Ghoul Charitable Lead Trust Proposed Regulations

Ghoul Charitable Lead Trust Proposed Regulations

Article posted in Regulations on 22 June 2000| comments
audience: National Publication | last updated: 16 September 2012


The IRS has issued proposed regulations to curtail a scheme that has come to be known as the "vulture" or "ghoul" charitable lead trust. The purpose of the plan is to artificially inflate the gift or estate tax charitable deduction by using an unrelated, seriously ill individual as the measuring life of a non-grantor or defective grantor charitable lead trust. The result is an early transfer to the noncharitable remainder beneficiary and reduced income payments to the charitable beneficiaries. In this edition of Planned Giving Online, PGDC legal editors Emil Kallina and Jon Ackerman examine the scheme and the proposed regulations intended to end its use.

by: Emanuel J. Kallina, II, Esquire & Jonathan D. Ackerman, Esquire

A Charitable Lead Trust ("CLT") is a sanctioned split interest trust under Section 170(f) of the Code, and usually is structured to pay income to charity for a term of years or for the lifetime of an individual, with the remainder (at the end of the term or life) passing to a non-charitable person or entity. The IRS has issued new Proposed Regulations pursuant to Sections 170, 2055, and 2501 of the Code,1 to prevent taxpayers from using an unrelated individual - who is seriously ill but not "terminally ill" within the meaning of the current Section 7520 Regulations - as the measuring life for the term of a charitable lead trust to artificially inflate the charitable deduction. 2

According to the IRS, these charitable lead trusts have been marketed in "packages" which include the name of a seriously ill individual and provide access to the individual's medical records. In return for serving as the measuring life, the seriously ill person receives a token payment. The IRS notes that the person is sometimes misled into thinking a benefit will pass to a charity interested in the person's particular illness. The IRS states, "Marketing schemes that exploit the misfortunes of some for the benefit of others are contrary to public policy." In addition to violating general public policy, the IRS believes such schemes are contrary to Congressional intent. The IRS states that such schemes are abusive and frustrate "the Congressional purpose in limiting the charitable deduction to specific types of split-interest transfers" which are designed to make sure that the charitable deduction reasonably correlates to the amount passing to charity. 3

A public hearing on the Proposed Regulations was scheduled to be held on June 29, 2000. That hearing, however, was cancelled on June 22, 2000 because, according to the IRS, no one had requested to speak.4


When a donor transfers interests in an asset for both charitable and non-charitable purposes, he or she is entitled to a charitable deduction for the charitable portion of the transfer only if certain requirements are met. For example, the income portion of a gift to a charitable lead trust is deductible only if it is in the form of a guaranteed annuity or a guaranteed unitrust interest. 5 The donor must be treated as the owner of the whole trust under the grantor trust rules if he or she wishes to take a charitable income tax deduction for the lead interest. 6

As the IRS notes in its comments on the Proposed Regulations, neither the Code nor the legislative history to the Tax Reform Act of 1969 includes limits for the term that may be used for charitable lead trusts. The statutory provisions governing charitable remainder trusts and pooled income funds do include certain term or measuring life limitations. 7 The current Regulations governing charitable lead trusts simply provide that the term of a charitable lead interest must be either a specified term of years or the life or lives of one or more individuals who must be living and ascertainable at the date of the transfer to the charitable lead trust. 8

When a measuring life or lives are used for the term of the charitable lead interest, donors are generally entitled to use the actuarial tables under the Regulations to Code Section 7520 to value the charitable interest, 9 as long as the persons whose lives are used are not "terminally ill." 10 The gift tax provisions, for example, describe a terminally ill person as follows:

an individual who is known to have an incurable illness or other deteriorating physical condition is considered terminally ill if there is at least a 50 percent probability that the individual will die within 1 year. However, if the individual survives for eighteen months or longer after the date the gift is completed, that individual shall be presumed to have not been terminally ill at the date the gift was completed unless the contrary is established by clear and convincing evidence. 11

As the IRS notes in describing the Proposed Regulations, the Code Section 7520 tables are based on the average life expectancies of all persons of the same age as the person whose life is used to measure the term. 12 If a terminally ill person is used as the measuring life, his or her actual life expectancy must be used to value the interest. 13

Description of Proposed Regulations

In an attempt to curb this potential abuse, the Proposed Regulations provide that only one or more of the donor, the donor's spouse and a lineal ancestor of all the remainder beneficiaries may be used as the measuring lives for a charitable lead trust. This limitation would not apply to charitable remainder trusts. 14 The IRS observes:

