Everson Eyes Nonprofits

The head of the Internal Revenue Service is complaining about what he says are abuses of charitable remainder trusts and other charitable-funding vehicles.[@@]

IRS Commissioner Mark Everson recently addressed his concerns about those issues at a U.S. Senate Finance Committee hearing on tax-exempt organizations.

Everson talked mostly about issues, such as tax breaks for used cars, which hold little interest for life insurance and estate planning specialists, but he did mention some topics that come up in estate planning discussions.

Everson told Senate Finance Committee members that some tax shelter promoters have set up “purported charitable or split-interest trusts that can be used for the taxpayer’s personal benefit,” according to a written version of Everson’s testimony.

“There are a variety of schemes, without legal merit, designed to allow individuals to deduct amounts that ultimately will be used for their personal expenses,” Everson said. “The charitable trust typically is a nonexempt charitable trust that serves as a holding entity of an individual’s assets. Individuals retrieve these assets at will, generally through loan transactions, gifts or by having the trust pay for expenses directly.”

Everson also complained about charitable remainder trusts, which wealthy taxpayers may use to leave assets to at least 2 different beneficiaries, at least 1 of which is not a charity. After a specified number of years or the end of the life (or lives) of the human beneficiaries, the remainder of the trust assets must be contributed to charity.

Abusive CRT arrangements “are typically funded with highly appreciated property,” Everson said. “One marketed scheme attempts to abuse the tax rules governing the character of distributions from the trust to the transferor by timing distributions in a year when the trust has little or no ordinary income or capital gain. The claim is that the transferor thus avoids any significant tax liability from the sale of the trust’s appreciated property.”