Kathleen ReynoldsKeymasterOctober 24, 2022 at 8:05 pmPost count: 428
This calculation determines the donor’s deduction for a contribution to a charitable remainder unitrust. Specify whether the trust lasts for a term of years, a single life expectancy, or a joint life expectancy (up to five ages). It also calculates the deduction as a percentage of the amount transferred.
When a charitable remainder unitrust is established, a donor transfers cash and/or property to an irrevocable trust but retains (either for himself or for one or more non-charitable beneficiaries) a variable annuity (payments that can vary in amount, but are a fixed percentage) from that trust. At the end of a specified term, or upon the death of the beneficiary (or beneficiaries, and the donor and the donor’s spouse can be the beneficiaries), the remainder interest in the property passes to the charity the donor has specified.
For calculations involving a term, the length of the economic schedule is limited to that term. Otherwise, the economic schedule illustrates the trust for life expectancy. If the number of lives is greater than one, then the length of the economic schedule will be determined by the joint life expectancy of the first two ages provided by the user. Single life cases will use the single life expectancy. The economic schedule will end if the trust is depleted of funds prior to the end of the schedule.
The principal difference between a charitable remainder unitrust and a charitable remainder annuity trust is that a unitrust pays a varying annuity. In other words, the amount paid is likely to change each year. The payable amount is based on annual fluctuations in the value of the trust’s property. As it goes up, so does the annuity paid each year. If it drops in value, so will the annuity.
A gift to a charitable remainder unitrust will qualify for income and gift tax charitable deductions (or an estate tax charitable deduction) only if the following conditions are met:
- A fixed percentage (not less than 5% nor more than 50%) of the net fair market value of the assets is paid to one or more non-charitable beneficiaries who are living when the unitrust is established. The charity’s actuarial interest must be at least 10% of any assets transferred to the trust. (See 26 U.S.C. §664(d)(2)(A).)
- The unitrust assets must be revalued each year, and the fixed percentage amount must be paid at least once a year for the term of the trust, which must be a fixed period of 20 years or less, or must be until the death of the non-charitable beneficiaries, all of whom must be living at the beginning of the trust.
- No sum can be paid except the fixed percentage during the term of the trust and at the end of the term of the trust, the entire balance of the trust’s assets must be paid to one or more qualified charities.
The donor receives an immediate income tax deduction for the present value of the remainder interest that will pass to the charity at the end of the term.
Because a charitable remainder unitrust is exempt from federal income tax (the income and gains of the trust are only taxed when they are distributed to the non-charitable beneficiaries as part of the fixed percentage of trust assets distributed each year), they are frequently used to defer income tax on gains about to be realized. For example, if a donor has an appreciated asset that is about to be sold, the donor can give the asset to a charitable remainder unitrust, reserving the right to received a fixed percentage of the value of the trust for life, and for the life of the donor’s spouse as well, and the asset can then be sold by the trust and the proceeds of sale reinvested without payment of any federal income tax on capital gains. The capital gains will be taxable to the donor (or the donor’s spouse) only as they are distributed to the donor as part of the annual distributions from the trust.
A variation of the CRUT (which pays a fixed percentage of the value of the trust assets, regardless of income) is the net-income CRUT, or “NICRUT,” which pays either the fixed percentage or the income actually received by the trust, whichever is less. A variation of the ‘NICRUT’ is the net-income-with-makeup CRUT, or “NIMCRUT.” This can be used if the income is less than the fixed percentage, which creates a deficiency that can be paid in a future year, as soon as the trust has income, which exceeds the fixed percentage. An additional variation is a “flip” unitrust, which is a trust that changes from a NIMCRUT to a regular CRUT upon the occurrence of a specific event, such as the sale of a specific asset that was contributed to the trust and was not expected to produce much income. However, NICRUTs, NIMCRUTs and “flip” CRUTs are valued in the same way as a regular CRUT for the purpose of determining the income, estate, and gift tax charitable deduction.
Income or Estate Deduction
The program will allow for either type of calculation and illustrate how the deduction can be used. If you select to include Income Tax reports, additional inputs are required, and additional results are provided.
- Transfer Date – Enter the month and year. See Transition Period Notes
- CRUT Type Enter “Normal” for a CRUT that makes the annual distribution regardless of trust, “NIMCRUT” for a trust that is “net income with makeup,” meaning that distributions are made only out of trust income, but past deficiencies in distributions can be “made up” if there is additional trust income in a year, “Flip CRUT” for a trust that switches from a NIMCRUT to a normal CRUT (and loses all make-ups) upon the lapse of time or the occurrence of a particular event or “NICRUT,” which pays either the fixed percentage or the income actually received by the trust, whichever is less.
- Year to Change/ “Flip” Enter the number of years until the investments are changed for a NIMCRUT, or the “Flip” CRUT switches from a NIMCRUT to a normal CRUT.
- Trust Type Select a type of trust (Term ,Life, Shorter) If you select Life, the Economic Schedule runs from year one until the Life Expectancy or until the remainder is zero (whichever happens first). If you select Term or Shorter, the Economic Schedule runs from year one until the end of the Term or until the remainder is zero (whichever happens first).
- FMV of Trust Enter the initial Fair Market Value (FMV) of the assets placed in the trust when established.
- Growth of Trust – Enter a growth percentage or investment yield for the assets of the trust for the purpose of the economic schedule.
- Term If you chose a term or shorter trust, enter the number of years that the trust will last.
- Percentage Payout – Enter the payout (percentage) that will go to the beneficiary during the life of the trust. This rate must be no less than 5% and no more than 50%
- Payment Period Select the number of payments that will be made during a normal full year to the beneficiary (Annual, Semiannual, Quarterly, Monthly, and Weekly).
