ArmaninoLLP Welcomes You To Today’s Webinar:
Leveraging The Benefits of Using
Charitable Remainder and Lead Trusts
The presentation will begin in a few moments
Participants will receive an email within 3 business days with
access to their certificate of completion.
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About the Presenters
LYNN HENLEY, CPA, NONPROFIT TAX PARTNER
• Master of Science, Taxation, UC Berkeley
• Bachelor of Arts, UC Berkeley
• Member of the American Institute of Certified Public
Accountants and the California Society of Certified Public
Accountants
• Member, AICPA Task Force on the Form 990 Program
Guides and Organizer Revisions
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About the Presenters
MONIKA PELZ, CPA, NONPROFIT AUDIT PARTNER
• Bachelor of Science, Business, with an Accounting
emphasis, Sonoma State University
• Member of the American Institute of Certified Public
Accountants and the California Society of Certified Public
Accountants
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Presentation Overview
• Charitable Remainder Trusts
• Charitable Lead Trusts
• CRT’s: Types and FMV Measurement
• Accounting for Charitable Remainder Trusts
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Learning Objectives
During today’s webinar, participants will:
• Identify donors with planned giving potential
• Determine some of the tax consequences of
contributing to a CRT and CLAT
• Apply the appropriate valuation of these assets in
their financial statements
• Comply with the financial statement disclosure
requirements related to charitable contributions
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The Charity’s Dilemma Money Now or Money Later
• Planned gifts - charitable giving strategies that work for the donor
Charitable Remainder Trusts (CRT’s) and Charitable Lead
Trusts (CLT’s) are planned gifts.
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Charitable Remainder Trusts
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Solving the Donor’s Problem -- Classic Use of a CRT
• The Profile –
oPotential Donor has high value, low basis stock
oHeld for more than a year
oDonor needs to:
–
–
–
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diversify,
increase the income received from the
investment, and/or
provide future income
What is a “CRT”?
• A CRT is an irrevocable testamentary or inter vivos trust that pays
income, at least annually, to one or more non-charitable beneficiaries
for life or for a term of years (not to exceed 20).
• At the end of the term, the Trust distributes whatever is left in the
Trust to the charity or charities.
Donor
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$
Trust
$
Income
Beneficiary
Remainder
Beneficiary
Why Would a Donor Want to Create a CRT?
• Economically advantageous or
• Fulfills the Donor’s desire to give
to charity or
• Both
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The Income Tax Consequences
• Charitable Income Tax Deduction
o2 Types of CRT’s: CRAT’s and CRUT’s
oThis discussion applies to gifts a LTCG property to CRAT’s
oCharitable deduction = the present value of the remainder interest –
the interest that will be distributed to the charity when the Trust term
ends
oThe PV of the remainder interest = the current value of the amount
contributed to the Trust less the income interest
oThe income interest is the PV of the income stream that will be paid to
the non-charitable beneficiary
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Equation
• Charitable Deduction = PV of the Remainder Interest
• PV Remainder Interest = FMV Contributed Property – PV Income Stream
PV of the
Remainder
Interest
Charitable
Deduction
PV
Remainder
Interest
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FMV of
Property
Contributed
to CRT
PV Income
Stream
Present Value of an Income Stream
• Meet Randy:
Single
Age 65
5% CRT
Contributing $1,000,000 of Omega stock to a CRT
Annuity factor 12.389. The 5% payout = $50,000
The present value of the income stream is $50,000*12.389 = $619,450
PV of the remainder interest is $1,000,000 - $619,450 = $380,550
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Impact of Interest Rates
• As interest rates increase, charitable deduction increases
Interest Rates
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Charitable
Deduction
PV Income
Stream
Charitable Remainder Unitrusts
• Similar calculations to CRAT’s
• Additional complexities
• The timing and frequency of
payments impact the calculations
with both CRAT’s and CRUT’s
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Taxation of Distributions
• Income in the CRT is divided into categories:
1.
