Frequently Asked Questions

1. What is a Charitable Remainder Unitrust?
2. What Formats are available for Charitable Remainder Unitrusts?
3. What are some possible, personal financial benefits for creating a Charitable Remainder Trust?
4. Who are the Candidates for a Charitable Remainder Trust?

5. How is the income tax charitable deduction calculated for a gift to a Charitable Remainder Trust?

   Once the present value of the remainder interest has been calculated for a gift to the Charitable Remainder Trust, the planner must determine to what extent the remainder interest is deductible for income tax purposes; subject to the reduction and annual percentage limitation rules applicable to charitable contributions under Internal Revenue Code §170. The rules for gifts of remainder interests are the same, with few exceptions, as the rules for direct transfers to a charity.
   

   A. Overview of Deduction Limitations

   The amount of income tax charitable contribution deduction a Trustor can claim in any tax year for a transfer to a charitable remainder trust is based upon the five following factors:
   

   • the statutory limitation,
   • the type of organization that may be named as a remainder beneficiary,
   • the type of property being contributed,
   • if the gift is to or for the use of the remainder beneficiary, and
   • the carryover provisions.
     

   The facts of each contribution are applied against these criteria with the smallest applicable percentage limitation governing the use of the deduction. For an overview, see the following chart.
   

   1. Statutory Limitation

   The Code imposes a ceiling on the amount of charitable contribution deduction that can be claimed in any tax year.

   An individual can deduct charitable contributions to the extent of 50% of Trustor’s contribution base in any tax year. The term, "contribution base" means adjusted gross income without regard to any net operating loss carryback to the taxable year.

    For C-corporations and LLCs electing to be taxed as a corporation, deductible contributions are limited to ten percent of taxable income. S-corporations can pass deductions through to shareholders subject to the limitations of IRC §1366(d)(1). Partnerships and LLCs electing to be taxed as partnerships also pass charitable deductions through to their partners and members.

    

   2. Type of Charitable Organization

   The 50% statutory ceiling can be reduced based upon the type of organization receiving the gift. In the case of a charitable remainder trust, the status of the possible charitable remainder beneficiary governs.

   Contributions to charitable remainder trusts that require the remainder beneficiary to be public charities, supporting organizations, private operating foundations, pass-through foundations and common fund private foundations are deductible to the extent of 50% of the Trustor’s contribution base in any tax year. These organizations are referred to as 50%-Type Organizations.
   

   Contributions to charitable remainder trusts that permit the remainder beneficiary to be private non-operating foundations are deductible to the extent of 30% of the Trustor’s contribution base in any tax year. These organizations are referred to as 30%-Type Organizations.
   

   3. Type of Property Being Contributed

   Further limitations are imposed upon deductible contributions based on the type of property being contributed. The rules are complex in that not only are there three categories of percentage limitations (50%, 30% and 20%), there are also rules that reduce the amount of the deductible portion of the gift property itself. These limitations and corresponding reduction rules are most easily described on an integrated basis as follows:

   Transfers to 50%-Type Organizations Named as Remainder Beneficiary

    

    

   Cash

   Contributions of cash are deductible to the extent of 50% of Trustor’s contribution base if the charities are required to be public charities or 30% if the trust permits the charities to be a private non-operating foundation.

   Ordinary Income Property

   Ordinary income property includes: short-term capital gain property; inventory in a business; property subject to depreciation recapture; IRC §306 stock; original issue discount debt instruments; market discount bonds; listed options and other property, the sale of which would produce ordinary income to the Trustor.

   In determining the present value of the remainder interest, the net fair market value of the property is reduced by the amount of gain that would not have been long-term capital gain had the property been sold at its fair market value on the date of contribution. The remaining amount is deductible to the extent of 50% of Trustor’s contribution base if the charities are required to be public charities or 30% if the trust permits the charities to be a private non-operating foundation.

   Long-Term Capital Gain Property

   The full fair market value of long-term capital gain property is deductible to the extent of 30% of Trustor’s contribution base if the charities are required to be public charities or 20% if the trust permits the charities to be a private non-operating foundation.

   Special Election

   An individual may elect to have all 30% limitation capital gain property contributions and carryover contributions into the election year treated as being IRC §170(e)(1)(B) property subject to the 50% limitation. However, the cost of this election is the reduction of the deduction from fair market value to the lesser of fair market value or adjusted cost basis. 
   

   4. Tangible Personal Property

   The deductibility of transfers of tangible personal property to a charitable remainder trust presents special issues.

