Hello and thank you for your question.
I will assume that both A and B are US citizens or permanent
residents, and that the $5 million is all cash.
Upon establishing the trust A is required to pay gift tax
(approximately a $2 million tax) on the entire $5 million, because the
trust is neither a 'charitable remainder annuity trust (CRAT),' nor a
'charitable remainder unitrust (CRUT).'
Charitable Remainder Trust Sample Forms
http://www.irs.gov/pub/irs-irbs/irb00-29.pdf
If the trust had required that B receive not just its annual income,
but instead the annuity payments that a CRAT or CRUT call for, then A
would have qualified for a lower gift tax, because he would have been
able to subtract from the $5 million gift a gift tax charitable
deduction equal to the present value of the charitable remainder. How
big that deduction is would be determined by B's age at the creation
of the trust (because B's life expectancy controls how long the
charity will expect to wait before it receives the trust remainder).
There is no estate tax for A or B when B dies. But there is that gift
tax at the inception.
B paying the income tax does not spare A the gift tax--in this case a
gift tax on the full value of the funds paid to the trust because the
trust does not qualify for any gift tax charitable deduction.
Google search terms used:
crat crut site:irs.gov
I hope you find this helpful.
If any of the above is not clear, please request an Answer
Clarification. I would appreciate your holding off on rating this
answer until I have an opportunity to respond.
Sincerely,
richard-ga |
Request for Answer Clarification by
bestflyguy-ga
on
24 Sep 2002 14:56 PDT
Your original answer infers that annual income from the trust PLUS
some type of annuity payments to B would result in lower gift tax to
A. Are such annuity payments to B taxable to B as regular income? Is
there a website to calculate the gift tax to A if B is 63 at the trust
onset?
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Clarification of Answer by
richard-ga
on
24 Sep 2002 16:59 PDT
Hello again
At age 63, the annuity trust is permitted to pay approximately 6.5%
per year of the amount initally contributed, so a $5,000,000 fund will
pay B $325,000 per year.
For funding it, A will get about a 33% deduction (the IRS expects B to
live for 16 years). So the taxable gift is 2/3 of the funding, or
$2,000,000. If A stil has his $1,000,000 gift tax exemption intact,
he will apply that too to the gift, and he'll pay gift tax on the
remaining $1,000,000, about a $420,000 tax.
A also gets an income tax deduction, as if he paid 1/3 of the funding
or $1,000,000 to the charity. That deduction isn't necessarily usable
all in the first year (depending on how much income A has) but it can
be spread to 5 future years.
Some or all of the $325,000 annuity will be taxable to B each year,
depending on how much income the trust earns from the $3,000,000 fund.
If the trust earns $325,000 or more then B will be taxed on the
entire $325,000. The tier system of how CRAT income is taxed is
clearly explained on the following website:
LDS Foundation--CRAT
http://www.lds.org/ldsfoundation/ways/default/0,8113,458-1-12,00.html
The best software tool to do CRAT and CRUT calculations is Steve
Leimberg's Number Cruncher. Unfortunately it isn't free.
NumberCruncher
http://www.leimberg.com/
Good luck!
-R
|
Clarification of Answer by
richard-ga
on
24 Sep 2002 18:08 PDT
Oops, the clarification that I posted above has some scrambled
arithmetic.
Please ignore that and read this instead:
At age 63, the annuity trust is permitted to pay approximately 6.5%
per year of the amount initally contributed, so a $5,000,000 fund will
pay B $325,000 per year.
For funding it, A will get about a 33% deduction (the IRS expects B to
live for 16 years). So the taxable gift is 2/3 of the funding, or
$3,333,000. If A still has his $1,000,000 gift tax exemption intact,
he will apply that too to the gift, and he'll pay gift tax on the
remaining $2,333,000, about a $1,100,000 tax.
A also gets an income tax deduction, as if he paid 1/3 of the funding
or $1,667,000 to the charity. That deduction isn't necessarily usable
all in the first year (depending on how much income A has) but it can
be spread to 5 future years.
Some or all of the $325,000 annuity will be taxable to B each year,
depending on how much income the trust earns from the $5,000,000 fund.
If the trust earns $325,000 or more then B will be taxed on the
entire $325,000. The tier system of how CRAT income is taxed is
clearly explained on the following website:
LDS Foundation--CRAT
http://www.lds.org/ldsfoundation/ways/default/0,8113,458-1-12,00.html
The best software tool to do CRAT and CRUT calculations is Steve
Leimberg's Number Cruncher. Unfortunately it isn't free.
NumberCruncher
http://www.leimberg.com/
Good luck!
-R
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