HOW TO COORDINATE CHARITABLE CONTRIBUTION PLANNING OPPORTUNITIES WITH BUSINESS SUCCESSION PLANNING

 

 

CHARITABLE LEAD TRUST

 

 

 

 

by Michael V. Bourland

Shannon G. Guthrie

 

 

 

Bourland, Wall & Wenzel,

A Professional Corporation

Attorneys and Counselors

City Center Tower II

301 Commerce Street, Suite 1500

Fort Worth, Texas 76102

 

(817) 877-1088

(817) 429-3945 (metro)

(817) 877-1636 (facsimile)

mbourland@bwwlaw.com (Email)

sguthrie@bwwlaw.com (Email)

 

 

Presented to

 

Eleventh Annual Advanced ALI-ABA Course of Study

 

ESTATE PLANNING FOR THE FAMILY BUSINESS OWNER

 

Thursday – Saturday

August 1-3, 2002

 

Loews Coronado Bay Resort

Coronado (San Diego), California

 

 

 

© Bourland, Wall & Wenzel, P.C.

100113/corrected 8/12


 

 

BIOGRAPHICAL INFORMATION

 

MICHAEL V. BOURLAND

EDUCATION

            B.A., Baylor University

            J.D., Baylor University

            LL.M. in Taxation, University of Miami, Florida

 

PROFESSIONAL ACTIVITIES

            Founding Shareholder - Bourland, Wall &Wenzel, P.C.

Board Certified (Estate Planning and Probate Law) – Texas Board of Legal Specialization

            Fellow, American College of Trust and Estate Counsel

Former Member, Real Estate, Probate and Trust Law Council (State Bar of Texas Real Estate, Probate and Trust Law Section)

 

ACADEMIC APPOINTMENT AND HONORS

Guest Lecturer in Estate Planning at

            Baylor University School of Law

            Baylor University School of Business

            The Center for American and International Law

            University of Texas School of Law

 

SHANNON G. GUTHRIE

EDUCATION

B.S., Magna Cum Laude, University of Evansville

J.D., Indiana University (Southern Methodist University – Visiting Student)

 

PROFESSIONAL ACTIVITIES, ACADEMIC APPOINTMENTS AND HONORS

Associate Attorney - Bourland, Wall &Wenzel, P.C.

Adjunct Co-Instructor, Fall 2001 – Baylor University, School of Law

Adjunct Instructor 1998-2001 – University of Texas at Arlington, Continuing Legal Education

 

GUEST LECTURER IN ESTATE PLANNING AT

State Bar of Texas – Advanced Drafting Course 2001

State Bar of Texas – Advanced Drafting Course 2000

State Bar of Texas - Advanced Probate Course 2000

East Texas Estate and Business Council (2001)

Texas Society of CPAs – Fort Worth Chapter (2000-2001)

Fort Worth Tarrant County Young Lawyers Association

Baylor University School of Law (Nonprofit Organizations)

Institute of Paralegal Education

Texas Bankers Association

Halfmoon, LLC


TABLE OF CONTENTS

 

I.          ATTRIBUTES OF CHARITABLE LEAD TRUST (“CLT”).......................... 4

A.        Payment – Charitable Lead Interest.................................................... 4

1.         ANNUITY TRUST..................................................................... 4

2.         UNITRUST................................................................................. 4

B.         Distributions in Satisfaction of Annuity or Unitrust Payment.................. 4

C.         Term................................................................................................. 4

D.        Remainder Interest............................................................................. 5

E.         Testamentary and Inter Vivos CLTs.................................................... 5

F.         No Minimum Distribution.................................................................... 5

G.         Private Foundation Rules.................................................................... 6

II.         BASIC DIFFERENCES BETWEEN GRANTOR CHARITABLE LEAD TRUST AND NON-GRANTOR CHARITABLE LEAD TRUST.................................................................... 10