A transfer using the donor or the donor's spouse as the measuring life is a substitute for a testamentary disposition to the remainder beneficiaries. In other situations, the donor may desire to benefit an individual's heirs only after the death of the individual currently providing their support. For example, a donor may establish a charitable lead trust for the life of the donor's sibling with the sibling's children named as the remainder beneficiaries. A measuring life unrelated to the remainder beneficiaries is not appropriate for estate planning purposes and therefore is not permitted under the proposed regulations. 15

In addition, the Proposed Regulations provide that an interest payable for a term of years may qualify as a guaranteed annuity or unitrust interest even if the trust includes a rule against perpetuities savings clause. However, such savings clause must use a vesting period of 21 years after the deaths of people who are selected as measuring lives to maximize rather than limit the term of the charitable lead trust. 16 In the explanation of this provision, the IRS states, "For example, a guaranteed annuity or unitrust interest that will terminate on the earlier of 30 years or 21 years after the death of the last survivor of the descendants of any grandparent of the donor living on the date of the creation of the interest will be treated as payable for a specified term of years." 17

The Proposed Regulations generally apply to transfers to charitable lead trusts made on or after April 4, 2000, or in the case of the estate tax provision, to transfers made to charitable lead trusts under wills and revocable trusts where the decedent dies on or after April 4, 2000. 18 An exception to this effective date applies for wills and revocable trusts executed on or before April 4, 2000, if the decedent dies on or before the date that is 6 months after the date final Regulations are published and the decedent has not redone his or her will or amended his or her revocable trust. A second exception applies for decedents under mental disabilities on April 4, 2000, who cannot change the disposition of their property, so long as they do not regain competency to dispose of such property prior to their deaths or so long as they die before the later of (i) 90 days after the date on which they first regain competence or (ii) 6 months after the date final Regulations are published, without having revised their wills or amended their revocable trusts. 19

The Proposed Regulations contain provisions allowing for reformation of charitable lead trusts using improper measuring lives when the transitional rules do not offer relief. In such cases, the lead interest may be reformed into a lead interest payable for a specified term of years. Under the Proposed Regulations, the specified term of years would be determined by taking the factor for valuing the annuity or unitrust interest for the named individual measuring life and identifying the term of years (rounded up to the next whole year) that corresponds to the equivalent term of years factor for an annuity or unitrust interest. 20 A judicial reformation would have to be commenced prior to the later of (i) 6 months after the date final Regulations are published or (ii) for gift tax purposes, October 15th of the year following the year in which the transfer is made21 or, for estate tax purposes, the date prescribed by Code Section 2055(e)(3)(C)(iii). 22 Any judicial reformation must be completed within a reasonable time after it is commenced. 23

Non-judicial reformations would be permitted if they are effective under applicable state law. The non-judicial reformation would have to be completed within the time frame for commencing a judicial reformation. 24 The estate tax provision indicates that if a court proceeding is commenced on or before 6 months after final Regulations are published and the court declares a transfer made pursuant to a will or revocable trust where the decedent dies on or after April 4, 2000, and on or before the date that is 60 days after the date final Regulations are published, null and void ab initio, then the Service will treat the transfer in a manner similar to that described in Code Section 2055(e)(3)(J). 25 Similarly, the gift tax provision provides that if a court proceeding is commenced on or before 6 months after final Regulations are published and the court declares a transfer made on or after April 4, 2000, and on or before the date that is 60 days after the date final Regulations are published, null and void ab initio, then the Service will treat the transfer in a manner similar to that described in section 2055(e)(3)(J). 26

The Proposed Regulations include an example of how a reformation would work as follows:

For example, in the case of an annuity interest payable for the life of an individual age 40 at the time of the transfer, assuming an interest rate of 7.4% under section 7520, the annuity factor from column 1 of Table S(7.4), contained in IRS Publication 1457, Book Aleph, for the life of an individual age 40 is 12.0587 (Publication 1457 is available from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402). Based on Table B(7.4), contained in Publication 1457, Book Aleph, the factor 12.0587 corresponds to a term of years between 31 and 32 years. Accordingly, the annuity interest must be reformed into an interest payable for a term of 32 years. 27

Nature of the Abuse

If an individual has an actuarial life expectancy under the IRS Tables of 25 years, the payments made to charity pursuant to a lifetime charitable lead trust will be based upon payments to be made to charity for that 25 year period. The charitable deduction will likewise be based upon payments for 25 years. Thus, the charitable income, gift or estate tax deduction, as the case may be, will constitute a large portion of the fair market value of the property contributed to the trust.

