Charitable Remainder Trusts and Pooled Income Funds (Portfolio 865)

Tax Management Portfolio, Charitable Remainder Trusts and Pooled Income Funds, No. 865-2nd, describes and analyzes the rules governing the creation and administration of a qualified charitable remainder trust and summarizes the relevant income, gift, estate, and generation-skipping transfer tax considerations, as well as the private foundation prohibitions, that relate to charitable remainder trusts.

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Tax Management Portfolio, Charitable Remainder Trusts and Pooled Income Funds, No. 865-2nd, describes and analyzes the rules governing the creation and administration of a qualified charitable remainder trust and summarizes the relevant income, gift, estate, and generation-skipping transfer tax considerations, as well as the private foundation prohibitions, that relate to charitable remainder trusts. These rules are set forth primarily in §§170, 664, 2055, and 2522. The basic statutory structure was established by the Tax Reform Act of 1969 in an attempt to correct perceived abuses in the charitable trust area. Of particular concern were “split-interest” trusts, such as charitable remainder trusts, which have both charitable and noncharitable beneficiaries.
In the case of a qualified charitable remainder trust, the donor is entitled to an immediate income, gift, or estate tax charitable deduction equal to the present value of the charitable remainder interest upon the creation of the trust. The donor may retain an income interest in the trust for his or her life (or a term of years not to exceed 20) or create such an interest in another. Subject to certain restrictions, a donor can specify successive or concurrent beneficiaries. In addition, the interest of the noncharitable beneficiary or beneficiaries can be in the form of the payment, at least annually, of either a guaranteed annuity amount (a sum certain) or a unitrust amount (a stated percentage of the market value of the trust assets as revalued annually). The trust may be either inter vivos or testamentary.
This Portfolio also examines the §642(c) rules applicable to pooled income funds, including the requirements governing the creation of a qualified pooled income fund and the availability of income, gift, or estate tax charitable deductions for gifts to such funds. Pooled income funds are similar to charitable remainder trusts in that a donor retains an income interest in the property donated (or creates such an interest in another) and the donor is entitled to an immediate charitable deduction for the present value of the remainder interest passing to charity.
Planners must follow the statutory requirements very carefully in order to insure that the establishment of the trust or the gift to the pooled income fund has the desired income, gift, estate, and generation-skipping transfer tax consequences.
This Portfolio may be cited as Rosepink and Bradley, 865-2nd T.M., Charitable Remainder Trusts and Pooled Income Funds.


Robert J. Rosepink, Esq.

Robert J. Rosepink, B.A., Amherst College (magna cum laude, 1972), Phi Beta Kappa; J.D., The George Washington University (with honors, 1975); partner, Rosepink & Estes, P.L.L.C., Scottsdale, Arizona; Member: Maricopa County Bar Association, State Bar of Arizona (Chair, Section of Real Property, Probate and Trust Law, 1984), American Bar Association (Sections: Real Property, Probate and Trust Law; Taxation), Estate Planning Seminar Group, and Trusts and Estates magazine Mini-Board for Estate Planning and Taxation (1995–1999); Fellow: American College of Trust and Estate Counsel and American College of Tax Counsel; Draftsperson, Arizona versions of Revised Uniform Principal and Income Act and Uniform Trustees' Powers Act (1984); author, Arizona Probate (Bancroft-Whitney 1980) and various articles; listed in Best Lawyers in America.

Kathryn A. Bradley, Esq.

Kathryn A. Bradley, B.A., Arizona State University (summa cum laude, 1995); J.D., Arizona State University (cum laude, 1999); Member: State Bar of Arizona (Chair of Probate and Trust Section, 2005), State Bar of Nevada, Maricopa County Bar Association, and Clark County Bar Association.

Table of Contents

Detailed Analysis

Part I: Charitable Remainder Trusts

1:I. Introduction

1:II. Legislative History

1:III. Basic Considerations

A. Description

B. Tax Consequences

1:IV. General Rules Applicable to Annuity Trusts and Unitrusts

A. Governing Instrument

B. Requirement That Trust Must Be Either an Annuity Trust or Unitrust

C. Permissible Income Recipients

D. Remainder Beneficiaries

E. Permissible Contributions

F. Additional Contributions

G. Restrictions on Investments

H. Restrictions on Powers of Invasion or Reversion

1. Return of Assets to Grantor

2. State Law - Powers of Invasion

I. Permissible Payments

J. Selection of Trustee

K. Trust Must Function Exclusively as Charitable Remainder Trust from Date of Creation

L. Testamentary Trusts

M. Reformation of a Charitable Remainder Trust

N. Division of a Charitable Remainder Trust

O. Termination of a Charitable Remainder Trust

P. Effective Dates

1:V. Payment of Annuity and Unitrust Amounts

A. In General

1. Annuity Trust

2. Unitrust

3. Time of Payment

B. Rules Common to Annuity Trusts and Unitrusts

1. Definition of Sum Certain and Fixed Percentage

2. Minimum Amounts

3. Maximum Amounts

4. Computation of Annuity or Unitrust Amount for Short Taxable Years and Last Taxable Year of Payment Period

5. Period of Payment

a. Payments “for Life”

b. Payments “for a Term of Years”

c. Combining “for Life” and “for a Term of Years”; “Tacking”