A.        Non-Grantor Charitable Lead Trust................................................... 10

B.         Grantor Charitable Lead Trust........................................................... 10

III.       TAXATION OF NON-GRANTOR AND GRANTOR CHARITABLE LEAD TRUSTS            10

A.        Non-Grantor CLT............................................................................. 10

1.         INCOME TAXATION OF TRUST............................................ 10

2.         UNRELATED BUSINESS TAXABLE INCOME (“UBTI”)....... 12

3.         ALTERNATIVE MINIMUM TAX (“AMT”)............................. 14

4.         CAPITAL GAINS TAX............................................................. 15

5.         TIER SYSTEM OF ALLOCATION........................................... 15

6.         ESTATE/GIFT TAX.................................................................. 15

7.         GENERATION SKIPPING TAX (“GST”)................................. 15

B.         Grantor CLT.................................................................................... 16

1.         INCOME TAXATION OF TRUST............................................ 16

2.         ALTERNATIVE MINIMUM TAX............................................ 17

3.         CAPITAL GAINS TAX............................................................. 17

4.         TIER SYSTEM OF ALLOCATION........................................... 17

5.         ESTATE TAXES....................................................................... 17

6.         GIFT TAX................................................................................. 18

7.         GENERATION SKIPPING TAX............................................... 18

8.         UNRELATED BUSINESS TAXABLE INCOME...................... 18

IV.       SPECIAL CONSIDERATIONS................................................................... 18

A.        Trustee............................................................................................ 18

1.         INDEPENDENT TRUSTEE OR QUALIFIED APPRAISER FOR VALUATION OF ASSETS.................................................................................... 18

2.         INDEPENDENT TRUSTEE AND GRANTOR TRUST RULES 20

3.         RELATED PARTY AS TRUSTEE............................................ 20

B.         Disqualified Person As General Partner Of Partnership/Avoidance Of Self-Dealing          22

C.         Treatment of CLT Payment Received By Private Foundation.............. 23

V.        ADVANTAGES OF CHARITABLE LEAD TRUST.................................... 24

Vi.       DISADVANTAGES/LIMITATIONS OF CHARITABLE LEAD TRUST..... 24

VIi.      DRAFTING CONSIDERATIONS/FILING REQUIREMENTS.................... 25

 


CHARITABLE LEAD TRUSTS

 

I.          ATTRIBUTES OF CHARITABLE LEAD TRUST (“CLT”)

A.        Payment – Charitable Lead Interest

Annual (or more often) payments to charitable beneficiary for a number of years or for a life or lives in being at the trust's creation.  But see subparagraph C below regarding proposed regulations limiting permissible term.

1.         ANNUITY TRUST

            Payment is a fixed dollar amount or a fixed percentage of the initial net fair market value of the trust assets.  IRC §§ 2522(c)(2), 2055(e)(2) and 170(c); Treas. Reg. §§ 25.2522(c)(3) and 1.170A-6(c).

2.         UNITRUST

            Payment is a fixed percentage of the net fair market value of the trust assets determined annually.  IRC §§ 2522(c)(2), 2055(e)(2) and 170(c); Treas. Reg. §§ 25.2522(c)(3) and 1.170A-6(c).

The Annuity Trust has traditionally been the preferred form of a CLT because remaindermen benefit from appreciation of the trust assets without gift or estate taxation (but with potential generation-skipping transfer taxation) and the assets do not need to be revalued each year for determining the charitable payment.  However, the IRC now requires the Annuity Trust (but not the Unitrust) to be valued at the end of the charitable term for Generation-Skipping Transfer Tax (“GST”) purposes using the interest rate used for valuing the charitable interest at the time of funding the trust and applying it to the value of the remainder interest at the time of funding, compounded annually.  IRC § 2642(e).  (See GST paragraph below.) 

Formula Clauses:  The use of a formula clause has been allowed by the Service as long as the gift is determinable at the time of the transfer.   Planning idea:  make the formula have one variable (either the term or the payment amount) calculated to result in a certain gift amount.

