result of claiming a deduction under IRC Section 642(c).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> This change impacts charitable remainder trusts, charitable lead trusts, and pooled income funds. It remains to be seen whether Treasury will create a new form for split-interest charitable trusts or continue to use Form 1041-A.<br /> <br /> <hr><br /> <br /> In addition, the penalty for failure to file the form (required by IRC Section 6034(a)) is $10 for each day the form is late. The maximum penalty that may be imposed is $5,000. However, for certain large trusts with gross income in excess of $250,000, the penalty is $100 per day up to a maximum of $50,000.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Form 1041-A is subject to public inspection. However, information regarding the noncharitable beneficiaries of charitable split-interest trusts is not subject to public inspection.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.IRC &sect; 6034, as amended by PPA 2006.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.IRC &sect; 6652(c)(2)(C), as amended by PPA 2006.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.IRC &sect; 6104(b), as amended by PPA 2006.<br /> <br /> </div></div><br />

<div class="Section1">The regulations provide that if the only trustee is the grantor, a noncharitable beneficiary, or a related or subordinate party to the grantor or the noncharitable beneficiary, a CRUT&rsquo;s &ldquo;unmarketable assets&rdquo; (defined in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8093">8093</a>) must be valued by <em>either</em> an &ldquo;independent trustee&rdquo; or by a &ldquo;qualified appraisal&rdquo; from a &rdquo;qualified appraiser.&rdquo;<a href="#_ftn1" name="_ftnref1">¹</a> An &ldquo;independent&rdquo; trustee&rdquo; is a person who is <em>not</em> the grantor, the grantor&rsquo;s spouse, a noncharitable beneficiary, or a party who is related or subordinate to the grantor, the grantor&rsquo;s spouse, or the noncharitable beneficiary. However, a <em>co-trustee</em> who is an &ldquo;independent&rdquo; trustee may value the trust&rsquo;s unmarketable assets.<a href="#_ftn2" name="_ftnref2">²</a> For an explanation of the application of the Chapter 14 special valuation rules to CRUTs, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="938">938</a>.<div class="Section1"><br /> <br /> The Service has ruled that a CRUT was not disqualified even though the grantors were also the sole trustees because the trust instrument provided that the trust could only accept, invest in, and hold assets with an objectively ascertainable market value.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.Treas. Reg. &sect; 1.664-1(a)(7).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.Treas. Reg. &sect; 1.664-1(a)(7).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.Let. Rul. 200029031.<br /> <br /> </div></div><br />

<div class="Section1">For property contributions for which a deduction of more than $500,000 is claimed, the individual, partnership, or corporation must attach the qualified appraisal of the property to the tax return for the taxable year.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.IRC &sect;&sect; 170(f)(11)(D), 170(f)(11)(E).<br /> <br /> </div></div><br />

<div class="Section1"><br /> If a taxpayer underpays his tax because of a substantial valuation misstatement of property donated to charity, he may be subject to a penalty of 20 percent of the underpayment attributable to the misstatement.<a href="#_ftn1" name="_ftnref1">¹</a> However, this penalty applies only if the underpayment attributable to the misstatement exceeds $5,000 ($10,000 for a corporation other than an S corporation or a personal holding company).<a href="#_ftn2" name="_ftnref2">²</a> A &ldquo;substantial valuation misstatement&rdquo; exists if the value claimed is 150 percent or more of the amount determined to be correct.<a href="#_ftn3" name="_ftnref3">³</a> If the value claimed is 200 percent or more of the amount determined to be correct, there is a &ldquo;gross valuation misstatement,&rdquo; which is subject to a 40 percent underpayment penalty.<a href="#_ftn4" name="_ftnref4">⁴</a><div class="Section1"><br /> <br /> For guidance on the circumstances under which the disclosure on a taxpayer&rsquo;s return with respect to an item or a position is adequate for the purpose of reducing the understatement of income tax under IRC Section 6662(d), see Revenue Procedure 2005-75.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.IRC &sect;&sect; 6662(a), 6662(b)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.See IRC &sect; 6662(d).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.IRC &sect; 6662(e)(1)(A), as amended by PPA 2006.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.IRC &sect; 6662(h)(2)(A)(i), as amended by PPA 2006.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.2005-50 IRB 1137.<br /> <br /> </div></div><br />