6. Qualified Contingencies

7. Termination of Income Interest

8. Incorrect Valuation of Trust Assets

9. Deferral of Annuity or Unitrust Amounts in the Case of a Testamentary Trust

C. Miscellaneous Special Rules

1. Inter Vivos Annuity Trust That Does Not Provide for Payment of Minimum Annuity Amount

2. Additional Contributions to Unitrust

3. Depreciation Reserve

D. Permissible Recipients

1. In General

2. Permissible Powers Over Income

a. Power to Allocate Annuity or Unitrust Amount

b. Grantor's Testamentary Power of Revocation

3. Payment of Income to § 170(c) Organization

1:VI. Remainder Beneficiary Rules

A. Permissible Remainder Beneficiaries

B. Concurrent or Successive Remainder Beneficiaries

C. Alternative Remainder Beneficiaries

D. Minimum Required Remainder Interest

1:VII. Taxation of the Recipient of the Annuity or Unitrust Amount

A. In General

B. Character of Distributions

1. Tiers of Income

2. Allocation of Deductions

3. Computation of Distributions

C. Distribution to § 170(c) Organization

D. Year of Inclusion

1. General Rule

2. Year of Recipient's Death

3. Payments Resulting from Incorrect Valuation

E. Distribution in Kind

1:VIII. Taxation of Grantor

1:IX. Taxation and Administration of Trust

A. Taxation of Trust

B. Calendar Year Requirement

C. Recordkeeping Requirements

D. Filing Requirements

E. Testamentary Trust - Period of Estate Administration

1. Distributions Deduction

2. Charitable Set-Aside Deduction

3. Effect of Estate Distribution on Tier System and Beneficiaries

1:X. 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 - Investments Jeopardizing Charitable Purpose

