Choosing the Best Charitable Lead Trust to Meet a Client's Needs

Choosing the Best Charitable Lead Trust to Meet a Client's Needs

Article posted in Charitable Lead Trust on 19 March 2003| comments
audience: National Publication | last updated: 16 September 2012
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Summary

A charitable lead trust can be qualified or non-qualified, and either a grantor or non-grantor trust. Establishing a CLT now when interest rates are low may well increase the overall return on investment for the donor's family. In this article from the February 2003 issue of Estate Planning Journal, attorney Andrew M. Grumet of Herrick, Feinstein LLP, New York City and New Jersey, reviews the various types of charitable lead trusts and how planners can design them to accomplish clients' philanthropic and personal planning objectives.

by Andrew M. Grumet, Attorney

Andrew M. Grumet is an attorney with the law firm of Herrick, Feinstein LLP, located in New York City and New Jersey. He has previously written for professional publications. His e-mail address is agrum@herrick.com.


RIA Estate PlanningThis article is reprinted with the publisher's permission from ESTATE PLANNING, a monthly journal on strategies for saving taxes, building wealth, and managing assets published by RIA under the WGL imprint. Copying or distribution without the publisher's permission is prohibited. To subscribe to ESTATE PLANNING or other RIA journals please call 800.950.1216 or visit http://www.riahome.com/journals/. For information on ESTATE PLANNING, click here.


For years, planners have wrestled with the question of how to design a charitable lead trust (CLT) to maximize the effectiveness of the estate plan. With so many variables that can affect the overall performance of this planning device, it is often difficult to find just the right mix. The selection of trust investments, interest rates, and the type of CLT--when taken together--determine whether the plan has been, or will be, successful. Moreover, the type of CLT that is implemented will have a direct impact on the choice of trust investments.

Generally, a CLT is an inter vivos or testamentary trust that provides for the payment of an amount to one or more qualified charities for a specific period of time.1 The period during which the charity receives an interest is referred to as the "lead interest." At the conclusion of the lead interest, the remaining trust assets, if any, pass to one or more non-charitable beneficiaries, either outright or in further trust.

After the enactment of TRA '69, an extensive set of rules were implemented to ensure that donors who established CLTs received charitable deductions that reasonably correlated to the amount that a charity would actually receive. Thus, we have the concept of the qualified CLT and the non-qualified CLT. If a donor wants to receive a charitable gift tax deduction (and in some cases a charitable income tax deduction) for the present value of the lead interest, the CLT must be a qualified CLT. However, if the donor wants to fund the CLT with assets that would violate the private foundation rules applicable to CLTs (or other requirements of a qualified CLT), the donor may establish a non-qualified CLT. Regardless of whether a CLT is qualified or non-qualified, if the trust is a completed gift, its entire value may be excluded from the donor's estate, thus providing a potential estate tax benefit for the donor.

Types of CLTs

A qualified CLT grants a qualified income interest to one or more charities and provides for the remainder of the trust assets to pass to one or more non-charitable beneficiaries.2 A qualified income interest is either an annuity or a unitrust interest, payable at least annually. If a charitable lead unitrust (CLUT) is used, each year the trust distributes an amount equal to a stated percentage of the fair market value (FMV) of the trust which is determined on a specific day of each taxable year of the trust (i.e., pay to charity 5% of the FMV of the trust as determined on the first day of each taxable year).3 The trust should also provide that in any year that the trust assets are overvalued, the charitable beneficiaries will reimburse the trust for the overpayment, and in any year that the trust assets are undervalued, the trust will make additional distributions to correct the deficiency in the amount distributed.

If a charitable lead annuity trust (CLAT) is used, the annuity may be stated either as a specific dollar amount or as a percentage of the initial FMV of the assets contributed to the trust.4

In order for a CLT to be a qualified CLT, the term of the lead interest must be defined either as a specific number of years or by a person's lifetime. The Regulations make clear that only the following individuals can be used as the measuring lives for the lead interest: (1) the donor, (2) the donor's spouse, or (3) a lineal ancestor (or a spouse of a lineal ancestor) of all the remaindermen of the trust.5 A special de minimis rule provides that remainder beneficiaries who do not qualify under the lineal ancestor rule will be ignored if there is less than a 15% chance that they will receive any benefits from the trust. These beneficiaries are usually the contingent beneficiaries if all the other beneficiaries are deceased.

