Attached is a piece I wrote last year for the quarterly newsletter of the planned giving office at the University of Chicago, linked here.
Posted this thread to Twitter today
challenging the sector's position on the push for legislation to require minimum payouts from donor advised funds.
I will be posting the appended text to LinkedIn on Wednesday. The article describes a brainstorming process that is typical in my consulting practice -- in the particular case, salvaging an income tax deduction for the distribution of a nonqualified trust remainder to charity.
[copy also posted to LinkedIn]
Word seems to be getting around that alongside his consulting practice, helping other lawyers sort through various tax and nontax issues arising in connection with private wealth transfers,
particularly those involving split-interest trusts funded with appreciated property, interests in closely held business entities, etc.,
your correspondent also performs the calculations required to substantiate a claimed income and/or transfer tax charitable deduction for funding one of these, or for accelerating the remainder.
An eight- or ten-page narrative, showing the math step by step, and his signature on an 8283.
Often in these engagements, your correspondent is brought in after the transaction has already been completed. And some of the details on which he might have advised had he been involved earlier as a consultant have already been locked in. Sometimes some t's did not get crossed or some i's dotted. And sometimes this can require delicate handling.
Specifically. For example.
Where you have a remainder trust created by one spouse for her own life, with a successive "income" interest in her surviving spouse, subject to revocation, and they both renounce in favor of the remainder org, or they surrender or assign their respective interests, however you want to phrase it,[fn. 1]
but the settlor does not take the preliminary step of releasing her power to revoke the spouse's successive interest, do you say anything about this in the appraisal report?
Obviously you would rather not, but if you do not, have you misstated the value of the deductible gift, exposing yourself to a penalty under section 6695A? and to possibly being barred from doing similar appraisal work going forward? The stakes are not negligible.
difficulty level two
The result everyone is looking for here is a deductible gift in the amount of the present value of the consecutive life interests combined.
But there is a question whether the successive interest in the spouse had any value on the date of the assignment. Not only was it contingent on the spouse surviving the settlor, but it was also subject to defeasance by the settlor exercising her reserved power to revoke.
You can calculate the actuarial likelihood the spouse will survive the settlor, and by how many years, but you cannot calculate the likelihood the settlor will or will not arbitrarily exercise her power.
Yes, the settlor had to take the successive interest into account in calculating her deduction at the inception of the trust for the then present value of the remainder, and if we cannot claim a deduction now for the present value of the successive interest, we would have some rather substantial slippage.
But that is a problem that could have been addressed by going through the formality of releasing the power to revoke before making the assignments. This would have completed a gift to the spouse, which would be eligible for a gift tax marital deduction per section 2523(g).
We might then have to calculate separately the present values of the settlor's life interest and the spouse's deferred, contingent life interest, but in the end these would add to the present value of the two lives combined.
is this trip necessary
You raise the issue with the taxpayer's advisors, and after some hesitation they respond quite sensibly that it is obvious what the parties intended. Fair enough. However.
In a letter ruling issued back in the late 80s, IRS did determine this question adversely to the taxpayer. So we have to pay attention.
The ruling was PLR 8805024.[fn 2] The settlor had created a five pct. straight unitrust payable to himself for his life, then to his spouse if she survived, but he reserved a testamentary power to revoke her successive interest. They each proposed to transfer a portion of their respective unitrust interests to the remainder org. Our facts on almost all fours.
IRS ruled the spouse could not claim a deduction for the acceleration of her contingent, defeasible interest, because there was no "ascertainable assurance" her interest "will ever pass to charity."
It is not entirely clear what that means. Obviously the spouse did hold a transferable interest, albeit contingent and defeasible and therefore of negligible to zero value. Absent her assigning this interest to the remainder org, there would be no merger. The trust would continue to pay out over the settlor's life, but directly to the remainder org. And then if the spouse survived the settlor and he had not exercised his power to revoke, she would step into the income stream.
So it is necessary for her to participate in the transaction to effect a merger of the income and remainder interests, and her assignment does "assure" that her interest will pass to the remainder org, not at some future date, but immediately.