B.        Distributions in Satisfaction of Annuity or Unitrust Payment

The CLT instrument may provide for the payment of the annuity or unitrust interest to be made in cash or in kind.  If the trust distributes appreciated property in satisfaction of the annuity trust or unitrust payment, the trust will realize capital gains on the assets distributed in kind to satisfy the annuity or unitrust payment.  Rev. Rul. 83-75, 1983-1 C.B. 114.  See also, P.L.R. 9201029 (Oct. 7, 1991) applying Rev. Rul. 83-75 to the income tax treatment of distributions of appreciated stock in satisfaction of a lead unitrust payment. 

Planning Opportunity:  Establish the trust with appreciated stock and distribute stock to satisfy the annuity or unitrust payment.  The CLT will recognize the gain and the CLT will receive an income tax charitable deduction for the amounts paid to charity resulting from the realization of the capital gain.  (See discussion of income tax treatment of the non-grantor and grantor charitable lead trusts below.)

C.        Term

Payments can continue for the life or lives of one or more individuals, all of whom must be living when the trust is created or for a term of years (limited only by the applicable rule against perpetuities).  Treas. Reg. §§  1.170A-6(c)(2)(i)(A) and (ii)(A); Treas. Reg. §§ 20.2055-2(e)(2)(v)(a) and (vi)(a); Treas. Reg. §§ 25.2522(c)-3(c)(2)(v)(a) and (vi)(a).   However, the Service issued proposed regulations on April 5, 2000, (Proposed Reg. 100291-00, 65 Fed. Reg. 17835 (4/5/00) and Final Regulations, effective January 5, 2001, whereby the permissible term for charitable lead trusts is defined so as to prevent abuse in obtaining inflated charitable deductions. 

The problem:  taxpayers have been using an unrelated individual's measuring life as the term of the charitable lead trust where that unrelated individual is seriously ill, but not “terminally ill” as defined under I.R.C. § 7520 and the Regulations thereunder.  (See, for example, Treas. Regs. § 20.7520-3(b)(3)).  The value of the charitable interest is calculated under the applicable actuarial tables, which are based upon the average life expectancies of individuals of the same age as the measuring life.  However, the life expectancy of the measuring life involved is, in fact, much shorter than the life expectancy of individuals set forth in the actuarial tables.  If the individual dies prematurely (which is expected), the charity's interest is terminated resulting in the remainder beneficiaries receiving their interest sooner than anticipated by the tables at a reduced gift or estate tax of that based upon the lives of those provided in the tables.  The measuring life individual is paid a fee for allowing the trust creator to use such individual as the measuring life.  The Service believes that this type of charitable lead trust is abusive and frustrates the Congressional intent of allowing deductions for certain split-interest trusts and further that the marketing of such is against public policy.  The Service's Solution:  the final regulations limit the permissible term for a guaranteed annuity interest and unitrust interest to a specified term of years, or the life of certain individuals living at the date of the transfer, such individuals being limited to one or more of the donor, the donor's spouse, or a lineal ancestor or spouse of a lineal ancestor of all of the remainder beneficiaries.  Additionally, an interest payable for a specified term of years will also qualify where the governing instrument contains a “savings clause” that is intended to qualify with the rule against perpetuities.  A trust will satisfy the requirement that all of the noncharitable remainder beneficiaries are lineal descendants of the measuring life individual (or the spouse of the measuring life individual), if there is less than a 15% probability (computed based upon the current applicable Life Table under Treas. Reg. § 20.2031-7 at the time the property is transferred to the trust, taking into account interest of all primary and contingent remainder beneficiaries living at that time) that individuals who are not lineal descendants will receive any trust corpus.  Treas. Dec. 8923. 