- Months Valuation Precedes Payout Enter the number of full months by which the valuation date (for the assets of the unitrust) precedes the first payout in the first full taxable year of the trust (not the short first year). The program will only allow valid input values according to which Payment Period was selected in the previous entry field. Growth is applied on the payment schedule before payments are calculated unless Months Valuation Precedes Payout is zero. This does not pertain to the planning period before the trust goes into effect.
- Lives If you choose a life or shorter trust, enter the number of lives (up to ten) used to determine the charitable deduction.
- Ages Enter the age(s) of the person(s) whose life is being used to measure the term of the trust as of the nearest birthday. You may enter up to five ages (Valid ages are 0-109.)
- Optimize Click this button to have the program calculate the highest payout rate that passes the 10% test for the AFR you selected. The feature is useful in creating a new trust if you have not designed one before.
- Growth and Income (Before Change) Enter the principal growth rate (capital gain) and the income rate to apply to the economic projection during the period before any change or “flip.”
- Growth and Income (After Change) Enter the principal growth rate (capital gain) and the income rate to apply to the economic projection after the change or “flip.”
- Charity Type Choose 50%, 30%, or 20%. All qualified non-profit organizations will fit within one of these types (IRS Publication 78). There is also special consideration for Cash, 60%. For more information, visit: https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions#:~:text=ln%20most%20cases%202C%20the%20the%20amount,not%20subject%20to%20this%20limitation
Income Tax Inputs (Optional)
- Sunset in 2026? The Tax Cut and Jobs Act of 2017 sunsets in 2026. Indicate whether or not you wish to assume that the income tax provisions of that act will sunset.
- Adjusted Gross Income Enter the total estimated amount of adjusted gross income for the year in which taxes are being calculated.
- Total Itemized Deductions Enter the estimated total of allowable itemized deductions.
- Deductions Not Subject to Phaseout Enter the estimated total of allowable medical, casualty, or theft losses, and investment-interest deductions (subject to the regular limits and restrictions discussed above).
- Total Long-term Capital Gain Enter the total net gain from the sale or disposition of capital assets held for more than one year that has been included in adjusted gross income.
- 28% Rate Capital Gain Enter the total net gain from collectibles and section 1202 that has been included in adjusted gross income. (See IRC section 1(h)(4).)
- Qualified Dividends For years 2003 and following, enter the total amount of dividends that are included in adjusted gross income and qualify for the special tax rate for long-term capital gains.
- Unrecaptured §1250 Gain Enter the amount of long-term capital gain included in adjusted gross income that would be ordinary income if section 1250 applied to depreciation in excess of 100% straight-line depreciation. (See IRC section 1(h)(6).)
- Net Investment Inc. For tax years after 2012, enter the amount of net investment income as defined by IRC section 1411(c) that has been included in adjusted gross income. In general, net investment income is investment income such as interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses trading financial instruments or commodities, and businesses that are passive activities to the taxpayer (within the meaning of section 469), reduced by deductions properly allocable to those incomes, such as investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, tax preparation fees, fiduciary expenses (in the case of an estate or trust), and state and local income taxes.
- Filing Status Choose the applicable filing status (Single, Joint, Separate, Head of Household).
- Age in Tax Year Enter the taxpayer’s age at the end of the tax year being calculated.
- Spouse’s Age in Tax Year Enter the age of the taxpayer’s spouse at the end of the tax year being calculated.
- Personal Exemptions Enter the number of allowable personal exemptions for the taxpayer and any dependents.
- Estimated Inflation Enter an inflation rate to be applied to bracket amounts and other deductions in future years. For the current year or past years, this input is not applicable.
The Summary Tab displays the deduction permitted to a donor who establishes a charitable remainder unitrust. The deduction is shown both as a dollar amount and as a percentage of the amount transferred. The results also show the trust’s payout sequence factor and adjusted payout rate, along with the Remainder factor.
If the transfer date is greater than 7/97 and the Charitable Remainder is less than 10% of the initial FMV, a message appears stating “Fails the 10% minimum Charitable Benefit Test.” If the transfer date is greater than 7/97, and the Charitable Remainder is less than 10% of the initial FMV, a message appears stating “Does not pass the 10% Test. (Donor’s Deduction is set to 0.) When this message appears, the result entry Donor’s Deduction as Percentage of Amount Transferred appears on the Summary tab. There are actually three error messages regarding the 10% test that can appear. This is because of the fact that with charitable remainder trusts, the user has the option of using an AFR from the transfer month or from one of the previous two months. The wording of the Taxpayer Relief Act of 1997 does not make it clear which AFR should be used for valuing the remainder interest when performing the 10% test. The software performs the test using both the transfer month’s AFR and using the AFR the user selected, and informs the user if either (or both) of these tests are failed.
If a calculation is of the “Life” or “Shorter” type, if there is more than one non-charitable beneficiary, and if their interests are all “vested” and not subject to revocation by the grantor, then there may be a taxable gift equal to the present value of all non-charitable interests other than any interests retained by the grantor. The program assumes that the first measuring life is that of the grantor and shows the value of all succeeding non-charitable interests, which is calculated by subtracting the present value of the interests retained by the grantor (calculated using only the first measuring life) from the total present value of all non-charitable interests.
Note: The Taxpayer Relief Act of 1997 added a requirement that the remainder interest be at least 10% of the initial fair market value of all the property placed in trusts to charitable remainder trusts. The 10% Minimum Charitable Benefit Test applies to transfers made after 7/28/97.
If Income Tax calculations are included in the PDF, the following reports will also appear.
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