<div class="Section1">Annual valuation (which is required for charitable remainder unitrusts and not permitted for any other charitable trust) increases the flexibility of a CRUT considerably. It permits the donor to make additional contributions to the trust, thus providing a certain degree of control over the amount of the resulting payment stream. Assuming the trust investments perform reasonably well, the variable payments provide a hedge against inflation. In contrast, a charitable remainder <em>annuity</em> trust provides a fixed payment amount, and additional contributions to the trust are not permitted.</div><br />

<div class="Section1">A charitable remainder unitrust provides to a noncharitable beneficiary a variable payment stream based on an annual valuation of the trust assets, with an irrevocable remainder interest to be paid to or held for the benefit of a charity. The payout must be a fixed percentage of not less than 5 percent nor more than 50 percent of the net fair market value of the trust assets, and is paid at least annually to the noncharitable beneficiary or beneficiaries.<a href="#_ftn1" name="_ftnref1">¹</a> Since the trust is valued annually, the donor may make additional contributions to the trust. To qualify as a charitable remainder trust, a trust must meet the definition of, and function exclusively as, a charitable remainder trust from the time the trust is created.<a href="#_ftn2" name="_ftnref2">²</a> Thus, if a trust does not qualify as a charitable remainder unitrust at its inception, it never will.<a href="#_ftn3" name="_ftnref3">³</a><div class="Section1"><br /> <br /> The IRS denied both trust and CRUT status to an entity that was proposed to be established by an S corporation essentially to receive its profits and make distributions to its owners. The Service ruled that the proposed entity would not qualify as a trust under Treasury Regulation Sections 1.301.7701-4(a), 1.301-7701-4(c), or as a valid CRUT.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <p style="text-align: center"><strong>10 Percent Remainder Interest Requirement</strong></p><br /> The value of the remainder interest (i.e., the charitable deduction) must equal at least 10 percent of the net fair market value of the property as of the date it is contributed to the trust.<a href="#_ftn5" name="_ftnref5">⁵</a> The value of a remainder interest for this purpose is calculated using the IRC Section 7520 interest rate, which is published every month by the IRS. The calculation of the deduction can be made using the current rate or either of the previous two months&rsquo; rates. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8099">8099</a> for an explanation of the calculation of the deduction.<br /> <br /> If a transfer to an existing charitable remainder unitrust does not meet the 10 percent remainder interest value requirement, the contribution will be treated as if it were made to a separate trust; thus, the existing CRUT will not become disqualified by a contribution that does not meet this requirement.<a href="#_ftn6" name="_ftnref6">⁶</a> It appears that the separate trust will be taxed as a complex trust, since it will not meet the requirements for a CRT.<br /> <br /> The Service privately ruled that reducing the unitrust payment percentage for additional contributions to ensure that the value of the charity&rsquo;s interest would be no less than 10 percent of the fair market value of the additional property would not cause the CRUT to be disqualified <em>if</em> the total annual unitrust payment percentage for the additional contribution did not fall below 5 percent annually.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.IRC &sect; 664(d)(2)(A); Treas. Reg. &sect; 1.664-1(a)(1). (But see Let. Rul. 200108035, where a split-payout was approved).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.Treas. Reg. &sect; 1.664-1(a)(4).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.See, e.g., Let. Rul. 200122045.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.Let. Rul. 200203034.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.IRC &sect; 664(d)(2)(D).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.See IRC &sect; 664(d)(4).<br /> <br /> </div></div><br />