If a transfer is made to a trust on or after April 4, 2000 that uses an individual other than a permitted measuring life individual, the trust may be reformed to satisfy the rule or may be rescinded for a transfer made on or before March 6, 2001.  See Treas. Reg. § 25.2522(c)-3(e). The final regulations apply to transfers to inter vivos charitable lead trusts made on or after April 4, 2000 and to testamentary type transfers where the creator dies on or after such date.

Although comments to the proposed regulations pointed out that the limitations on the measuring lives, although not a bad thing, were too narrow and precluded many situations where the beneficiaries are not related to the creators of the charitable lead trust, the Service did not adopt any of such suggestions, except as they further broadened the class of the measuring lives as described above. 

D.        Remainder Interest

The remainder interest, after payment of the charitable lead amount, is distributed to the noncharitable beneficiary or beneficiaries, which may include (but is not limited to) the donor, donor's estate, children, grandchildren or other trust or trusts for children or grandchildren. 

E.         Testamentary and Inter Vivos CLTs

The charitable lead trust may be established as an inter vivos trust (during life) or as a testamentary trust (at death). 

F.         No Minimum Distribution

Unlike a Charitable Remainder Trust and a Private Foundation, there is no minimum percentage or amount that must be distributed annually and, therefore, the Charitable Lead Trust (“CLT”) is not subject to the Annual Minimum Distribution Amount, which is 5% of the initial fair market value of the trust assets (with a charitable remainder annuity trust) and 5% of the annual fair market value of the trust assets (with a charitable remainder unitrust), or 5% of the annual fair market value of the assets of the private foundation.  Compare IRC §§ 664(d)(1)(A) and 664(d)(2)(A).

G.        Private Foundation Rules

CLT is a split-interest trust under IRC § 4947(a)(2).  As such, it is subject to the following private foundation rules:

1.         Self-Dealing:  Trust must not be involved in self-dealing whether direct or indirect with disqualified persons as precluded by IRC § 4941(d).  Includes any direct or indirect: a) sale or exchange or leasing of property between trust and a disqualified person; b) lending of money or extension of credit between a trust and a disqualified person; c) furnishing of goods, services, or facilities between a trust and a disqualified person, unless such goods, services or facilities are made available to the general public on at least as favorable a basis as they are made to the disqualified person, Treas. Reg. § 53.4941(d)(3)(b)(1); d) payment of compensation (or payment or reimbursement of expenses) by a trust to a disqualified person, unless it is for personal services and such compensation is reasonable and necessary to carry out the exempt purpose and is not excessive, Treas. Reg. § 53.4941(d)(3)(c)(1); e) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation; and, f) agreement by a private foundation to make any payment of money or other property to a government official [as defined in § 4946(c)] other than an agreement to employ such individual for any period after the termination of his government service if such individual is terminating his government service within a 90 day period.  IRC § 4941(d).

Treas. Reg. § 53.4941(d)-1(b)(3) provides an exception to the prohibitions against self-dealing in a transaction involving the administration of an estate or revocable trust if the administrator or executor or trustee either possesses a power of sale with regard to the property, has the power to reallocate the property to another beneficiary, or is required to sell the property under the terms of a preexisting option, such transaction is approved by the probate court having jurisdiction over the estate, the transaction occurs before the estate is considered terminated under Treas. Reg. Sec. 1.641(b)-3(a), the estate or trust receives an amount which equals or exceeds the fair market value of the foundation's (CLT's) interest or expectancy in the property at the time of the transaction taking into account the terms of any options subject to which the property was acquired by the estate and (with respect to transactions occurring after 4/16/73) the transaction either resulted in the foundation receiving an interest or expectancy at least as liquid as the one it gave up, resulted in the foundation (CLT) receiving an asset related to the activity carrying out its exempt purposes or is required under the terms of any option which is binding on the estate or revocable trust.

