Contents
Contents Contents
CHARITABLE REMAINDER TRUSTS(e) Anti-Abuse RulesAnti-abuse rules concerning CRTs are designed to prevent certain abusive transactions,in which a remainder trust is used to convert appreciated assets intomoney while avoiding tax on the gain from the disposition of the assets. 331 Thistechnique rested on an aggressive interpretation of the rules concerning themanner in which distributions to noncharitable beneficiaries of these trusts aretaxed. As discussed, 332 this structure is multitiered, with distributions taxed firstas income, then capital gain, then other revenue (such as nontaxable interest),and then nontaxable return of corpus.Summary of Transaction. In a transaction of this type, an individual typicallycontributes highly appreciated assets to a CRT that has a relatively short termand a relatively high payout rate. Instead of selling the assets to generatemoney to pay the income interest beneficiary, the trustee borrows money,enters into a forward sale of the assets, or engages in a similar transaction.Because the transaction does not result in current income to the trust, the partiesattempt to characterize the distribution of money to the beneficiary as atax-free return of corpus. 333Distributions may continue to be funded in this manner for the duration ofthe trust term. As noted, this term usually is short to meet the 10 percent remainderrequirement. 334 The appreciated assets may be sold and the transactionclosed out (e.g., repayment of the loan) in the last year of the trust. In anotherapproach, the trustee may distribute the appreciated assets to the charitable beneficiary,subject to a contractual obligation to complete the transaction (e.g., theforward sale contract).This is one of these arrangements that involves what the IRS terms a“mechanical and literal” application of the CRT rules. In other words, technicallythis approach is within the bounds of the language of the statute and regulations,but it is outside the purposes and intent of the rules. Like the acceleratedCRT schemes that Congress endeavored to stymie in 1997, 335 these abusivemanipulations of the law yield a result that the IRS will not respect.Summary of Anti-Abuse Rules. The rules target distributions of an annuity orunitrust amount from a CRT when the funds are not characterized in the hands ofthe recipient as ordinary income, capital gain, or other revenue. 336 When thisoccurs, and when the distribution was made from an amount received by the trustthat was neither a return of basis in any asset sold by the trust nor attributable to a331 Earlier, Congress revised the CRT qualification rule to end another version of the abusive accelerated charitableremainder trust. See § 12.1(a), notes 9 and 14). The IRS observed, as to this development: “Nothing is everreally put to rest. It comes back with a twist. Some tax professionals are advocating or promoting the revivalof the accelerated charitable remainder trust in different form.” IRS Exempt Organizations Continuing ProfessionalEducation Program Textbook for Fiscal Year 2001, at 103.332 See § 12.5(a).333 IRC § 664(b)(4).334 See §§ 12.2(i), 12.3(i).335 See, e.g., § 12.2(c), text accompanied by note 72.336 IRC § 664(b)(1)–(3). 458
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- Page 930: § 12.4 ISSUESthird-party purchaser
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- Page 938: § 12.4 ISSUES(c) Transfers of Tang
- Page 942: § 12.4 ISSUESthe noncharitable ben
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- Page 950: § 12.5 TAX TREATMENT OF DISTRIBUTI
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- Page 1004: POOLED INCOME FUNDSincome interest
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CHARITABLE REMAINDER TRUSTS(e) Anti-Abuse RulesAnti-abuse rules concerning CRTs are designed to prevent certain abusive transactions,in which a remainder trust is used to convert appreciated assets intomoney while avoiding tax on the gain from the disposition of the assets. 331 Thistechnique rested on an aggressive interpretation of the rules concerning themanner in which distributions to noncharitable beneficiaries of these trusts aretaxed. As discussed, 332 this structure is multitiered, with distributions taxed firstas income, then capital gain, then other revenue (such as nontaxable interest),and then nontaxable return of corpus.Summary of Transaction. In a transaction of this type, an individual typicallycontributes highly appreciated assets to a CRT that has a relatively short termand a relatively high payout rate. Instead of selling the assets to generatemoney to pay the income interest beneficiary, the trustee borrows money,enters into a forward sale of the assets, or engages in a similar transaction.Because the transaction does not result in current income to the trust, the partiesattempt to characterize the distribution of money to the beneficiary as atax-free return of corpus. 333Distributions may continue to be funded in this manner for the duration ofthe trust term. As noted, this term usually is short to meet the 10 percent remainderrequirement. 334 The appreciated assets may be sold and the transactionclosed out (e.g., repayment of the loan) in the last year of the trust. In anotherapproach, the trustee may distribute the appreciated assets to the charitable beneficiary,subject to a contractual obligation to complete the transaction (e.g., theforward sale contract).This is one of these arrangements that involves what the IRS terms a“mechanical and literal” application of the CRT rules. In other words, technicallythis approach is within the bounds of the language of the statute and regulations,but it is outside the purposes and intent of the rules. Like the acceleratedCRT schemes that Congress endeavored to stymie in 1997, 335 these abusivemanipulations of the law yield a result that the IRS will not respect.Summary of Anti-Abuse Rules. The rules target distributions of an annuity orunitrust amount from a CRT when the funds are not characterized in the hands ofthe recipient as ordinary income, capital gain, or other revenue. 336 When thisoccurs, and when the distribution was made from an amount received by the trustthat was neither a return of basis in any asset sold by the trust nor attributable to a331 Earlier, Congress revised the CRT qualification rule to end another version of the abusive accelerated charitableremainder trust. See § 12.1(a), notes 9 and 14). The IRS observed, as to this development: “Nothing is everreally put to rest. It comes back with a twist. Some tax professionals are advocating or promoting the revivalof the accelerated charitable remainder trust in different form.” IRS Exempt Organizations Continuing ProfessionalEducation Program Textbook for Fiscal Year 2001, at 103.332 See § 12.5(a).333 IRC § 664(b)(4).334 See §§ 12.2(i), 12.3(i).335 See, e.g., § 12.2(c), text accompanied by note 72.336 IRC § 664(b)(1)–(3). 458