Ordinary
2.
Capital
Gain
3.
TaxExempt
4.
Principal
• Buckets must be “emptied” in order. All income in 1st bucket must be
distributed before any income from the other buckets is distributed.
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Taxation of Distributions
Property
Contributed
to Trust
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Trust Sells
Property
Income
Stored in
Appropriate
Bucket
Example
• Randy contributes $1,000,000 of Omega stock to a
5% CRT. Basis $800,000. The CRT sells the stock.
• The CRT invests the proceeds in a 6% tax-exempt
bond. The distributions to Randy will all be LTCG
until the $200,000 has been distributed.
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Gift Tax Consequences
• If a donor creates a CRT during his lifetime, the donor is entitled to a
gift tax deduction for the present value of the remainder interest given
to charity.
• Both the gift to the charity and the offsetting deduction must be
reported on a gift tax return. The return must be filed even if the value
of the gift is less than the annual exclusion amount.
• Since the gift is a gift of a future interest, it doesn't qualify for the
annual exclusion.
• If the donor creates an income interest for a noncharitable beneficiary
other than himself or his spouse, the value of the income interest may
a taxable gift.
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Why Create a CRT…Revisiting Randy
• Randy contributes $1,000,000 of Omega stock to
a 5% CRT. Basis $0. The CRT sells the stock.
• The CRT has $1,000,000 to invest in the 6% taxexempt bond. The distribution to Randy is
$50,000 per year.
• If Randy sells, he pays 20% federal and 13%
(approx.) California tax. Net = $670,000 at 6% is
$40,200
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Variations
• NICRUT’s
oPays the lesser of the specified
payout and the actual income in
the trust.
• NIMCRUT’s
oPays the lesser of the specified
payout and the actual income in
the trust and makes up for any
payouts not made in previous
years.
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Charitable Lead Trusts
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Charitable Lead Trusts (“CLT”)
• Charitable Lead Trusts – wealth
transfer device as well as a planned
giving vehicle
oIncome stream to charity
oAmount remaining at the end of
the term goes to the noncharitable remainderman
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Process
Donor contributes
assets to the Trust
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Income
stream to
charity
Remainder to
non-charitable
beneficiary
Tax Consequences
• Generally, no charitable income tax
deduction
oException if the donor is treated as
the owner of the deductible interest
under the grantor trust rules
• CLT’s created during the donor’s
lifetime may expose the donor to a
gift tax liability
• Gift tax deduction for the value of the
charity’s “lead interest”, assuming
completed gift
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Tax Consequences (cont’d)
• Grantor Trust
oDonor is taxed on all income
during the charitable lead term
• Non-Grantor Trust
oA qualified CLT is subject to the
normal rules of Subchapter J
(Trust taxation) as a complex trust
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Primarily a Wealth Transfer Device
• Example – CLAT (Charitable Lead Annuity
Trust)
• The present value of the gift to the children is:
– Current Value of the assets: $1,000,000
– Less: the PV of the Income Stream to
charity
?
– Taxable gift
• Donor: Age 58, estate in excess of $10 million,
children, no gift/estate tax exemption left,
“7520 rate”, 3.0% investments earn 7%
o Establish CLAT with 20 year term, annuity payout 6.73%
o Annuity factor = 14.8775
o 14.8775 * 67,300 = $1,001,256 present value of the gift to charity
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CLAT Example (cont’d)
• FMV of Assets Contributed to CLAT
• Less PV of Income Stream to Charity
• Taxable gift to children
$1,000,000
(1,001,256)
$
0
The greater the disparity between the Sec. 7520 rate and the annuity rate, the greater the
potential for “zero” planning.
