Ltr. Rul. 201323007: Completed Gift Occured Notwithstanding That Settlor of CLT is a Director of Private Foundation That is Charitable Lead Beneficiary

Ltr. Rul. 201323007: Completed Gift Occured Notwithstanding That Settlor of CLT is a Director of Private Foundation That is Charitable Lead Beneficiary

News story posted in Letter Rulings on 15 January 2014| comments
audience: National Publication, Richard L. Fox, Esq. | last updated: 15 January 2014
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by Richard L. Fox, Esq.

In recently issued Ltr. Rul. 201323007, the taxpayer created a charitable lead annuity trust (“CLAT”), where the beneficiary of the income interest was a private foundation. The foundation was established by the taxpayer and his spouse and the taxpayer, his spouse, and his two sons are the members of the foundation’s board of directors. Section III(a) of CLAT provides that the trust would pay a guaranteed annuity amount over a specified period of time to the private foundation.  In light of the creation of the CLAT, the Board of Directors of the foundation amended the foundation's bylaws to provide the following:

  • If at any time the foundation is a beneficiary of a charitable lead trust, a charitable remainder trust or other similar trust, and the charitable trust was established by a director or officer of, or substantial contributor to, the foundation, the director, officer or substantial contributor establishing the charitable trust shall be prohibited from acting on or involvement in matters concerning the receipt, investment, grant or distribution of, or any other decisions involving funds received by Foundation from such charitable trust.
  • Any funds received from a charitable trust shall be segregated into a separately established and dedicated account and separately accounted for on the books and records of Foundation in a manner that clearly allows the tracing of the funds into and out of such separate account.
  • A director who establishes a charitable trust for the benefit of foundation may not be counted when establishing a quorum to vote on matters relating to the receipt, investment, grant or distribution of, or any other decisions involving funds received by foundation.
  • Article VI, Section 5.1 provides that no committee established by the Board of Directors, including a standing committee established under Section 5.5 of the bylaws, shall include as a member a director or officer of, or a substantial contributor to, Foundation who has established a charitable trust of which Foundation is a beneficiary.

Subsequently, a quorum of the Board of Directors, excepting Taxpayer, established a standing committee (Committee) under Section 5.5. of the bylaws, with the sole authority to receive, separately invest and make all investment decisions and administrative, grant and distribution decisions on behalf of Foundation with respect to and regarding all funds received by Foundation from Trust. The bylaws provide that Committee consists of at least three members, at least one of whom is not a director of Foundation and at least one of whom is not related or subordinate to any director of Foundation as defined by § 672(c). All actions by Committee shall require unanimous consent.

            Based upon the actions taken by the foundation, as described above, the IRS held that the taxpayer made a completed gift to the CLAT, stating:

“In this case … Taxpayer has not retained a power over the property transferred to Trust, and he has not retained an interest, reversion, or right to alter, amend, or revoke Trust. Taxpayer may not serve as a trustee of Trust. Although he is one of the directors of Foundation, he is not permitted to vote on matters relating to disbursements or grants of funds received from Trust. Any funds received by Foundation from Trust will be segregated into a separate account. Committee will administer and distribute the separate account. Taxpayer will have no power over the account or Committee …  Accordingly, based upon the facts submitted and the representations made, we conclude that Taxpayer's transfer to Trust is a completed gift for Federal gift tax purposes. We further conclude that Taxpayer is entitled to a gift tax deduction under § 2522 based on the present value of the guaranteed annuity payable to Foundation.”

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