                        A “disqualified person” is a substantial contributor to the CLT (an individual, trust, estate, corporation or partnership who or which contributes an aggregate amount in excess of $5,000 to the CLT, if his or her total contributions are more than 2% of the total contributions received), or a family member of a substantial contributor (spouse, descendants and spouses of descendants), or persons owning more than 20% of an entity which is a substantial contributor to the CLT (includes an entity in which a disqualified person [considering the attribution rules of I.R.C. § 4946(a)(4)] owns more than 35%.]

                        Reimbursement for Expenses:  Reimbursement to disqualified persons for travel expenses cause the CLT and the disqualified person's spouse to be potentially liable for penalty taxes for self-dealing, for making non-charitable expenditures, or possibly both.  Such reimbursement of expenses will not be taxed if the expenses are reasonable and necessary to carrying out the exempt purposes of the CLT and are not excessive.  I.R.C. § 4941(d)(2).  The Code does not explain what is “reasonable and necessary.”  Treas. Reg. § 53.3941(d)-3(c)(1).  Generally, business expense deductions under Treas. Reg. § 1.162-2(1) include travel fares, meals and lodging and expenses incident to travel.  Travel expenses are not included if the trip is primarily personal in nature.  Treas. Reg. § 1.162-2(a).  The Code does cross-reference Treas. Reg. § 1.162-7 to determine what is “excessive.”  Under Treas. Reg. § 1.162-7, an amount spent on director's services will not be deemed “excessive” if it is only such as would be paid “for like services by like enterprises under like circumstances.”  Treas. Reg. § 1.162-7 (i.e. As the organization would pay to someone independent of the CLT).

            A grant by one private foundation (a CLT in this case) to another private foundation does not constitute self-dealing within the meaning of I.R.C. § 4941 even when one entity serves as Trustee of both foundations.  Rev. Rul. 82-136 (1982-2 C.B. 300).  See also Treas. Regs. Examples 53.4941(d)-2(f)(2). 

            Excise Tax on Acts of Self-Dealing:  Any disqualified person who engages in an act of self-dealing is assessed an excise tax of 5% of that amount involved in the transaction for each year that the transaction is uncorrected.  Additionally, a foundation manager who knows the act is prohibited but approves it may also be subject to a tax of 2.5% of the amount involved (up to $10,000 for each such act) for each year that the transaction is uncorrected.  If the transaction is not timely corrected and the 5% was initially assessed, the disqualified person is subject to being assessed an additional tax of 200% of the amount involved.  Any foundation manager who does not correct the transaction may also be subject to an additional assessment of 50% of the amount involved (up to $10,000 for each such act.)

2.         Excess Business Holdings:  Trust must not retain excess business holdings as restricted by IRC § 4943(c).  To apply, the entity in which an interest is held must be engaged in a business enterprise.  IRC § 4943(a)(1).  A business enterprise includes the active conduct of a trade or business and also includes any activity which is regularly carried on for the production of income from the sale of goods or the performance of services and that constitutes an unrelated trade or business.  Treas. Reg. § 53.4943-10(a)(1).  Production of a profit is not required.  Id.  An entity is not engaged in a business enterprise if 95% or more of gross income is from passive activity, IRC § 4943(d)(3), or if the business is a functionally related business defined in IRC § 4942(j)(4).  A functionally related business is one which is either (1) a trade or business which is a related trade or business (as defined under I.R.C. § 513), or (2) an activity which is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which is related to the exempt purposes of the organization.  I.R.C. § 4943(d)(3)(A); I.R.C. § 4942(j)(4).  (See Exception subsequent to #6 below.)