6. Section 4945 - Taxable Expenditures

C. Special Rules

1. Noncharitable Amounts

2. Segregated Amounts

3. Pre-May 27, 1969, Transfers

4. Special Exclusion from Applicability of § § 4943 and 4944

D. Special Problems Relating to Creation and Termination of Split-Interest Trusts

1. Creation

a. In General

b. Revocable Trust Becoming Split-Interest Trust

c. Certain Trusts That Wind Up

d. Estates

2. Termination

a. Charitable Remainder Trusts That Wind Up

b. Split-Interest Trusts That Become Charitable Trusts

1:XI. Income, Gift, and Estate Tax Charitable Deductions

A. In General

B. Computation of Value of Remainder Interest

1. Annuity Trust

a. Valuation Dates Before May 1, 1989

b. Valuation Dates After April 30, 1989

c. Incorrect Valuations

2. Unitrust

a. Adjusted Payout Rate

b. Valuation Factor

c. Computing the Value of the Remainder Interest

d. Special Cases

C. Appraisal of Unmarketable Assets

1:XII. Income Tax Charitable Deduction

Introductory Material

A. Deductibility Ceilings and Reduction Rules

1. Type of Charitable Donee

2. Gifts of Appreciated Long-Term Capital Gain Property

a. Gifts to Public Charities

b. Gifts to Private Foundations

3. Election to Apply 50% Deduction Ceiling

4. Gift of Ordinary Income Property

5. Gift “to” or “for the Use of”

6. Interaction of 50%, 30%, and 20% Limitations and Five-Year Carryforward

7. Gift of Certain Intellectual Property

B. The Alternative Minimum Tax

C. Power to Change Character of Donee

D. The 5% Exhaustion Rule

E. Gift of Tangible Personal Property

F. Recognition of Gain Inherent in Contributed Property

1:XIII. Gift Tax

A. In General

B. Annuity Trust or Unitrust Interest

1. Annual Exclusion

2. Gift Tax Marital Deduction

3. Incomplete Gift

C. Remainder Interests

1. In General

2. Form of Trust

3. Reformation of Instrument

4. The 5% Exhaustion Rule

5. The 10% Minimum Charitable Benefit Rule

6. Identity of Remainder Beneficiaries

7. Section 508

D. Amount of Deduction

E. Disposition of Annuity Trust or Unitrust Interest

F. Application of § 2702

1:XIV. Estate Tax

A. In General

B. Effective Date and Transitional Rules

1. Effective Date

2. Reformation Proceedings

3. Effectiveness of Reformation Proceedings

C. Qualification for Charitable Deduction

1. Form of Trust

2. Remainder Beneficiaries

3. Acceleration of Charitable Remainder Interest

4. The 5% Exhaustion Rule

5. The 10% Minimum Charitable Benefit Rule

6. Inclusion of Property Subject to Power of Appointment

D. Amount of Deduction

1. Valuation of Remainder Interest

2. Death of Annuity or Unitrust Recipient Before Due Date of Estate Tax Return

3. Taxes Payable Out of Charitable Bequests

E. Effect of Other Provisions

1. Section 2036 - Retained Powers

2. Section 2035 - Transfers Within Three Years of Death

3. Section 508 - Governing Instrument Requirements

4. Basis

5. Section 2038 - Right to Revoke

6. Section 2056 - Marital Deduction

7. Disclaimer

8. Section 2012 - Credit

1:XV. Generation-Skipping Transfer Tax

1:XVI. Planning Considerations

Introductory Material

A. Choosing Between Annuity Trust and Unitrust

1. In General

2. Recordkeeping

3. Additional Contributions

4. Additional Payout Options

B. Long-Term Capital Gain Appreciated Assets

1. Contribution of Appreciated Income-Producing Assets

a. Operation of Tier Rules

b. Recognition of Gain on Transfer

c. Investment in Tax-Exempt Bonds

d. Summary

2. Contribution of Appreciated Nonincome- Producing Assets

3. Depreciable Property

4. Zero Coupon Bonds

C. Specific Strategies

1. Investment Diversification

2. Enhancement of Annual Return

D. Inter Vivos vs. Testamentary Gifts

Part II: Pooled Income Funds

2:XVII. Introduction and Summary of Requirements

2:XVIII. Specific Requirements for Qualification

Introductory Material

A. Contribution of Remainder Interests

1. Qualified Organizations

2. Only One Remainder Beneficiary

3. Alternative Remainder Beneficiary

B. Retention of Income Interest

1. Duration of Income Interest

2. Concurrent or Successive Life Beneficiaries

3. Revocation of Income Interests

4. Charitable Remainder Beneficiary as Income Beneficiary

C. Commingling of Property

D. Investment Prohibitions

1. Tax-Exempt Securities

2. Depreciable and Depletable Assets

E. Maintenance of the Fund

F. Who May Serve as Trustee

G. Income Realized by the Income Beneficiary

1. Amount of Income - Unit Plan

2. Calendar Year Requirement

3. Partial Years

4. Transfers Between Determination Dates

5. Testamentary Transfers

6. Partial Allocation of Income to Charity

H. Termination of Life Income Interest

I. Death Taxes

2:XIX. Type of Property Contributed to or Held by a Pooled Income Fund

Introductory Material

A. Property Subject to an Indebtedness

B. Tangible Personal Property

C. Depreciable Property

2:XX. Valuation of Income and Remainder Interest

Introductory Material

A. Computation of the Present Value of the Life Income Interest

B. Computation of Present Value of Remainder Interest

2:XXI. Amending the Governing Instrument

A. Fund Created After May 6, 1971

B. Funds Created Before May 7, 1971

2:XXII. Tax Considerations

Introductory Material

A. Taxation of the Fund

B. Income Tax Charitable Deduction

C. Estate Tax Charitable Deduction

D. Gift Tax Charitable Deduction

E. Generation-Skipping Transfer Tax

F. Taxation of the Beneficiary

G. Tax on Capital Gains

H. Private Foundation Rules

2:XXIII. Securities Laws

A. Philanthropy Protection Act of 1995

B. Disclosure Statement

C. State Blue Sky Considerations

2:XXIV. Planning Considerations

Introductory Material

A. Advantages

B. Disadvantages

C. Practical Considerations

2:XXV. Drafting Considerations

2:XXVI. Filing Requirements

Working Papers

Working Papers

Table of Worksheets

Other Sources

Worksheet 1 Conference Report to the Taxpayer Relief Act of 1997, H.R. Rep. No. 220, 105th Cong., 1st Session, 605–608 (for the Amendment of § 664)

Worksheet 2 Form 5227, Split-Interest Trust Information Return

Worksheet 3 Sample Contribution Statement (As required by Regs. § 1.664-4(c) for unitrusts and Regs. § 1.664-2(d) for annuity trusts)

Worksheet 4 Sample Prior-Month Election for Valuing Charitable Remainder Trusts (§ 7520(a))

Worksheet 5 Sample Memorandum to Individual Trustee of Newly Created Charitable Remainder Unitrust

Worksheet 6 Pooled Income Fund Disclosure Statement

Worksheet 7 Approximate Charitable Deduction Factors for Charitable Remainder Unitrusts at Various Payout Rates (5% to 10%) for One and Two Lives

Worksheet 8 Table S Based on Life Table 2000CM Single Life Remainder Factors Applicable on or After May 1, 2009 (from Regs. § 1.642(c)-6T(e))

Worksheet 9 Table U(1) Based on Life Table 2000CM Unitrust Single Life Remainder Factors Applicable or or After May 1, 2009 (from Regs. § 1.664-4T(e))

Worksheet 10 Life Table 2000CM Applicable on or After May 1, 2009 (from Regs. § 20.2031-7T(d))

Worksheet 11 “Charitable Remainder Trusts: The Income Deferral Abuse And Other Issues”

Worksheet 12 Securities and Exchange Commission Release on Pooled Income Funds dated January 10, 1980





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