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

3. The trustee of the CLT makes defined annual payments to a charity for a
specific time period.
a. The charity may be a public charity, private foundation, or donor
advised fund.
b. There are potential pitfalls if the donor retains too much control
over designating the charitable beneficiary after the donor
establishes an intervivos trust, i.e. a trust established during the
donor’s life. Examples: a donor who retains the right to change the
charitable beneficiary or a donor who serves on the board of the
private foundation. In these cases, the IRS deems the owner to
have the right to control the enjoyment of the income from the
trust, and the trust will be included in the donor’s estate if the
donor dies during the term of the trust. IRC § 2036.
c. The donor may retain the right to recommend charitable
beneficiaries of a donor advised fund without the IRC § 2036
problem because the donor does not have the legal authority to
designate the fund beneficiaries.
d. As with a CRT, the time period may be measured by a person’s
lifetime or a term of years, or a permissible combination of both
4. At the end of the term, the trustee pays the remaining assets of the trust to
a non-charitable beneficiary, commonly the donor’s children or a trust for
children.
5. The charity’s interest in the trust is the present value of the annuity
payments calculated using the IRC § 7520 rate. If that rate is low, the
charity’s interest will be relatively larger than if that rate is high.
Similarly, the non-charitable trust remainder will be valued as a smaller
portion of the assets contributed to the trust if the IRC § 7520 rate is low.
B. Tax Considerations.
1. Gift Tax. The donor must pay a gift tax for property given away during
life, with certain exemption amounts available for non-charitable
beneficiaries. For an intervivos CLT, the donor may take a gift tax
charitable deduction for the present value of the charitable beneficiary’s
annuity payments from the trust.
2. Estate Tax. The donor must pay an estate tax for property given away at
death, with certain exemption amounts available for non-charitable
beneficiaries. For a testamentary CLT, the donor’s estate receives an estate
tax charitable deduction for the present value of the charitable interest.
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