For example, if a charitable lead annuity trust was created in May, 2000 with $1 Million for the life of Mary, a 65 year old, the charitable deduction would be approximately $800,000 based upon a 7.8 CMFR. Whereas, if Mary was much older and had only a two year life expectancy at the creation of the trust, the charitable deduction would be approximately $200,000. If the promoter of the Ghoul CLT can locate a 65 year old Mary who is sickly, but not terminally ill, and Mary dies in two years, the charitable deduction will not be reflective of the amount expected to be paid to charity. Of course, not even the IRS is in control of when Mary dies, but the tax system is abused where a plan is promoted in which the life expectancy of the measuring life for the term of a charitable lead trust is based upon a sickly, but not terminally ill, individual who has a significantly shorter life expectancy than as reflected in the IRS actuarial tables.

Analysis of Proposed Regulations

The transaction described in the Notice of Proposed Rulemaking is abusive and does not comport with the policy underlying the Code provisions allowing a charitable deduction. With the Tax Reform Act of 1969, Congress imposed restrictions on the types of split interest charitable gifts that would qualify for charitable deductions. The goal of the restrictions was to make sure that the charitable deduction taken for a gift would be reasonably related to the amount ultimately received by the charity. With this background in mind, it is clear that something should be done to prevent the use of the so-called Ghoul charitable lead trusts.

Most comments on the Proposed Regulations seem to center on the overly restrictive limitations on the measuring lives that may be used. Although uncommon, there may be legitimate reasons to use a measuring life other than the ones listed in the Proposed Regulations. For example, the donor may have a reason to use one of his or her siblings, who is not ill, as the measuring life for a lead interest where the remainder beneficiaries are the donor's own children or the children of another sibling. As drafted, the Proposed Regulations would prevent this even though there is no abuse of the charitable deduction.

Alternative Methods

The IRS has several arguments at its disposal to combat and produce a chilling effect to the Ghoul CLT, even without these new regulations. For instance, the promoter could be attacked with the abusive tax shelter penalties under Code Section 6700. The charitable lead trust could be disqualified as this plan violates the legislative intent underlying the charitable deduction. If a Ghoul CLT is actually created and a gift made, the IRS could argue self-dealing and impose the excise tax. Lastly, the IRS could argue that the tables under Code Section 7520 should not be available to the donor, especially if the individual whose life is the basis for the term of the CLT dies within 18 months.


  1. REG-100291-00.back

  2. REG-100291-00.back

  3. Id, citing H.R. Rep. No. 413 (Part 1), 91st Cong., 1st Sess. 61 (1969) and S. Rep. No. 552, 91st Cong., 1st Sess. 93 (1969).back

  4. REG-100291-00.back

  5. I.R.C. §§170(f)(2)(B), 2055(e)(2)(B) and 2522(c)(2)(B).back

  6. I.R.C. §170(f)(2)(B).back

  7. REG-100291-00 and see I.R.C. §§664 and 642(c)(5).back

  8. Treas. Reg. §§1.170A- 6(c), 20.2055-2(e) and 25.2522(c)-3(c).back

  9. See Treas. Reg. §§1.170A-6(c)(3), 1.7520-2, 20.2031-7, 20.7520-2, 25.2512-5 and 25.7520-2.back

  10. See Treas. Reg. §§1.7520-3(b)(3), 20.7520-3(b)(3) and 25.7520-3(b)(3).back

  11. Treas. Reg. §25.7520-3(b)(3).back

  12. REG-100291-00.back

  13. Treas. Reg. §§1.7520-3(b)(4) Example 2, 20.7520-3(b)(4) Example 1 and 25.7520-3(b)(4) Example.back

  14. Prop. Reg. §§1.170A-6, 20.2055-2 and 25.2522(c)-3.back

  15. REG-100291-00.back

  16. Prop. Reg. §§1.170A-6, 20.2055-2 and 25.2522(c)-3.back

  17. REG-100291-00.back

  18. Id and Prop. Reg. §§1.170A-6, 20.2055-2 and 25.2522(c)-3.back

  19. Prop. Reg. §20.2055-2.back

  20. Prop. Reg. §§20.2055-2 and 25.2522(c)-3.back

  21. Prop. Reg. §25.2522(c)-3.back

  22. Prop. Reg. §20.2055-2.back

  23. Prop. Reg. §§20.2055-2 and 25.2522(c)-3.back

  24. Id.back

  25. Prop. Reg. §20.2055-2.back

  26. Prop. Reg. §25.2522(c)-3.back

  27. Prop. Reg. §20.2055-2.back

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