All qualified CLTs are subject to the private foundation excise taxes for making jeopardy investments, retaining excess business holdings, engaging in acts of self-dealing, and making taxable expenditures.6 However, if the value of the charitable lead interest is 60% or less of the donor's contribution to the trust, the excess business holdings rule and the jeopardy investment rules will not apply.7 The governing instrument of a CLT must explicitly provide that these rules will not be violated unless state law already provides these restrictions.

Unless all the above rules are satisfied, a CLT will not be a qualified CLT, and as a result, no gift (or estate) tax charitable deduction will be available for the gift to charity. Whether or not a CLT is a qualified CLT will control the economic benefits of the trust. The value of the qualified income interest determines many of the tax benefits of the CLT and more importantly, whether the design of the CLT can achieve the practical objectives of the donor. The Regulations provide extensive rules for calculating the qualified income interest. The value of an annuity interest is based on a formula that takes into account: (1) the term of the lead interest (whether the term is a specific number of years or an actuarial life expectancy computed under Table 90 CM); (2) the Section 7520 rate for the month in which the trust is established (or the rate for either of the two preceding months); (3) the amount, timing, and frequency of the annuity payments; and (4) the initial FMV of the assets contributed to the trust.8

The value of a unitrust interest is determined by subtracting the present value of the remainder interest in the trust from the FMV of the property transferred to the trust.9 The present value of the remainder interest is computed by a formula that takes into account (1) the term of the trust; (2) the Section 7520 rate for the month in which the trust is established (or the rate for either of the two previous months); (3) the amount, timing, and frequency of the unitrust payments; and (4) the FMV of the assets contributed to the trust.

The above rules determine the value of a qualifying income interest (and by extension, the value of the gift (or estate) tax charitable deduction). If, however, a CLT is a non-qualified CLT, the above formulas do not apply because a gift to a non-qualified CLT is treated as a gift of the entire amount transferred to the trust, and no gift (or estate) tax charitable deduction is available. Depending on the donor's intentions, this may be a benefit or a detriment.

Income tax consequences

Each taxable year, like most other trusts, qualified and non-qualified CLTs are required to report all the trust's income, gain, loss, deductions, and credits. However, whether a CLT will be required to pay tax on any of these items will depend on whether the CLT is a "grantor trust."10

If the CLT is not a grantor trust, each taxable year the trust will pay tax on all its income in accordance with Subchapter J.11 To offset its income, a non-grantor CLT--regardless of whether or not it is a qualified CLT--will receive a charitable income tax deduction, each year, for the amount distributed to pay the lead interest, plus any additional amount distributed to charity under the terms of the trust instrument. Charitable distributions that exceed any amount that is expressly authorized by the trust instrument do not qualify for the charitable income tax deduction.12

If a CLT is a grantor trust, the donor recognizes each year all the trust's income, gain, loss, deductions, and credits on his personal income tax return. In the year that the trust is established, the donor will also receive an immediate income tax deduction equal to the value of the qualified income interest. As a result, a grantor CLT will not pay tax on any of its income, nor will it receive any charitable income tax deductions for its distributions to charity during the period in which the CLT is a grantor trust.

Because the donor of a grantor qualified CLT receives an income tax charitable deduction in the year the trust is formed, no additional income tax charitable deductions are permitted in subsequent years unless distributions to charity are made from the trust (under the terms of the trust instrument) in excess of the amount required to be distributed.13 Thus, if a donor establishes a grantor qualified CLT with $1 million of assets and a qualifying income interest equal to $700,000, the donor will be entitled to a charitable income tax deduction of $700,000 in the year the trust is established (subject to the percentage limitations of Section 170 and other income tax limitations). Any charitable deductions that are not used in the current year may be carried forward for up to five years.14

