PORTFOLIO

Charitable Lead Trusts (Portfolio 866)

Tax Management Portfolio, Charitable Lead Trusts, No. 866-2nd, describes and analyzes the rules governing the creation and operation of qualifying nongrantor charitable lead trusts, both inter vivos and testamentary; grantor charitable lead trusts; and nonqualifying nongrantor lead trusts.

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DESCRIPTION

Tax Management Portfolio, Charitable Lead Trusts, No. 866-2nd, describes and analyzes the rules governing the creation and operation of qualifying nongrantor charitable lead trusts, both inter vivos and testamentary; grantor charitable lead trusts; and nonqualifying nongrantor lead trusts. Many of the technical rules and requirements for charitable lead trusts are related to the rules and concepts applicable to charitable remainder trusts. Thus, the reader may find it helpful to refer to 865 T.M., Charitable Remainder Trusts and Pooled Income Funds.
A charitable lead trust (also called a charitable income trust) is a trust in which the income interest is paid to a charitable beneficiary and the remainder interest either reverts to the grantor or is paid to a noncharitable beneficiary at the termination of the trust. Conceptually, a charitable lead trust is the opposite of a charitable remainder trust where the noncharitable beneficiary receives the income interest and the charitable beneficiary receives the remainder interest.
This Portfolio sets forth the basic requirements for obtaining the applicable charitable tax deductions for inter vivos and testamentary qualifying nongrantor charitable lead trusts and grantor charitable lead trusts and explores the taxation of nonqualifying charitable lead trusts and their beneficiaries. In addition, this Portfolio discusses certain planning considerations relating to qualifying nongrantor lead trusts, such as the identity of the trustees and the types of property that may be contributed to such trusts, and outlines the planning considerations relevant to the establishment of a nonqualifying nongrantor charitable lead trust. The final section of this Portfolio summarizes the taxation and planning considerations relevant to grantor charitable lead trusts.
Planners must follow the statutory requirements very carefully to ensure that the establishment of the trust has the desired income, gift, estate, and generation-skipping transfer tax consequences.
This Portfolio may be cited as Etheridge, 866-2nd T.M., Charitable Lead Trusts.


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AUTHORS

DONALD M. ETHERIDGE, JR., ESQ.
Donald McGee Etheridge, Jr., A.B. (magna cum laude) and J.D., Duke University; LL.M. (Taxation), Georgetown University; member of State Bar of Georgia and North Carolina Bar; North Carolina Bar Association (Chairman, Tax Section, 1988–1989) and American Bar Association; Certified Public Accountant (North Carolina); Senior Lecturer of Law, Duke University Law School (1984–1994); Adjunct Faculty, University of North Carolina Law School (1985–1987); Adjunct Faculty, Emory University Law School (2010-2011); Adjunct Faculty, Boston University Law School (2012-2013); Adjunct Faculty, Northeastern University Law School (2013); Gift Planning Attorney, National Christian Foundation.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. General

B. Legislative History

C. Basic Definitions

D. Scope

II. Basic Requirements for Charitable Deduction - Qualifying Nongrantor Charitable Lead Trust and Grantor Charitable Lead Trust

Introductory Material

A. Desirability of Advance Ruling and Written Instrument Requirement

B. Guaranteed Annuity or Unitrust

1. Guaranteed Annuity

a. Payment

b. Date of Valuation - “Determinable Amount”