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CRT Accounting:
Types and Fair Value Measurement
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Charitable Remainder Trusts (“CRTs”)
• Beneficial interests in trusts held
by others or trust held by the NPO
• Perpetual trusts or non-perpetual
trusts
• Unit of account is the beneficial
interest in the trust – not the
assets of the trust itself
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Perpetual Trusts Held by Others
• Generally measured using the fair value of assets contributed to the
trust
• If facts and circumstances indicate fair value may differ from assets
contributed to the trust, use income approach
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Non-Perpetual Trusts Held by Others
• Use income approach
• Measurement = PV of future distributions
projected to be received discounted at
appropriate rate
• Cash flows from the trust to NPO beneficiary
are at least as risky as cash flows within the trust
• FV of interest in the trust should not exceed the
FV of the trust assets
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Split-Interest Agreements Held by NPO
• A contribution to an NPO in which the NPO
shares the investment income/benefits with
the donor and other beneficiaries if
designated
• Initial measurement of split-interest
agreements is at FV for assets, liabilities and
contribution
oFV of assets – FV of liabilities = contribution
oMost NPOs have used income approach for
all split-interest agreements
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Income Approach
• CRUTs and CLUTs
• Cash flows from the trust are at least as risky as cash flows of the trust
investments
• Best practice is to use same rate for discount rate and rate of return
• Rate can be either risk-neutral or projected earnings rate on trust
assets
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Example 1
• Assets transferred = $200,000
• Payments = 5% of fair value
• Life Expectancy = 20 years
• Investment return = 6% annual
• Discount rate: 6% annual
• Income approach
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Example 1 (cont’d)
Year
Projected
Projected
Trust Income Payment
Projected Fair
Value - EOY
1
$12,000
$10,000
$202,000
2
$12,120
$10,100
$204,020
3
$12,241
$10,201
$206,060
4
$12,364
$10,303
$208,121
and so forth through year 20
=NPV(Rate/1,PaymentSum)
$123,908
NPO is trustee
=NPV(Rate,Years,ProjFV)
$76,092
NPO not trustee
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Example 2
• Charitable Remainder Trust
• NPO is trustee
• Donor’s spouse receives an
annual distribution based on a
percent of the FV of the trust’s
assets each year until death
• Upon death of donor’s spouse,
remaining assets of the trust
distributed to NPO as permanent
endowment
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Example 2 (cont’d)
• Upon creation of trust
Dr. Assets Held in CRT
Cr. Liability under unitrust agreement
Cr. Contribution revenue – perm restricted
• Entries recorded during the trust term
Dr. Liability under unitrust agreement
Cr. Assets Held in CRT
Statement of activities – record changes in the value of the Asset
and Liability: Change in value of split interest agreements permanently restricted
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Example 2 (cont’d)
• Upon termination of Trust
Dr. Liability under unitrust agreement
Cr. Change in value of split interest agreements –
permanently restricted
Dr. Endowment assets (investments)
Cr. Assets Held in CRT
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Example 3
• Same fact pattern and Example 2,
but NPO is NOT trustee
• Creation of trust
Dr. Beneficial interest in remainder trust
Cr. Contribution revenue – permanently restricted
• Over term of trust
Dr. Beneficial interest in remainder trust
Cr. Change in value of CRT – permanently restricted
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Example 3 (cont’d)
• Upon termination of trust
Dr. Endowment assets
Cr. Beneficial interest in remainder trust
Cr. Change in value of CRT – permanently restricted
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In Conclusion…
During this webinar, we’ve covered:
• The differences between CRT’s and
CLT’s as options for donors
• Described the tax implications of
each vehicle
• Reviewed how to accurately account
for these vehicles in your financial
statements
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What
Questions Do
You Have?
Submit Your Questions
Now!
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Lynn Henley, Tax Partner
phone: 415 568 3294
email: Lynn.Henley@amllp.com
Monika Pelz, Audit Partner phone: 925 790 2834
email: Monika.Pelz@amllp.com
Participants will receive an email within 3 business days with
access to their certificate of completion.
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