8107 / Is the deduction for a gift to a charitable lead unitrust of a right to payment taken in the year of the gift?
An immediate deduction of the present value of all the annual payments to be made over the period may be taken if the trust is structured so that the donor is taxable on the income of the trust each year (under the “grantor trust rules”). If the trust is structured so that he is not taxable on trust income, he will not get an income tax deduction for the gift.1 The IRS has determined that a donor was to be treated as the owner of a charitable lead trust where the donor retained the power to substitute trust property. The donor was entitled to a current deduction in an amount equal to the present value of the unitrust interest.2
In general, the amount of the charitable contribution deduction allowable for the transfer of property to a charitable lead unitrust is equal to the present value of the unitrust interest. If the unitrust payments are made annually at the beginning of each year and the annual payout rate is equal to an adjusted payout rate for which factors are given, the present value of the unitrust interest can be calculated simply by multiplying the value of the property transferred to the charitable lead unitrust by the appropriate unitrust factor (see Appendix A). If the unitrust payments are made other than annually at the beginning of each year or the annual payout rate falls between adjusted payout rates for which factors are given, the calculation of the deduction for a contribution to a charitable lead unitrust is more complex.
Example 5. In September, Mr. Smith (age 85) transferred property worth $100,000 to a charitable lead unitrust that is a grantor trust. The trust is to make annual payments (at the beginning of each year) of 5 percent of the value of the trust corpus (valued annually) to charity during his lifetime (i.e., a 5 percent annual payout rate).
The value of the unitrust payable to charity is calculated as follows:
(1) Find the single life unitrust remainder factor for a person age 85 at a 5.0 percent adjusted payout rate: .74516 (from Single Life Unitrust Remainder Factors Table in Appendix A).
(2) Calculate the single life unitrust factor for a person age 85 at a 5.0 percent adjusted payout rate by subtracting the factor in (1) from one – 1 – .74516 = .25484.
(3) Multiply the value of the property transferred to the charitable lead unitrust ($100,000) by the single life unitrust factor for a person age 85 at a 5 percent payout rate (.25484) – $100,000 × .25484 = $25,484.
The amount of the charitable contribution deduction is $25,484.
Example 6. If the unitrust payments in Example 5 were to be made for 20 years (at the beginning of each year) rather than for Mr. Smith’s life, the present value of the unitrust remainder interest is calculated as follows:
(1) Find the term certain unitrust remainder factor for 20 years at a 5.0 percent adjusted payout rate: .358486 (from Term Certain Unitrust Remainder Factors Table in Appendix A).
(2) Calculate the term certain unitrust factor for 20 years at a 5.0 percent adjusted payout rate by subtracting the factor in (1) from one – 1 – .358486 = .641514.
(3) Multiply the value of the property transferred to the charitable lead unitrust ($100,000) by the term certain unitrust factor for 20 years at a 5 percent payout rate (.641514) – $100,000 × .641514 = $64,151.
The amount of the charitable contribution deduction is $64,151.
Example 7. Assume the same facts as in Example 5, except that payments are to be made at the end of each year. Assume the valuation table interest rates for September and the two preceding months, July and August, were 3.4 percent, 3.2 percent, and 3.0 percent. Mr. Smith elected to use the 3.0 percent rate.
The value of the unitrust payable to charity is calculated as follows:
(1) Find the unitrust payout adjustment factor for annual payments to start 12 months after the valuation date at a 3.0 percent interest rate: .970874 (from Unitrust Payout Adjustment Factors Table in Appendix A).
(2) Multiply the factor in (1) by the annual payout rate to obtain the adjusted payout rate: .970874 × 5 percent = 4.854 percent.
(3) Find the single life unitrust remainder factor for a person age 85 at a 4.8 percent adjusted payout rate: .75352 (from Single Life Unitrust Remainder Factors Table in Appendix A).
(4) Find the single life unitrust remainder factor for a person age 85 at a 5.0 percent adjusted payout rate: .74516 (from Single Life Unitrust Remainder Factors Table in Appendix A).
(5) Subtract the factor in (4) from the factor in (3): .75352 – .74516 = .00836.
(6) | 4.854% – 4.800% | = | X |
5.000% – 4.800% | .00836 | ||
X = .00226 | |||
(7) Subtract X in (6) from the factor at 4.8 percent from (3): .75352 – .00226 = .75126.
(8) Subtract the interpolated unitrust remainder factor in (7) from one – 1 – .75126 = .24874.
(9) Multiply the value of the property transferred to the charitable lead unitrust ($100,000) by the interpolated unitrust factor in (8) (.24874). The amount of the charitable contribution deduction is $24,874. [The same procedure applies to calculating a unitrust interest for a term certain. However, Term Certain Unitrust Remainder Factors are used instead of Single Life Unitrust Remainder Factors.]
If the donor of a right to payment ceases to be taxable on the trust income before the termination of the interest, he must “recapture,” that is, include in his income, an amount equal to the deduction less the discounted value of all amounts required to be, and which actually were, paid before the time he ceased to be taxable on trust income.3