Probate & Trust Law Section Conference Manual ... - Minnesota CLE

2. Gift Tax.
a. The donor will receive a gift tax deduction equal to the amount of
the charitable remainder. The remainder beneficiary must be
described in IRC § 2522(a).
b. If the donor creates a present income interest in the trust for
another individual, the donor is making a taxable gift. If an income
interest is provided for the donor’s spouse, the gift tax marital
deduction will apply. IRC § 2523(g).
c. If the donor creates a successor income interest for a noncharitable
beneficiary, this will result in a future interest and it will not
qualify for the annual gift tax exclusion. If the donor retains the
right to revoke this interest in his or her will, this will prevent the
gift from being “complete” and the transfer will not be subject to
gift tax upon the initial funding of the trust. Treas. Reg. § 1.664-
2(a)(4), Treas. Reg. § 1.664-3(a)(4).
3. Estate Tax.
a. If the donor retains a lifetime income interest, the entire value of
the CRT trust corpus is included in the donor’s estate at his or her
death. IRC § 2036.
b. If the trust is included in the donor’s estate, an estate tax charitable
deduction is allowed for the value of the remainder interest, valued
at the donor’s death. To receive this deduction, the remainder
beneficiary must be described in IRC § 2055(a).
c. Any interest in the donor’s spouse will qualify for the estate tax
marital deduction so long as the spouse is the only remaining
noncharitable beneficiary. IRC § 2056(b)(8).
H. Tax Considerations for the CRT.
1. A CRT is generally exempt from income tax. IRC § 664(c)(1). There is an
exception, however, for unrelated business taxable income (“UBTI”). IRC
§ 664(c)(2) (imposing a 100% tax on a CRT’s UBTI).
2. Annual payments to non-charitable beneficiaries carry out trust income in
a particular order (often referred to as “worst-in-first-out”) depending on
the character of the income. IRC § 664(b). The order is: ordinary income,
then capital gains, then income with the character of tax-exempt interest.
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