Contents

CHARITABLE LEAD TRUSTS§ 16.8 ANTI-ABUSE RULE CONCERNING INCOME INTERESTSIn yet another attempt to thwart abuses in the use of charitable split-interesttrusts, 43 the IRS issued regulations concerning charitable lead trusts in an effort toshut down the practice of using the lives of seriously ill individuals to moveassets and income away from charitable beneficiaries prematurely and to otherprivate beneficiaries instead. 44(a) AbuseCharitable gift planners have been taking advantage of the way in which theterm of the charitable income interest, in the case of a charitable lead trust, isdefined. With this approach, which was permissible under prior law, an unrelatedindividual’s life was used as the measuring life. There is nothing inherentlywrong with that, by itself. This technique, however, involved the selectionof an unrelated young individual who was seriously ill but not quite terminally ill.This meant that the charitable interest was valued using the standard actuarialfactors 45 rather than the special factors. 46 The charitable deduction, then, wasbased on this individual’s normal life expectancy, even though the individualhad been carefully selected because he or she likely would not live to an averagelife expectancy. Thus, on the face of the matter, the amount the charity wasexpected to receive was based on the longer term (the life expectancy). The charitablededuction, of course, was in turn based on this expectation.When the seriously ill individual died (prematurely), the amount the charityactually received was significantly less than the amount on which the charitablededuction was based. Therefore, the strategy artificially inflated the charitablededuction. Further, the amount of the actual transfer to the remainder beneficiarieswas significantly greater than the amount subject to the gift or estate tax.These charitable lead trusts were marketed in a package that included the nameof a seriously ill individual and access to his or her medical records. A token paymentwas made to the ill individual whose life was the measuring one. Sometimes,the ill individual was led to believe that a charitable organization interested in theindividual’s particular interest would receive some benefit from the transaction.In characterizing this scheme, the IRS wrote in the preamble to these rulesin their proposed form—with considerable understatement—that “this kind ofadverse selection of an unrelated measuring life to artificially inflate the charitablededuction is contrary to Congressional intent.” It was also observed that“[m]arketing schemes that exploit the misfortunes of some for the benefit ofothers are contrary to public policy.” 4743 See §§ 12.2(c), (i); 12.3(c), (i); 12.4(g).44 T.D. 8923. Given their origin and character, these trusts are sometimes referred to as vulture trusts or ghoultrusts. As the IRS observed: “Similar to the vulture, the promoters of this form of charitable lead trust circlein on mortally ill young people.” Exempt Organizations Continuing Professional Educational Program Textbookfor Fiscal Year 2001, at 103.45 See § 11.3.46 See § 11.4.47 65 Fed. Reg. 17,835 (April 5, 2000). In this connection, the IRS quoted a commentator who wrote that “[t]histechnique (which is not strictly speaking wealth transfer planning for the terminally ill, but rather wealth transferplanning using the terminally ill) falls somewhere between ghoulish and grotesque.” 522