While the donor's continued obligation to pay tax on the trust's income may not sound like a beneficial arrangement, if the donor is charitably inclined and is seeking to achieve additional gift, estate, and generation-skipping transfer (GST) tax benefits, his obligation to pay tax on the trust's income will be an added advantage to all the trust beneficiaries. Each tax payment by the donor inures to the benefit of the charity--particularly if the trust is a CLUT--because such payment permits the trust assets to grow income tax- free, thereby increasing the amount distributed to charity each year. To a lesser extent, the donor's payment of the trust's income tax also helps the non-charitable beneficiaries because these payments will likely increase the amount remaining in the trust for them at the end of the lead interest. These payments are, in effect, additional gifts to the remaindermen which are not subject to gift tax.15

If the donor of a grantor qualified CLT dies before the end of the lead interest, the trust ceases to be a grantor trust and will subsequently be a complex trust.16 As a complex trust, a CLT must pay tax on its income in accordance with Subchapter J, but will receive charitable deductions for each distribution to charity.17 In addition, on the donor's final income tax return, the donor is required to report, as income, the excess of the charitable income tax deduction received, over the discounted value of the distributions previously made to charity during the trust's existence.18 This rule prevents donors from establishing a grantor qualified CLT just before death so as to take advantage of an immediate income tax deduction.

If a donor establishes a non-qualified CLT as a grantor trust, unlike a qualified CLT, the donor will not be entitled to a charitable income tax deduction for the value of the income interest.19 This is one of the critical differences between a qualified and non-qualified CLT. The donor of a grantor non-qualified CLT will be required each year to pay tax on all the trust's income, and will be able to claim a charitable income tax deduction for each annual distribution made to charity. Gift and GST tax effects

Upon the creation of an inter vivos CLT, for gift tax purposes, assuming the transfer to the trust is a completed gift, a gift of the qualifying income interest is made to charity, and a gift of the remainder is made to the non-charitable beneficiaries. Unlike the charitable income tax deduction, which may be subject to percentage and other limitations, a donor is entitled to an unlimited gift tax charitable deduction for the value of the gift to charity. If a CLT takes effect upon the death of the donor, the same method of valuing an inter vivos gift applies, but the gift to charity will qualify for the estate tax charitable deduction, and the gift to the remaindermen will be included in the donor's gross estate and thus will be subject to estate tax.

In designing a CLT, only a gift to charity in the form of an annuity can achieve a zero valuation of the gift to the remaindermen. Hence, if a CLT is designed to result in a zero gift, which can be done only with a CLAT, the entire value of the assets contributed to the trust will be deductible by the donor as a charitable gift tax deduction (and income tax deduction if the CLT is a grantor trust).20

For GST tax purposes, CLATs and CLUTs are dramatically different. Consequently, practitioners typically find that a CLAT is not suitable when the remainderman is a "skip person" (e.g., a grandchild). The reason is that although all CLTs can be allocated a donor's GST exemption upon formation, the inclusion ratio of a CLAT is not determined until the lead interest ends.21 In contrast, the inclusion ratio of a CLUT is determined when the trust is established. Because of the unfavorable GST tax consequences of creating a CLAT for a skip person, the CLUT is undoubtedly the preferred type of CLT when a donor wishes to benefit his grandchildren.

If one or more skip persons inadvertently become the non-charitable beneficiaries of a CLT due to the unexpected death of one or more non-skip person beneficiaries (e.g., a beneficiary dies, survived by children who become the beneficiaries in his place), changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) now enable the donor of a CLT to make a retroactive allocation of GST exemption to the trust.22 Prior to EGTRRA, a donor who subsequently allocated GST exemption to a trust had to make the allocation based on the FMV of the trust assets at the time of the allocation. However, new Section 2632(d) was added to address an "unnatural" order of deaths. This section permits a donor to make a retroactive allocation of GST exemption based on the original value of the gift to the trust. The ability to make a retroactive allocation offers CLT donors additional planning options when unexpected circumstances arise.

