Charitable remainder trusts offer noncharitable benefits

Article Abstract:

Tax professionals whose clients possess expensive tangible appreciated personal property (TAPP) with low basis that cannot be liquidated without resulting in major capital gains should consider the use of the charitable remainder trust (CRT) where the clients keep an income interest. Criticisms of TAPP CRT merely compare income tax benefits of this CRT against an outright gift of TAPP to charity. However, a broader analysis indicates that forming a TAPP CRT may generate a more satisfactory financial outcome for many clients than a sale of the asset. The nature of payments received by the income beneficiaries depends on the type of CRTs. Under a charitable remainder annuity trust, the trust pays a yearly amount at least 5% of the fair market value of the initial trust principal. Under a charitable remainder unitrust, the trust gives annual distributions at least 5% of the FMV of the trust assets.

Usage, Taxation, Personal property

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Tighter rules for charitable remainder trusts

Article Abstract:

Proposed Regulations provide that charitable remainder trusts should pay an annuity or fixed unitrust amount before the tax year for which it is due expires. Moreover, they should provide a qualified appraisal for unmarketable assets transferred to the trust if they will not be appraised by an independent trustee. Other requirements are aimed at deterring abuses when the unitrust amount is computed as an income exception. The valuation rules contained in Sec 2702 are applicable when income can be distributed to a family member who is not the donor or the spouse of the donor. Other provisions are concerned about flip unitrusts, time for paying the annuity or unitrust amount, appraising unmarketable assets, application of Sec 2702 to charitable remainder unitrusts (CRUTs), allocation of precontribution gain, ordering rules and CRUTs holding partnership interests.

Laws, regulations and rules

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Charitable remainder trust can't hold S corp. stock

Article Abstract:

Revenue Ruling 92-48, IRB 1992-26, 7 prohibits charitable remainder trusts as described in Section 664 from owning S corporation stock. Section 1361 (b)(1)(B) states that an S corporation's stock can only be held by individuals, estates and qualified subchapter S trusts. A corporation's S status will end if any of its stock is transferred to charitable remainder trusts. However, relief from inadvertent termination of the S election may be sought under Section 1362(f).

Securities, S corporations

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