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).

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.