Additional design issues

Aside from type of CLT selected, other factors that have a major effect on the overall performance of a CLT are the applicable Section 7520 rate and the term of the trust. During the third week of each month, the Section 7520 rate for the following month is issued in a Revenue Ruling. This rate is directly linked to current financial markets and predictions concerning the overall economy and the movement of interest rates.

In designing a CLT, you may use the Section 7520 rate for the month in which the trust is established, or the rate for either of the two preceding months--whichever provides a more favorable result. The lower the Section 7520 rate, the lower the value of the remainder interest is.

The term of the lead interest of a CLT also affects the ultimate performance of the trust. The longer the term, the lower the value of the remainder interest.

When selecting the charitable beneficiary of a CLT, a donor should consider the application of Section 4945, which imposes taxes on taxable expenditures. A taxable expenditure may occur any time a CLT makes a distribution to a private foundation if the CLT fails to exercise expenditure responsibility.23 Although the Service has ruled that the payment of a lead interest to a charitable beneficiary that is specifically identified in a CLT will not constitute a taxable expenditure, this may not be the case if the trustees have discretion to determine who the charitable beneficiaries will be and/or how much each beneficiary will receive.24

When establishing a CLT, careful consideration should also be given to choosing the trustee. If the donor is found to have retained the right to determine who will be entitled to the lead interest, the transfer to the CLT by the donor will be an incomplete gift.25 Further, if the CLT is payable to a private foundation that is controlled by the donor and/or his family, the CLT may fail to be a completed gift until the lead interest ends and/or may be entirely included in the donor's estate if the donor does not survive the lead term.26

Funding the CLT

Once a donor has evaluated the issues discussed above, the next question is what assets should be used to fund the CLT. Due to the many benefits of family limited partnerships (FLPs), planners often suggest that donors give beneficiaries gifts of limited partnership interests instead of gifts of the underlying assets.27 By giving limited partnership interests, donors may take advantage of valuation discounts for lack of control, lack of marketability, and other factors that are associated with the ownership of an asset with restricted rights. Giving FLP interests subject to valuation discounts has permitted donors to transfer larger amounts of wealth to younger generations at a reduced tax cost, while at the same time allowing donors, in many cases, to retain control over the underlying assets.

The economic benefit of using an asset subject to a valuation discount when funding a CLT is that the discount reduces the initial value of the interest transferred to the trust by "hiding" a portion of the value of the underlying assets. This means that a reduced amount is considered in calculating the charitable distribution, thereby allowing more to pass to the remaindermen. In the case of a grantor CLT, reducing the value of the assets contributed to the CLT via a discount also decreases the donor's charitable income tax deduction. Although a donor may not want to have his charitable income tax deduction reduced, this is a preferable approach from an overall tax standpoint when the donor's effective income tax rate is lower than his potential estate tax rate.

Impact of the private foundation rules. If a CLT is funded with assets subject to a valuation discount, such as limited partnership interests in an FLP, additional concerns may arise, particularly if the lead interest of the CLT will be payable to a private foundation that is controlled by the donor or the donor's family. As mentioned earlier, CLTs are subject to the private foundation rules in Sections 4941 through 4945. Although CLTs in which the value of the lead interest is 60% or less of the FMV of the assets contributed to the trust will not be subject to the excess business holding rules and jeopardy investment rules, the rules against self-dealing, distribution of minimum return, and taxable expenditures will always apply to a CLT.

A CLT funded with limited partnership interests may easily violate these rules due, in large part, to the inability to assign an objective value to a limited partnership interest. 28 For example, if a limited partnership interest is incorrectly valued too low (i.e., because of a high discount applied by an appraiser), a CLT and its fiduciaries may violate the rule against self-dealing because the distributions to charity will be insufficient due to the low value assigned to the trust assets. Insufficient distributions may also cause the CLT to fail to meet its minimum distribution requirements, which in the case of a CLT, can be satisfied only if the CLT distributes the amount required to be distributed under the trust agreement.

These problems can be illustrated by the following example. Assume that a CLT is funded with FLP interests and that the appraiser assigns a 50% valuation discount. Two years later, it is determined on audit that the appropriate discount should have been 30%. As a result of using a 50% (rather than a 30%) discount, the amount received by the remainderman of the CLT was increased by 27%. Further assume that the trustee of the CLT is the donor's son, who is also the remainderman of the CLT.

