Unwinding a CRUT and/or revoking remainder interest

Unwinding a CRUT and/or revoking remainder interest

Forum topic posted in Forum on 25 June 2008| 10 comments
audience: | last updated: 25 June 2008
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Anonymous
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?

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Offline
Joined: 10/02/2003
Points: 15
Unwinding a CRUT
Has anyone looked at the state law issues in this context? Especially where the income bene is not the donor. What is the legal basis for termination? I'm not sure that greed or need is a sufficent legal basis for terminating a irrevocable trust. Thoughts?
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Joined: 12/17/2008
Points: 30
Unwinding a CRUT
Can also be accomplished by converting to a Charitable gift annuity which would provide the donor an additional tax deduction, an income stream for life at a fixed rate depending on his or her age(s) and also release a portion of the corpus immedetely directly to the charity who is in need now rather then later. From Greg Chona in Sarasota, FL. gchona@metlife.com
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Joined: 12/26/2008
Points: 15
Unwinding a CRUT
Are there guidelines, standard procedures or PLR's for unwinding a crt?
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Joined: 06/25/2004
Points: 35
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.
csangster's picture
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Joined: 10/05/2000
Points: 229
Unwinding the CRUT--Basis issue
Please be sure to check out Notice 2008-99 (also known as the "Trick or Treat" Notice from the Service because it was issued on Halloween) which specifically addresses the issue of the income interest holder and charitable remainder beneficiary jointly selling their respective interests in order to take advantage of the uniform basis rules under section 1001(e)(3). As stated in the PDGC commentary about the notice: "The IRS and Treasury Department are concerned about the coordinated sale and manipulation of the uniform basis rules being used to avoid tax on gain from the sale or other disposition of appreciated assets." Claudia
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Joined: 06/26/2008
Points: 15
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
Kaitlyn Sands (not verified)
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?
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Joined: 07/31/2003
Points: 60
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
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Joined: 09/22/2006
Points: 15
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.
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Joined: 07/31/2003
Points: 60
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
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