    

   a) Future Interest Rule

   A charitable contribution which consists of a future interest in tangible personal property shall be treated as made only when all intervening interests in, and rights to the actual possession or enjoyment of, the property have expired or are held by persons other than the taxpayer or those standing in a relationship to the taxpayer described in IRC §§267(b) or 707(b).

   When does an intervening interest in tangible personal property held by a charitable remainder trust expire? Arguably, since the life interest is retained in the trust and not the tangible property, the interest should expire when the trust sells the property to an unrelated party. This argument has finally been validated by the IRS in a private letter ruling. PLR 9452026 prescribes that the income tax charitable deduction is available when the CRT sells the tangible personal property. Further, the AFR in effect for the month of the sale is the AFR that must be used for the income tax charitable deduction calculation.  

   Nevertheless, some commentators still believe the deduction should be permitted at the time the property is transferred to the trust based upon the fact that the self-dealing rules prohibit the use of the property by the donor after it is transferred to the trust.

   b) Related Use "Look Through" Rule

   Some commentators believe that the amount of the available charitable contribution and the percentage limitation applicable to its use depends upon the relation of the tangible property to the tax-exempt purpose of the charitable remainder beneficiary.

   The use by a trust of tangible personal property contributed to it for the benefit of a charitable organization is an unrelated use if the use by the trust is one, which would have been unrelated if made by the charitable organization.

   However, since a charitable remainder trust will not place the property to a related use but, rather, will most likely sell it in due course. As is, commentators believe that no gift to a CRT can ever qualify as a "related use" gift.

   If property is considered related, the deduction is based upon fair market value and available to the extent of 30% of the Trustor’s contribution base. As noted above, the deduction is delayed, however, until the property is sold by the trust.

   If property is considered unrelated, the deduction is based upon the lesser of fair market value and cost basis, and is available to the extent of 50% of Trustor’s contribution base. Again, the deduction is delayed until the tangible personal property is sold by the trust.

   Possible Safe Harbor for Museums?: If artwork is transferred to a charitable remainder trust that names a museum (that normally retains the type of property being transferred), would the sale of such property fall within the definition of that organization's tax-exempt status and could it be deemed a related use? The IRS has not specifically ruled on this question, but the few commentators who do advocate claiming a fair market value deduction only do so if the museum is irrevocably named as the sole remainder beneficiary of the CRT.

   Nevertheless, most commentators believe the deduction would be limited to the lesser of fair market value of the artwork and its cost basis.

   c) Inventory

   Inventory is not a capital asset but, rather, is property held by a taxpayer primarily for sale to customers in the ordinary course of a trade or business.

   If inventory property is transferred to a charitable remainder trust, the present value of the remainder interest is based upon the lesser of fair market value and the cost of goods sold (ordinary income property). The resulting amount is deductible to the extent of 50% of the Trustor’s contribution base. Further, the sale of property transferred by its creator (e.g., an artist transferring artwork) or dealer might cause the trust to have unrelated business income.

    

   5. Carryover of Excess Charitable Deductions

   Contributions to or for the use of charity in excess of the applicable percentage limitation in the year of contribution are treated as being made in the five years following the year of contribution. In other words, to the extent the donor cannot, by virtue of the percentage limitations, deduct the entire amount of the gift in the year of contribution, any remaining deduction can be carried forward up to an additional five years, if needed.
   

   Whether carryovers can be used by the Trustor depends upon the Trustor’s additional charitable contributions in those subsequent years relative to the Trustor’s contribution base during those years. Excess contribution carryovers are subordinated to current year contributions in determining a Trustor’s current year allowable contribution deductions. See IRS Publication 561.

    

6. What are the gift and estate tax consequences of retaining an income interest in a Charitable Remainder Trust?
7. What tax and information returns are required after a Charitable Remainder Trust is created?
8. What are the Annual Valuation Rules for Charitable Remainder Unitrusts? and Why are the Annual Valuation Rules Important?
9. What is a Charitable Remainder Annuity Trust?
10. What Factors Should I Consider When Choosing a Payout Format for my Charitable Remainder Trust?
11. How do I select a measuring term for my Charitable Remainder Trust?
12. What are some methods of income deferral within a Flip Charitable Remainder Unitrust (Flip-CRUT) or a Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT)?
13. What is a Flip Charitable Remainder Unitrust (Flip-CRUT)?
14. What are the Typical Responsibilities of a Trustee of a Charitable Remainder Trust?
15. What is an “Independent” Special Trustee (IST)? When is an IST used in Charitable Remainder Trust Planning?