In any event. Twenty years later, IRS issued another letter ruling approving the workaround described above -- the settlor first releases her power to revoke, completing the gift to the spouse, and only then do they each assign their separate interests to the remainderman.
PLR 200802024 does not get into the weeds on valuing the spouses' respective interests separately, but in any event they should add to the value of the combined life interests.[fn. 3] And that might be all we need.
push comes to shove
Your correspondent struggled with the question whether to include any of this in the appraisal report for maybe five minutes before concluding it was not technically his problem.
The decision to characterize the transferred property as the consecutive life interests combined, rather than as two separate interests, one of which might have negligible or zero value, is to be made by the taxpayers' tax advisors. The appraiser simply attributes a value to the property as thus characterized by others.
In other words, the appraiser, in that role at least, is not a "practitioner" subject to section 10.34 and/or section 10.37 of Circular 230. The appraisal report indicates a value, but does not in itself express a view with respect to deductibility. That is a matter for the lawyers, the accountants, and the return preparers.
It is sufficient that the appraiser communicate her concerns to the "practitioners," so that they can exercise the necessary diligence to determine whether the reporting position is supported by "substantial authority," and to instruct the appraiser to place a value on x rather than y.
In any event, the unexpired life interest passes to the remainderman, in whose hands the interests merge.
The online resource at irs.gov does not go back this far. Your correspondent gratefully acknowledges the Planned Giving Design Center for making the text available online without having to go behind a paywall.
Incidentally, as some readers may have heard, pgdc.com is doing some kind of relaunch on September 01. Your correspondent has done some writing for them in the past, and is looking forward to seeing what this "PGDC2 eCampus" is all about.
In other words, while the present value of the deferred single life interest for the spouse might be calculated with reference to the probability of her surviving the settlor by x years, the result should be the same as simply subtracting the present value of the settlor's life interest from the combined two-life interest.
The most current version of my "storm warnings" slide deck on Dickinson and Fairbairn, updated for the July 19 roundtable meeting of the NACGP Leadership Institute.
Also posted on this subject on LinkedIn.
Had a short paper under that title published this morning on Bloomberg Tax Daily. Subject the nonfungible token as the subject of a charitable gift, question is it a "collectible," for which the deduction would be limited to adjusted basis, answer no because it is not "tangible."
Attribution copy below in .pdf, also a pending submission to SSRN.
Back in November we wrote up the Tax Court decision in Dickinson for the Jack Straw, focusing on the argument IRS was actually making, which was not made all that clear in the text of the opinion. Still mystified why IRS did not take an appeal.
Phil Purcell over at PG Today asked me to turn this into an article for that publication. Linked below are the text as submitted and as it appeared in print.
Also linked is the slide deck I used on a joint presentation with Kate Crary at Gadsden Schneider & Woodward for the charitable planning and orgs group of the RPTE section of the ABA.
That deck has since been expanded to include a discussion of the pending litigation in Fairbairn v. Fidelity Charitable. We will be using a version of that deck in a webinar I am co-presenting tomorrow and again on Thursday with Bryan Clontz at Charitable Solutions, LLC.
A couple of years ago I threw together a webinar for Lorman on planning for intergenerational transfer of a vacation home. This was an orphaned topic for them, created years earlier by someone who had moved on to other projects. But they wanted to repeat it, and somehow they found me.
And obviously it is not within my usual scope. My skillset, yes, but not my wheelhouse. Or whatever is the jargon.
But I did it, and learned a thing or two along the way about qualifying the transfer of a nonvoting interest in a family limited partnership for the gift tax annual exclusion.
And then more recently the folks at WealthCounsel picked up on it and asked me to flesh this out into an article for their quarterly. Which just came out today. Enjoy.
[copy also posted to LinkedIn]
Got something in my e-mail inbox the other day from Crescendo Interactive inviting me to propose a paper for the 2021 iteration of their "practical planned giving conference," which they are hoping to do live in Orlando next September. The 2020 conference is already up and running virtually, and the sessions this year are free. You might want to check it out.