Under these facts, it is possible to conclude that the trustee/son's use of a 50% discount was an act of self-dealing because the son used the CLT assets for his own benefit in violation of Section 4941(d)(1)(E). Moreover, the CLT's failure to distribute the proper amount to charity due to the low valuation could, under Section 4942, cause a fiduciary to have violated the minimum distribution rules if the violation is not corrected in a timely manner.29 (Even if the proper amount is subsequently distributed, a fiduciary may still be subject to the excise tax if it is found that the incorrect valuation was not due to reasonable cause.)

Because a CLT's charitable distribution obligations may not be conditioned on available cash flow, CLTs funded solely with FLP interests can also run afoul of the self-dealing rules if the CLT fails to receive sufficient distributions of cash from the partnership. If this should occur, the trustees of the CLT will need to find an alternative source of funds for the trust to meet its distribution obligations. The trustees may satisfy the distribution obligation by: (1) selling a portion of the CLT's assets to obtain cash for subsequent distribution, (2) obtaining a loan and distributing the loan proceeds, or (3) distributing a portion of the limited partnership interest.

Because a sale of the assets owned by a CLT to a "disqualified person" will constitute an act of self-dealing, a family member will not be permitted to purchase limited partnership interests from the CLT.30 Thus, if the only asset of a CLT is an interest in an FLP, the trustee may be required to distribute a portion of the CLT's partnership interests if the trustee cannot find someone--other than a disqualified person--to either loan the CLT cash to make the distribution or purchase limited partnership interests. (A loan from a disqualified person to a CLT, however, is permissible if the loan is interest-free.31) Because assets distributed from a CLT must be valued at their FMV, a distribution of limited partnership interests by a CLT will likely require the trustees to discount the value of the limited partnership interests when making such a distribution. Accordingly, a CLT may have no choice but to distribute a limited partnership interest to the charity.

If a private foundation becomes an owner of the limited partnership interest, additional problems may arise because the foundation will also be subject to the rules against self-dealing (in addition to the other provisions of Sections 4941 through 4945), which may make it difficult for the foundation to hold, as well as dispose of, the limited partnership interest. For example, family members who are receiving management fees from the partnership may be receiving impermissible fees under the self-dealing rules. In addition, the ownership of a limited partnership interest by a private foundation could cause the foundation to have unrelated business taxable income. These problems, and others, may further frustrate the donor's estate planning goals because the options available to a private foundation with respect to disposing of an interest in an FLP are limited.

Choosing a grantor or non-grantor CLT

Since the amount that will ultimately pass to the non-charitable beneficiaries may be significantly affected by who will bear the burden of any income taxes attributable to the trust investments, the income tax status of the trust (as a grantor or non-grantor trust) should be evaluated in conjunction with the type of investments that the CLT is likely to make. A planner should consider whether the trust will be invested in tax-exempt assets (e.g., municipal bonds), assets that will produce large amounts of taxable income (e.g., interests in a hedge fund), or some combination.

A grantor qualified CLT can invest in assets that will generate substantial taxable income without reducing the amount ultimately received by the charity and the non-charitable beneficiaries, but a non-grantor qualified CLT that receives a large amount of taxable income may have fewer assets left for the final distribution to the non-charitable beneficiaries. The ramifications of who will pay the tax on the trust's income will mostly affect the non-charitable beneficiaries of a CLAT. If, however, the trust is a CLUT, the charitable beneficiaries will also be affected because each charitable distribution will be reduced by the amount of trust assets that must be used to pay income taxes.

Besides considering the potential investments of a CLT, the decision to establish a grantor qualified CLT should be based on whether the donor will be able to effectively use the charitable income tax deduction. Donors who are charitably inclined and anticipate receiving a particularly large taxable income in the year the CLT is established may want to establish a grantor qualified CLT to take advantage of the immediate income tax deduction. On the other hand, a donor who does not receive significant taxable income may have little need for the charitable deduction. Moreover, if the donor is ill and has a short life expectancy, the recapture rules in Section 170(f)(2)(B) may make a charitable deduction less useful.

