Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.
Question: My client is planning to create and fund a charitable remainder trust. I have heard that the IRS may disallow the charitable deduction if the gift fails to meet certain charitable standards. Can you explain that?
Answer: The Revenue Code provides, at Section 664(d)(1)(D), that the present value of the charitable remainder interest must be at least 10% of the initial value of the contributed property. If the remainder interest is less than that, the charitable gift fails.
In Revenue Ruling 77-374, the IRS also ruled that a gift of a remainder interest through a charitable remainder trust must be 95% certain to have assets available for charity at the end of the income phase. This means that if the actuarial possibility of a charity receiving a remainder interest is less than 5%, the charitable deduction will be denied.
It’s more likely that one or both of these tests may be failed if the charitable remainder trust is designed as a charitable remainder annuity trust (CRAT) rather than a charitable remainder unitrust (CRUT).
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