If a CLT holds business holdings, it must be determined whether the business holdings are excess business holdings, meaning that they are in excess of permitted holdings.  I.R.C. § 4943(c)(1).  Three rules apply as to permitted holdings:

1) General Rule as to Permitted Holdings: the CLT's holdings in a corporation's voting stock is 20% of the voting stock reduced by the percentage of the voting stock actually or constructively owned by all disqualified persons, I.R.C. § 4943(c)(2)(A);

2) The 35% Rule: Where the CLT and all disqualified persons together do not own more than 35% of the voting stock of a corporation and it is established to the satisfaction of the Secretary that effective control is in one or more persons who are not disqualified persons with respect to the CLT, then the 20% General Rule becomes a 35% rule, I.R.C. § 4943(c)(2)(B)-l; and,

3) 2% De Minimus Rule: The CLT is not treated as having excess business holdings in any corporation in which it, together with all other private foundations, owns not more than 2% of the voting stock and not more than 2% in value of all outstanding shares of all classes of stock, I.R.C. § 4943(c)(2)(C).

            Exception For Gratuitous Transfer: If the CLT is determined to have excess business holdings and the receipt of the assets constituting excess business holdings is by gratuitous transfer, then the assets received are treated as being held by a disqualified person for 5 years after the gratuitous acquisition.  I.R.C. § 4943(c)(6).  The CLT must dispose of the excess business holdings within the 5 year period.  An additional 5 year extension may be granted to the CLT in order to provide additional time for the CLT to dispose of the excess business holding received by gratuitous transfer.  The discretion is given to the Secretary to extend the period of disposition in the case of unusually large gifts or bequests of diverse holdings with complex corporate structures.  I.R.C. § 4943(c)(7).  The extension may be given provided that the following requirements are met:

1) the CLT establishes that it has made diligent efforts to dispose of the excess business holdings within the initial 5 year period;

2) disposition of the excess business holdings within the initial 5 year period has not been possible (except at a price substantially below fair market value) by reason of such size and complexity or diversity of the excess business holdings;

3) before the end of the initial 5 year period, the CLT a) submits to the Secretary a plan for disposing of all of the excess business holdings involved; b) the CLT submits such plan to the Attorney General (or other appropriate State official) having administrative or supervisory authority or responsibility with respect to the CLT's disposition of the excess business holdings and submits to the Secretary any response received by the CLT from the Attorney General (or other appropriate State official) to the plan within the 5 year period; and,

4) the Secretary determines that such plan can reasonably be expected to be carried out before the close of the extension period.

            Corporate Redemption: One way to dispose of the excess business holding is to have the corporation redeem the excess business holding of the CLT.  This includes holdings of a partnership in a corporation since the CLT is attributed with owning the shares of the corporation.  However, in redeeming the stock, care must be taken not to violate the rules against self-dealing.  (See generally, the discussion above regarding self-dealing.) In the case of a corporate redemption, the involved act of self-dealing is the direct or indirect sale or exchange of property between a disqualified person and a private foundation.  I.R.C. § 4941(d)(1)(A).  The CLT is treated as a private foundation for these purposes.  However, as to acts which would be an act of self-dealing, an exception is provided where liquidation or redemption of stock held in a private foundation (or CLT) is to a disqualified person which is the corporation if:

1) the corporation makes a bona fide offer of liquidation or redemption on a uniform basis to the private foundation (or CLT) and to every other person who holds stock in the corporation; and,

2) the liquidation terms provide for the liquidation at a price which is no less than fair market value.  Further, the corporation cannot use a note to redeem its stock from the private foundation (or CLT).  Treas. Reg. § 53.4941(d)-2(c)(1); Treas. Reg. § 53.4941(d)-3(d).  The exception for redemption on a uniform basis exception has been applied to partnerships in P.L.R. 9237032.

Excise Tax on Excess Business Holdings:  the CLT is taxed on its excess business holdings in the amount of 5% of the value of the excess business holding.  A penalty of 200% is imposed on the CLT if the initial penalty is assessed and the excess business holding is not timely corrected.  I.R.C. § 4943(b).  Although the CLT has a 5 year time period to dispose of the excess business holding, the disposition of such holding is subject to the restrictions against acts of self-dealing.