c. Hybrids

d. Excess Income

e. Private Foundation Provisions

f. Payments for Private Purposes

g. No Minimum or Maximum Annuity Payment Requirement

h. Additional Contributions

2. Unitrust

a. Payment

b. Date of Valuation for Unitrust Payments

c. Hybrids

d. Excess Income

e. Private Foundation Provisions

f. Variable Percentage

g. Payments for Private Purposes

h. No Minimum or Maximum Unitrust Payment Requirement

i. Additional Contributions

3. Planning - Unitrust v. Guaranteed Annuity

C. Completed Gift

D. Computation of Charitable Deduction - Valuation

1. Valuation of Guaranteed Annuity Interest

2. Valuation of Unitrust Interest

a. Ascertainable Value

b. Determination of Value by the IRS

3. Likelihood of Charitable Receipt

4. Comparison of Valuation - Guaranteed Annuity and Unitrust

5. Term of Charitable Interest

E. Permissible Beneficiaries

F. Substantiation for Contributions of $250 or More

III. Income Taxation of Qualifying Nongrantor Charitable Lead Trusts and Beneficiaries

A. Taxation of the Trust

1. Section 642(c) Deduction

a. No Set-Aside Deduction

b. No Statutory Tier System

c. Capital Gains

2. Trustee's Fees

3. Unrelated Business Taxable Income - Loss of 642(c) Deduction

4. The Alternative Minimum Tax

5. Selection of a Fiscal Year

6. Estimated Income Tax Payments

7. Recordkeeping

8. Reporting Requirements

9. Prepayment of Income Interest and “Commutation Clauses”

10. Private Foundation Rules

a. In General

b. Overview of Applicable Private Foundation Provisions

(1) Section 507: Termination Tax

(2) Section 508: Governing Instrument Language

(3) Section 4941: Self-Dealing

(4) Section 4943: Excess Business Holdings

(5) Section 4944: Jeopardy Investment Restrictions

(6) Section 4945: Taxable Expenditures

B. Taxation of Noncharitable Beneficiaries

1. General

2. Accumulation Distributions

IV. Additional Considerations for Qualifying Nongrantor Charitable Lead Trusts

Introductory Material

A. The Generation-Skipping Transfer Tax

B. Identity of Trustee

1. Grantor

2. Grantor's Family Members

C. Trustee's Sprinkle Power

D. Type of Property Contributed to Trust

1. Income Producing Property

2. Mortgaged Property and Real Estate

3. Tax-Exempt Securities

4. Non-Income Producing Property

5. Planning

a. Sale of Property by the Trust

b. Distribution of Corpus

c. Borrowing by the Trust

E. Restrictions on Investments

F. Powers of Invasion or Revocation

G. Reformation of a Charitable Lead Trust

H. Effective Date

I. Approved Forms

J. Projections

V. General Tax and Planning Considerations for Qualifying and Nonqualifying Nongrantor Charitable Lead Trusts

Introductory Material

A. Inter Vivos Qualifying Nongrantor Charitable Lead Trust

1. Introduction

2. Income Tax Consequences

3. Estate Tax Consequences

a. Section 2035

b. Sections 2036 and 2038

4. Gift Tax Consequences

5. Planning Considerations

B. Testamentary Charitable Lead Trust

1. Introduction

2. Income Tax Consequences

3. Gift Tax Consequences

4. Estate Tax Consequences

5. Additional Considerations

a. Contest and Settlement - Acceleration of Charitable Interest

b. Payment of Taxes Out of the Charitable Bequest

c. Disclaimer

d. Funding Considerations

e. Drafting Consideration - Use of “In Terrorem” Clause

f. Private Foundation Rules

6. Planning

a. Qualifying Inter Vivos Nongrantor Charitable Lead Trust v. Testamentary Charitable Lead Trust

b. Substitute for Marital and Residuary Trust

c. Preservation of Stock in Closely Held Corporation

C. Nonqualifying Nongrantor Charitable Lead Trust

1. Introduction

2. Income Tax Consequences

3. Estate Tax Consequences

4. Gift Tax Consequences

5. Private Foundation Rules

VI. Grantor Charitable Lead Trust

A. Introduction

B. Income Taxation of the Grantor Charitable Lead Trust

1. Section 642(c) Deduction

2. Capital Gains

3. Trustee's Fees

4. Unrelated Business Taxable Income

5. Alternative Minimum Tax

6. Generation-Skipping Transfer Tax

7. Recordkeeping, Reporting Requirements, and Calendar Year Requirement

8. Prepayment of Income Interest and “Commutation Clauses”

9. Private Foundation Rules

10. Taxation of Noncharitable Beneficiaries

C. General Tax and Planning Considerations for the Grantor Charitable Lead Trust

1. Income Tax Consequences

a. “For the Use of” Limitation

b. Grantor Trust Rules

(1) Section 673

(2) Section 674

(3) Section 675

(4) Section 676

(5) Section 677

2. Gift Tax Consequences

3. Estate Tax Consequences

4. Planning

D. The “Super Trust” Grantor Charitable Lead Trust

1. Introduction

2. Planning


WORKING PAPERS

Working Papers

Table of Worksheets

Additional Resources

Worksheet 1 Sample Contribution Statement

Worksheet 2 Sample Non-Grantor Charitable Lead Annuity Ttrust

Worksheet 3 Sample Non-Grantor Charitable Lead Unitrust

Worksheet 4 Sample Inter Vivos Grantor and Non-Grantor Charitable Lead Annuity Trusts - Rev. Proc. 2007-45, 2007-29 I.R.B. 89

Worksheet 5 Sample Testamentary Charitable Lead Annuity Trust - Rev. Proc. 2007-46, 2007-29 I.R.B. 102

Worksheet 6 Sample Inter Vivos Grantor and Non-Grantor Charitable Lead Unitrusts - Rev. Proc. 2008-45, 2008-30 I.R. B. 224

Worksheet 7 Sample Testamentary Charitable Lead Unitrust - Rev. Proc. 2008-46, 2008-30 I.R.B. 238

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

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