Much of the programming is focused on fundraising and stewardship, but there is room for the occasional foray into tax tech, so I went ahead and pitched an idea for a talk at next year's conference. Here is the pitch:
Outside the Box: the Nonqualified Lead Trust
With 7520 rates at historic lows, the charitable lead annuity trust can yield a steep discount on the remainder gift to noncharitable beneficiaries. If we are funding the trust with closely held stock, it may not be possible to meet the 60 pct. exception to the prohibition against excess business holdings. But there is a workaround. If the lead interest does not qualify for a gift tax charitable deduction, and if we render the gift of the income interest incomplete, we can still discount the remainder gift while avoiding the private foundation excise tax regime altogether. Let's take an hour or so to examine the nonqualified lead trust.
Okay, well, they allowed only one paragraph. I had to pack a lot into a small space. At slightly greater length, the pitch might have looked more like this:
Most of us are aware that a split-interest trust that is holding amounts for which an income or gift tax charitable deduction has been allowed is to that extent subject to the private foundation excise tax regime. And many of us are aware that there is an exception to the prohibition against excess business holdings in the case of a charitable lead annuity trust, where the present value of the unexpired annuity stream is not more than 60 pct. of the value of the trust corpus. If we are trying to leverage the present value of a remainder gift to noncharitable beneficiaries, we are unlikely to meet that exception, at least at the front end.
But what if, thinking outside the box, we were to not claim the gift tax charitable deduction? Or what if we structured the payout as something other than a fixed annuity or unitrust, so that it would not qualify?
We could still discount the remainder gift by the present value of the "income" stream, and by reserving a power to direct the payout to charities we could render the "income" gift incomplete.
And so on.
Obviously these ideas are not original with me, but they are not discussed all that often, and as a result these strategies may be underutilized where they could do some good.
I did touch on the nonqualified lead trust briefly in the closing slides of the lead trust session of a series of narrated slide decks I recently completed -- what they call "asynchronous webinars" in continuing education speak -- comprising a complete, somewhat advanced course on tax-advantaged charitable gift planning techniques.
These are gathered under the collective title "PG 103: stuff every gift planner should kinda know" and posted to a storefront tab on this site. I am in conversation with CFRE International to get these cleared for continuing education credit for their certificate holders.
But let us take a minute to expand on the idea of the nonqualified lead trust. If my paper is accepted I am going to have to work all this up before next September anyway, so let's start taking notes.
in broad strokes
The object is to try to replicate some of the income and transfer tax benefits of a qualified nongrantor lead trust without triggering an excise tax on excess business holdings. At least some discount on the value of the remainder gift, in other words, but somehow avoiding application of section 4947(a)(2) by not holding amounts for which an income or gift tax charitable deduction has been allowed.
Maybe without having to meet a fixed annuity payout, which might have to be paired with staged redemptions, or maybe by borrowing from an "intentionally defective grantor trust" to meet the payout obligation, which would be self-dealing if the private foundation excise tax rules applied. We can work out those details later. What we are looking for here is the flexibility to make those decisions.
Code section 2522(c)(2) disallows a gift tax charitable deduction for a contribution to a lead trust unless the payout is in the form of a fixed annuity or a unitrust amount. So if we set up a lead trust instead paying, say, net fiduciary accounting income, the lead interest would not qualify.
The remainder gift would still be discounted, albeit not by nearly as much. In a low interest rate environment, a fixed annuity provides very strong leverage, a net income payout almost worse than none. Remainder values after a term unitrust are not affected by fluctuations in the 7520 rate.
getting into the weeds
Or perhaps we should hedge even this claim by saying the income interest to charity "should not" be treated, for purposes of section 2702, as having been "retained" by the settlor, within the meaning of reg. section 25.2702-2(a)(3). The remainder gift "should" be discounted, in other words, though we have no formal or informal guidance from IRS on the question.
But while we are forgoing the gift tax charitable deduction, we do not want to "waste" lifetime exclusion -- or worse, pay gift tax out of pocket -- on amounts that are in fact going to charity. So we would want to render the gift of the income interest incomplete, per reg. section 25.2511-2(c), until distributions are actually made, by reserving to the settlor a power to allocate among charitable distributees. Per section 674(b)(4), this would not trigger "grantor" trust treatment.