Investment strategy

When determining the overall investment policy to implement for a CLT, several assumptions must be made. The first is an assumption as to the rate of appreciation of various types of assets, such as taxable bonds, tax-free bonds, and equities. Equities have historically yielded the highest overall rate of return on investment, but when market conditions are down, bonds are often viewed as a safer investment. Historical data suggest that, over long periods of time, bonds can be expected to yield a return of approximately 5% per year (depending on interest rates), while equities will have an overall rate of return far in excess of 5%. To minimize risk, yet retain the potential for increased returns, most investment advisors recommend an investment strategy that includes both bonds and equities.

A planner can dramatically change the ultimate performance of a CLT by changing the CLT design, interest rate, investment strategy, assumed rates of return, and tax status of the trust. For example, suppose that a donor with $25 million wants to establish an inter vivos CLT. The donor wants the trust to be a CLAT because she would like to zero out the gift and intends that the trust will be for the benefit of her children.32 The donor anticipates a substantial income tax liability this year and for the next several years. Therefore, if the trust is established as a grantor qualified CLAT, the donor will be able to use all of the charitable income tax deduction resulting from creation of the trust. If the donor forms a ten-year grantor qualified CLAT and funds it with limited partnership interests in an FLP that owns a portfolio of equities, the CLAT will yield a net benefit to the donor's children of approximately $41,936,000. In contrast, a non-grantor non-qualified CLAT funded with cash that is invested in tax-free bonds will yield the donor's children a net benefit of only $28,243,000, a difference of over $13,500,000.33 This differential can become even more pronounced if the CLT's investments do not perform up to expectations, or if the CLT ultimately outperforms the initial projections.

Based on the assumptions in the previous example, projections also show that changes in the Section 7520 rate--of as little as 0.4%--can increase or decrease the net family benefit by $700,000. While this change may appear modest, due to the current low interest rates, such a change may be a substantial understatement of what donors may expect to occur. The reason is that the assets of a CLT that are held for an extended period of time (i.e., ten years or more) can expect to sustain many changes in economic performance--some up and some down.

Because current projections are based on very low interest rates, any improvement in the economy and the financial markets is likely to dramatically increase the actual returns of a CLT. As a result, establishing a CLT when interest rates are low (such as right now) may increase the overall return on investment for the family because it is more likely than not that the CLT will outperform the current, short-term, economic predictions (i.e., the Section 7520 rate and a bearish market).

Because of the different factors that can make or break the performance of a CLT, a planner should draw on the expertise of a number of professionals when designing and implementing a CLT. For example, a lawyer may be well-versed in the mechanics of preparing a CLT, but may lack the expertise necessary to counsel a client about the future investment of the CLT's assets. Similarly, a financial advisor may be highly skilled in advising about the best asset allocations and other matters required for prudent investing, but may need guidance on how to design a CLT. To achieve the best result, professionals and donors should share their knowledge and expertise when designing a CLT.

Practice Notes

If a CLT is funded with assets subject to a valuation discount, such as limited partnership interests in an FLP, additional concerns may arise, particularly if the lead interest of the CLT will be payable to a private foundation that is controlled by the donor or the donor's family.


This article is reprinted with the publisher's permission from ESTATE PLANNING, a monthly journal on strategies for saving taxes, building wealth, and managing assets published by RIA under the WGL imprint. Copying or distribution without the publisher's permission is prohibited. To subscribe to ESTATE PLANNING or other RIA journals please call 800.950.1216 or visit http://www.riahome.com/journals/. For information on ESTATE PLANNING, click here.


