Fundamentals ö Charitable Lead Trust (Part 2)

Charity Advisor Resource Newsletter - Volume 1.2 2009

BY JONATHAN D. ACKERMAN

Payment of Lead Interest in Installments - The unitrust or annuity trust payout (lead interest) to charity may be paid in equal quarterly installments at the end of each calendar quarter. Alternatively, the trust instrument may specify that the annuity or unitrust amount is to be paid in annual or other equal or unequal installments throughout the year, See, Treasury Regulation Section 20.2055-2(e)(2)(vi)(a). However, the amount of the charitable deduction will be affected by the frequency of the payment, by whether the installments are equal or unequal, and by whether each installment is payable at the beginning or end of the period, see Revenue Procedure 2007-45, Section 5.02(2) relating to the payment requirement.

Getting More Sophisticated - There is much talk nowadays of a ãshark finä CLAT, where the charitable lead payments are small for a number of years of the CLAT term and then a balloon payment is made to charity in the final year of the CLAT. Donor advisors believe this is advantageous, because the CLAT can grow in value for the ultimate benefit of the family. But beware - if there is a need to sell any assets, any taxable income in excess of the annual amount paid to charity must be paid by the non-grantor CLAT, or by the grantor/donor, in the case of a grantor CLAT.

Term ö The payment of the annuity or unitrust amount may be paid for a specified term of years. Alternatively, the trust instrument may provide for payment of the annuity amount for the life or lives of one or more measuring lives or for the life or lives of one or more measuring lives plus a term of years, See, Revenue Ruling 85-49. However, only one or more of the following individuals may be used as measuring lives: the decedent's spouse and an individual who, with respect to all remainder beneficiaries (other than charitable organizations described in Code Section 170 or 2055), is either a lineal ancestor or the spouse of a lineal ancestor of those beneficiaries. Each person used as a measuring life for the lead period must be living on the decedent's date of death, See Treasury Regulation Section 20.2055-2(e)(2)(vi)(a) and Technical Article in this CAR Newsletter Vol. 1.2 relating to the Ghoul CLT.

Testamentary v Inter Vivos - A CLT may be created at the death of the donor or during the donorâs life. A testamentary CLT is created upon the death of the donor. A CLT may also be created during the donorâs life, which is an inter vivos CLT. In that regard, the donor can experience the benefit of watching the charitable dollars at work during his or her life and take advantage of either estate tax planning and/or income tax planning (by the use of a grantor CLT). See Technical Article in this CAR Newsletter Vol. 1.2 for more.

Permissible Recipients - A CLT must have one or more charitable lead beneficiaries. The governing instrument should also provide for an alternate charitable beneficiary if a specific charity is named and no longer qualifies (as in a CRT), or for the trustee to name the charitable recipient in the event no charity is designated. The IRS ruled in Revenue Ruling 78-101, that a failure to designate a specific charitable beneficiary will not disqualify the interest for the charitable deduction where the trustee is empowered to select the charitable beneficiaries and the governing instrument requires that only qualified charities can be selected.

Sample CLT Forms - The IRS recently published sample forms for grantor and non-grantor inter vivos and testamentary charitable lead trusts, See Revenue Procedure 2007-45 and Revenue Procedure 2007-46 (for a testamentary CLAT). Each Revenue Procedure contains significant annotations and alternate provisions for a CLT. However, the CLT is a sophisticated gift planning vehicle, and as with all such vehicles, professional counsel should be retained to fully analyze the effectiveness of a particular vehicle given a particular set of circumstances.