Computing the charitable tax deduction for a charitable remainder trust.

• Author: Ellentuck, Albert B.

THE DONOR'S CHARITABLE CON1 RIBU I ION FOR funding a charitable remainder annuity trust (CRAT) is the value of the property placed in the CRAT less the present value of the CRAT's annuity payments. In the case of a charitable remainder unitrust (CRUT), the value of the contributed property is reduced by the present value of the unitrust interest for a term of years or for the life of the income beneficiary. The two methods are different because the CRUT income stream fluctuates with changes in the value of the trust property. The technicalities involved in determining the value of the income stream or the remainder interest are much more complex for a CRUT.

Practice tip: Using commercial software for making these computations is recommended since it enables practitioners to compute various what-if scenarios for testing various income payout rates, terms, and frequencies of payments to assure that the 10% charitable remainder threshold is met.

Charitable Deduction for a CRAT

The rules for calculating the present value of the remainder interest in a CRAT are in Regs. Sec. 1.664-2(c). Generally, the present value of the annual income stream is determined and subtracted from the value of the property transferred to the trust to arrive at the value of the remainder interest. The factors for determining the present value of an income stream payable for a term of years are in Publication 1457, Table B, Term Certain Factors. The factors for determining the present value of an income stream payable for the life of the noncharitablc beneficiary are in Publication 1457, Table S, Single Life Factors. Special rules apply for valuing the annuity interest or for adjusting the valuation of the annuity interest if the noncharitablc annuity is payable other than annually at year end (e.g., at the first of each year or semiannually, quarterly, or monthly). The applicable factor is multiplied by the amount of the annual payment to compute the value of the income stream. Subtracting this amount from the value of the property contributed produces the value of the remainder interest. The tables (except Table J) for Publication 1457 are available at tinyurl.com/lrmgk8w. Table J, Adjustment Factors for Term Certain Annuities, is in Regs. Sec. 20.2031-7(d)(6).

The value of the remainder interest is normally determined by using the Sec. 7520 interest rate for the month of the transfer to trust. 1 lowever, the donor may elect to use the Sec. 7520 interest rate for either of the two months preceding the month of transfer. All other things being equal, the higher the Sec. 7520 interest rate, the larger the charitable contribution deduction for a charitable remainder trust (CRT) (see Sec. 7520(a); Regs. Secs. 20.7520-2(b) and 30l.9100-8(a)(1)).

Charitable Deduction for a...