by Linda Suzzanne
Griffin
A charitable lead trust is a trust which provides an annuity or unitrust interest to a charity followed by a noncharitable remainder interest. For example, 6% of trust assets could be distributed annually to your favorite charity lead trust with the remainder to your children. A gift or estate tax deduction is allowed for the present value of the charity's interest but a gift of the remainder interest is subject to a transfer tax. The term payable to a charity may be for a number of years or for the life of certain individuals. The income tax deduction is only allowed if the transferor is treated as the owner under the grantor trust rules.
Under prior regulations, if the lead interest were payable for both charitable and private purposes, and the private interest was payable before the expiration of the charitable interest, then for the charitable deduction to be deductible, the charitable interest had to begin either before, or at the same time as, the private interest.
In the Estate of Boeshore, 78 TC 523 (1982), the decedent died leaving a charitable remainder unitrust of which 6% would be distributed 70% to the decedent's husband and 30% to the decedent's daughter and grandchildren. Upon the husband's death 58% of the distribution would be payable to the daughter and grandchildren and 42% to a charity. After the death of the daughter and grandchildren the trust would terminate and be paid to charity. The Internal Revenue Service determined that the 42% interest for charity was not deductible because, pursuant to the regulations, the charitable interest was preceded by a unitrust payable to private beneficiaries. The Tax Court disagreed and found that the regulation was invalid.
The new Treasury Regs §1.170A-6(c)(2), §20.2055-2(e)(2) and §25.2522(c)-3(c)(2) eliminates any requirements that a charitable interest cannot be preceded by a noncharitable interest. The noncharitable interest, however, must be in the form of a guaranteed annuity or unitrust payment.
Advice:
When setting up a "mixed" interest carefully review the statute and the regulations to be certain that you will be able to obtain the deduction.
Gifts of Interests in LLCs
The Seventh Circuit Court of Appeals in Albert J.Hackl, Sr., vs. Com., (7/11/2003, CA7) 92 AFTR 2d 2003-5254 has affirmed the Tax Court's holding that gifts of membership units in a tree farming limited liability company ("LLC") were not gifts of present interests and thus did not qualify for gift tax annual exclusions. In Hackl the Tax Court determined that restrictions imposed on the LLC interests prevented the donees from realizing any substantial financial or economic benefits. The decedent had purchased two tree farms to diversify his real estate and placed the farms into LLCs and gave interest in the LLCs to his children, their spouses and into trusts for the benefit of grandchildren. Mr. Hackl was the manager with the power to distribute any available cash to members . The members could withdraw property or sell their units only with Mr. Hackl's approval.
The taxpayer argued that the gift(s) of the LLC interest(s) met the $10,000 gift tax annual exclusion. The IRS determined that the gifts did not qualify for a "present interest" which is required for the $10,000 (now $11,000) exclusion. The IRS concluded that because of the restrictions contained in the LLC operating agreements, the transfers did not give the donees the immediate and unconditional rights to the use, possession or enjoyment of property.
Advice:
To be certain of the annual gift tax exclusion one should consider giving the donee a limited right to demand income or principal similar to the "crummey" notice used in irrevocable trusts.
Charitable Remainder Annuity Trust
Revenue Procedures 2003-53, 2003-31 IRB; 2003-54; 2003,55; 2003-56; 2003-57, 2003-58; 2003-59; and 2003-60, all at 2003-31 IRB provide for sample trust instruments for certain types of charitable remainder annuity trusts.
Advice:
Be certain to review these charitable remainder annuity trust instruments to update your documents prior to preparing same for your clients.
Withdrawals From Qualified Plans And
IRAs
In Mary L. Coleman-Stephens, TC Summary Opinion 2003-91, the Tax Court held that an employee's depression qualified her for the disability exception to the withdrawal penalty on qualified plans. Generally, withdrawals cannot be made prior to age 59½ without a penalty unless certain restrictions apply. One such restriction is the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment. Also, proof of disability is required.
Mrs. Coleman-Stephens stopped working and was hospitalized for depression for three months. She returned to work but after a couple of weeks had to reenter the hospital. Her psychologist concluded that she remained disabled but there were fair prospects of returning to work. The Tax Court found that the disability exception applied and that Mrs. Coleman-Stephens did not have to pay a tax penalty for early withdrawal.
All
Contents © Copyright Linda Suzzanne Griffin,
P.A.
