Planned Giving Design Center, LLC › Forums › PGDC Discussion Forum › General Discussion
Wed
25
Jun
2008

Unwinding a CRUT and/or revoking remainder interest

 »  

No votes yet
We've recently had a donor approach us with a request for our organization to allow them to unwind their current CRUT because of the need for immediate cash. The donor needs the remainder beneficiary to agree to this before the unwinding can commence. Has anyone ever encountered a situation where a donor has had to liquidate? How did your organization handle this?
Thu
26
Jun
2008
94
points
#6 by Richard Fox    

Early Termination of CRTS

The early termination of CRTs has become very popular in recent years, particularly for donors that have come under financial pressure. Generally, the consent of all parties, including the remainder charity must be obtained, as well as the Attorney General, who might require court approval. There are special rules as to how to figure the amounts to be distributed to the noncharitable beneficiaries and the remainder charity, particularly in the case of NICRUTs and NIMCRUTs. The main advantage to the charity is that it gets its hands on money that it would otherwise have to wait many years to received. I am in the process of doing one right how, where the noncharitable beneficiaries are receiving over $5 million.

Let me know if I can help or be of any assistance.

Richard L. Fox, Esq. rfox@dilworthlaw.com Parnter, Dilworth Paxson LLP Visiting Professor of Philanthorpy - The American College

Thu
26
Jun
2008
101
points
#5 by Kaitlyn Sands    

Incuring penalties?

Thanks, Richard, for your reply. Now taking it one step further, would the charitable organization be subject to any penalties? Our legal counsel has said this is a possibility. Also, how could the organization insure that they were not penalized, and yet maintain good donor relations?

Thu
26
Jun
2008
94
points
#4 by Susan Fisher    

Terminating a CRUT due to high payout depleting it

Richard, Financial need triggered the question above. Would a poor initial design which included a high payout percentage be reason enough to terminate the CRUT? Are there IRS allowable situations such as we see for withdrawing IRA funds prior to age 59? Thank you for your response.

Thu
26
Jun
2008
100
points
#3 by Richard Fox    

Termination of CRT

There are a multitude of IRS private letter rulings where the IRS issued favorable rulings on the early termination of a CRUT. I think that as long as you obtain the contents of all parties, including the AG, and compute the payouts based on the IRS standards, you should be fine. Note, however, as I previously indicated, that the IRS will no longer issue rulings on early terminations. I don't think there is a down-side to a charity on the termination from a tax standpoint, although the noncharitable beneficiaries could face Section 4941 issues. Now that the IRS has stopped ruling on these issues, there is a bit of uncertainty, but until the IRS says otherwise, I would follow the patter of the rulings.

rfox@dilworthlaw.com

Thu
26
Jun
2008
99
points
#2 by DFischer    

Unwinding a CRUT

I just started researching this issue and have found some helpful language in PLR 200408031, PLR 200403051, PLR 200127023, and PLR 200314021.

If I am reading the rulings correctly (and I'm sure Richard can speak to this), it appears that the taxpayer is treated as if he is selling his interest to the charitable beneficiary and that the amount the taxpayer would realize for federal income tax purposes would be the amount of money and FMV of the property received by the Taxpayer as determined under Section 1001 rather than Section 664. The taxpayer is treated as though he no basis in his interest in the trust, and the taxpayer realizes gain under Section 1001(c), which is subject to taxation as long-term capital gain.

What I haven't been able to determine is whether it makes a difference if the taxpayer who is terminating the CRUT is the original settlor/donor, or if the taxpayer is a non-charitable beneficiary. In my case, the settlor/donor has passed away, and her children have lifetime interests in the CRUTs. Do the same rules apply to them as to settlor/donors? Any thoughts?

Thank you,

Danielle Fischer

Thu
26
Jun
2008
100
points
#1 by Donald Poole    

Unwinding a CRUT

If, charity and income interest holder unwind IRC Section 1001(e)(1) provides the income interst holder has no basis. It makes no difference if the income interest holder is the grantor or a subsequent beneficary. Consider IRC 1001(e)(3). Have charity and income holder sell to another charity at the same time. Now the income holder should have basis under the uniform basis rules. There are no rulings, but all the liquidation rulings point out the transaction is not a simultanous sale to a third party. A charity is a better purchaser because of the CRT termination rules.