3.         Jeopardizing Investments:  Trust must not make investments which would jeopardize the carrying out of the exempt purpose as prohibited by IRC § 4944.  (See Exception subsequent to #6 below.)  Although no investment is a per se violation, this rule requires close scrutiny of the standard of care in investment of the assets of the CLT when the trustees have invested in speculative investments such as working interests in oil and gas, trading on margin, trading in commodity futures, purchase of “puts” and “calls” and “straddles”, warrants and selling short.  This restriction addresses actions of investing and does not cover assets received by a CLT by gift or bequest.

                        Excise Tax on Jeopardizing Investments:  The CLT is not allowed to invest its funds in investments which could jeopardize the CLT's ability to carry on its exempt purpose.  If it does, it is taxed 5% of the amount of the improperly invested assets.  Additionally, each trustee who willfully participated in the making of the investment knowing that it jeopardized the carrying out of the CLT's exempt purposes may be subject to being assessed a tax of 5% of the amount of the improperly invested assets.  If the investment is not disposed of within 90 days after imposition of the initial tax, the CLT is liable for an additional tax of 25% of the amount improperly invested and each trustee who willfully participated in the making of the investment knowing that it jeopardized the carrying out of the exempt purposes may be subject to being assessed an additional tax of 5% of the amount of the improperly invested assets.

4.         Taxable Expenditures:  Trust must not make taxable expenditures as governed by IRC § 4945(d).  This covers amounts paid for propaganda or to attempt to influence legislation or the outcome of a public election, amounts paid to carry on any voter registration drive, or amounts paid as certain grants.  IRC § 4945(d).

5.         Termination Tax:  Trust is subject to “termination of private foundation status” of IRC § 507.  The tax is the lower of the aggregate tax benefit resulting from status as a private foundation or the fair market value of its net assets.  IRC § 507(c).

6.         Governing Instrument Requirements:  Trust must meet “governing instrument language” of IRC 508(e).  This includes provisions, the effects of which are to require income to be distributed so as to not subject the foundation to tax under IRC § 4942 and to prohibit foundation from engaging in self-dealing, retaining any excess business holdings, making jeopardizing investments and making taxable expenditures.

Exception:

Under IRC § 4947(b)(3)(A), the excess business holdings and jeopardy investment restrictions are not applicable if the charitable interest of the CLT at inception does not exceed 60% of the aggregate fair market value of the trust assets at inception and the CLT income interest (and none of the remainder interest) is devoted to specified charitable purposes.  This exception allows the qualified CLT to hold closely-held stock if the value of the charitable interest does not exceed 60% of the value of the trust assets at inception of the trust. 

Planning Opportunity:

By using a testamentary CLT that satisfies the exception described above, a decedent may retain control of a family corporation while reducing the estate tax on transfer of the stock to children or other beneficiaries and receive an income tax basis adjustment on the family corporation stock at death.

 

II.        BASIC DIFFERENCES BETWEEN GRANTOR CHARITABLE LEAD TRUST AND NON-GRANTOR CHARITABLE LEAD TRUST

A.        Non-Grantor Charitable Lead Trust

1.         Grantor (donor) will not receive an income tax charitable deduction upon contribution to the trust.  IRC § 170(f).

2.         Grantor (donor) will receive a gift tax charitable deduction upon contribution to the trust based upon the present value of the stream of payments to be made to the charity.

3.         Income of the trust is not taxed to grantor.  IRC § 641.

4.         This trust is most often used as transfer tax reduction technique.

5.         The trust receives an unlimited income tax charitable deduction for payments to charitable organizations from gross income.  IRC § 642(c).  Excess income is taxed at compressed trust income tax rate.

B.        Grantor Charitable Lead Trust

1.         Grantor (donor) receives an income tax and gift tax charitable deduction upon contribution to the trust. IRC § 170(f)(2)(B).  The income tax deduction is the present value of the charitable interest in the charitable lead trust.  Treas. Reg. § 1.170A-6(c)(3).  The income tax charitable deduction is subject to the limitations on charitable deductions made by individuals under IRC § 170(b).

2.         Grantor (