IRS did actually confirm this analysis in PLR 9742006. In the particular case, the settlor had also retained a testamentary power to alter the disposition to or among the remainder beneficiaries, rendering the entire gift incomplete.
More formally, in Rev. Rul. 77-275, IRS ruled that a settlor's reserved power to allocate income among charitable distributees would render the gift incomplete. The ruling did not expressly address the 674(b)(4) question, but since this was a pre-1988 "Clifford" trust, with a term of ten years and one month, the inference would be that this was not a "grantor" trust.
However, the reserved power would cause inclusion in the settlor's estate per section 2038(a), with no offset for the unexpired, nonqualified term. So, as in the case of a grantor retained annuity trust, it would be important to set the term well within the settlor's life expectancy. And to be prepared to accept the consequences of an early death.
As with any nongrantor lead trust, the nonqualified trust would be taxed as a "complex" trust, with an income tax deduction per section 642(c)(1) exactly offsetting current net fiduciary accounting income, potentially including any realized gains.
Although reg. section 1.642(c)-3(b)(2) requires that the charitable deduction be pro rated across various classes of income, thereby defeating any "ordering rule" that might otherwise purport to distribute items subject to higher rates first, reg. section 1.642(c)-3(c) does allow a deduction for distribution of realized gains, if the trust instrument includes these in the mix. So let's do at least that.
And then, if we are funding the trust with interests in a passthrough entity, we will have to deal with the fact that the income tax charitable deduction will be limited to the extent we are funding distributions with unrelated business taxable income.
If we are not claiming a gift tax charitable deduction, and if the only amounts for which income tax deductions have been allowed are no longer being held by the trust, we should not be subject to the private foundation excise tax regime. We need not concern ourselves with excess business holdings or with the prohibition on acts of self-dealing, notably including borrowing from or lending to the trust.
IRS has ruled privately to this effect twice. PLRs 201713002 and 201713003, identical verbatim, concerned a charitable remainder unitrust. PLR 200714025 concerned an ordinary "complex" trust in which the trustee had discretion to make deductible distributions to charity. In both instances, IRS agreed section 4947(a)(2) did not apply.
This is where we make the obligatory note that a letter ruling is not precedent, but applies only to the taxpayer who requested it.
Anyway, those are the broad outlines of the material I will be pulling together for the Crescendo conference. Regardless whether my proposal is accepted, I will be shaping this into a one-hour webinar, which will end up alongside the others on the storefront tab on this site.
Today we are doing a soft launch of a series of asynchronous webinars under the collective title "PG 103: stuff every gift planner should kinda know."
The intended audience are in house development folks, mostly nonlawyers, who have at least some occasion to talk with existing or prospective donors about various "planned" giving vehicles -- gift annuities, remainder trusts, etc.
But the material is pitched at a sufficiently advanced level, with citation to key rulings, court decisions, and sections of the tax Code and regulations, that lawyers should also find it useful. At this point we have not yet sought advance certification for continuing education credits.
The webinars attempt to situate the discussion of each of these vehicles within its tax policy context, so that the gift planner will have somewhat more than a basic understanding not only of the technical requirements -- what you might call "tax compliance" -- but also what are the policy objectives these requirements seek to accomplish. And what might the basic rules imply as the planner encounters novel situations
In my own experience (here reverting to the first person singular), a somewhat complex set of data points is much easier to remember if it is embedded in a narrative. Some version of this narrative is what we (again the editorial "we") intend to provide.
What makes this a "soft" launch is that we are putting the webinars up one at a time, somewhat out of sequence. Today's posting is a webinar titled "the gift annuity in context," which would actually be the second or third item in the completed sequence.
Alongside that webinar, we are also posting a freestanding item, not part of the PG 103 sequence, titled "charitable gifting incentives in the CARES Act," which we are offering for now on a "pay what you will" basis, in five dollar increments, from zero. From time to time we expect to post other items of this nature, i.e., special topics or recent developments.
the very occasional blogger
The text here used to say,