  1. See Sections 170(f)(2)(B), 2522(c), and 2055(e)(2)(B). A qualified charity is an organization described in Section 170(c), 2055(a), or 2522(a).back

  2. See Regs. 20.2055-2(e)(2)(vi) and 20.2055-2(e)(2)(vii); see also Regs. 25.2522(c)-3(c)(2)(vi) and 25.2522(c)-3(c)(2)(vii).back

  3. Reg. 20.2055-2(e)(2)(vii); see also Reg. 25.2522(c)-3(c)(2)(vii).back

  4. Reg. 20.2055-2(e)(2)(vi); see also Reg. 25.2522(c)-3(c)(2)(vi).back

  5. Regs. 1.170A-6(c)(2)(i)(A), 1.170A- 6(c)(2)(ii)(A), 20.2055- 2(e)(2)(vi)(a), 20.2055- 2(e)(2)(vii)(a), 25.2522(c)-3(c)(2)(vi)(a), and 25.2522(c)-3(c)(2)(vii)(a).back

  6. See Sections 508(d)(2), 508(e), and 4947(a); see also Sections 4944, 4943, 4941, and 4945(d).back

  7. Regs. 25.2522(c)-3(c)(2)(vi)(e) and 25.2522(c)-3(c)(2)(vii)(e).back

  8. See Regs. 1.170A-6(c)(3)(i), 20.2031-7, 20.2031-7A, 20.2055-2(f)(2)(iv), 25.2512-5, and 25.2522(c)- 3(d)(2)(iv). 9 See Regs. 1.170A-6(c)(3)(ii), 20.2055- 2(f)(2)(v), and 25.2522(c)- 3(d)(2)(v).back

  9. Section 671 et seq. If the grantor relinquishes his status as the owner under the grantor trust rules, Section 170(f)(2)(B) requires the grantor to recapture the excess deductions previously received over the income taxes paid.back

  10. See Section 661 et seq.back

  11. Section 642(c).back

  12. Sections 170 and 642(c); see also Regs. 25.2522(c)-3(c)(2)(vi)(d) and 25.2522(c)-3(c)(2)(vii)(d).back

  13. See Section 170.back

  14. Although the Service previously asserted that the donor's payment of income tax due to the grantor trust status of a trust constituted an additional gift to the trust, the Service seems to have relented on the issue. See Ltr. Ruls. 9444033 and 9543049.back

  15. See Section 641 et seq.back

  16. Sections 170, 642(c), and 661 et seq.; see also Reg. 1.170A- 6(c)(4).back

  17. Section 170(f)(2)(B); Reg. 1.170A-6(c)(4).back

  18. No gift of an income interest in a trust will qualify for a charitable deduction unless the gift is in the form of a guaranteed annuity or a guaranteed unitrust interest.back

  19. A CLAT can be designed to result in no taxable gift, but a CLUT can never be zeroed out.back

  20. Section 2642(e).back

  21. Section 2632(d).back

  22. Section 4945(d)(4).back

  23. See Ltr. Ruls. 199952093 and 9826032.back

  24. See Rev. Rul. 77-275, 1977-2 CB 346.back

  25. Rifkind, 5 Cl. Ct. 362, 54 AFTR2d 84-6453 (Cl. Ct., 1984).back

  26. Although this article refers only to limited partnership interests in FLPs, the same issues apply to many other assets, such as non-voting stock in a closely held corporation (and non-voting interests in limited liability companies), that are subject to substantial restrictions in the hands of the owner. These restrictions include a lack of voting rights, no control over the management and affairs of the entity, inability to transfer the asset, potential built-in gains tax, and other factors that reduce the FMV (i.e., the amount a willing buyer would pay) of the assets.back

  27. For an in-depth discussion of the issues applicable to funding a CLT with FLP interests, see Grumet, "Gains and Gaffes From Funding Charitable Trusts With FLP Interests," 68 Prac. Tax Strategies 332 (June 2002).back

  28. See Sections 4942(a) and 4942(j)(2).back

  29. Generally, the donor and his entire family will be treated as "disqualified persons." See Section 4946(a)(1) for a complete definition of who is a disqualified person.back

  30. Section 4941(d)(2)(B).back

  31. For purposes of this example, assume that the applicable Section 7520 rate is 5.8%.back

  32. For purposes of the example, assume that: (1) limited partner units are discounted by 30%, (2) bonds are tax-free and yield 5%, and (3) equities yield 9%. Also assume that all yields are subject to a blended 30% tax rate.back

  33. footnote errorback

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