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Oct 2009 Charitable Remainder Trust Update

Posted by Predovich & Company

Although many investment assets have lost value in the past year, individuals coming to CPAs for estate planning advice often hold highly appreciated assets, and many want to make significant charitable gifts. For that reason, charitable remainder trusts remain a popular method of reducing assets subject to estate tax. They allow donors an income stream from assets that also support a charity. Thus, it’s not surprising to place a high priority on regulating these vehicles.

The IRS issued final regulations modifying the regime for unrelated business taxable income (UBTI) received by charitable remainder trusts. For tax years beginning after Dec. 31, 2006, a charitable remainder trust that receives UBTI in a tax year is liable for a 100% excise tax on UBTI but retains its tax-exempt status.

In a revenue ruling, the IRS addressed pro rata division of a charitable remainder trust with two or more income recipients into new trusts. Generally, charitable remainder trusts may be divided without termination or other penalties and the bases of assets carried over to the new trusts.

In the “transaction of interest,” a charitable remainder trust with highly appreciated, low-basis assets sells them and replaces them with new assets. The income and charitable beneficiaries then sell their interests in the charitable remainder trust to a third party. The income beneficiary recognizes little or no gain on the transaction by claiming and exception to the no-basis rule of IRC Sec. 1001(e).

Source: “Charitable Remainder Trust Update” by Justin P. Ransome, Esq., CPA, and Vinu Satchit, CPA, Journal of Accountancy, October 2009

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