What is the tax treatment of a sale?
The right to receive income from a trust such as a Charitable Remainder Trust (CRT) is a capital asset in the hands of the owner. As such, the sale of such an asset would generally qualify for capital gains treatment. If the asset has been held for more than a year, the asset would qualify for long term capital gains treatment.
What is the authority for the tax treatment?
Rev. Rul. 72-243, 1972-1 C.B. 233, provides that the sale of the life interest in a trust by the life tenant of a trust is treated as the sale of a capital asset under § 1222.
What are the legal issues of selling a CRT interest?
In general, no unusual legal issues arise in connection with the sale of a CRT income interest. Each trust must be analyzed individually in accordance with its terms and the applicable state law.
Is there recapture of the initial charitable contribution?
No. A CRT is a split interest trust. When the trust is created, the life interest (typically, or term interest in the case of a term trust) at a stated rate (or dollar amount in the case of a CRAT) belongs to the grantor. This is the income interest which may be sold. The remainder interest is given irrevocably to charity when the trust is created. It is this gift which gives rise to the initial tax deduction. The sale of the lead interest does not change the fact the remainder is still assigned to charity.
How long does it take to complete the sale?
In most cases a trust sale can be completed in a matter of a few weeks from the date at which all the information is made available and a decision to sell has been made. If there are complicating factors, the sale can take longer.
What is the ideal size for a trust?
There is no fixed minimum size for a trust for the income interest to be a candidate for sale.
Can NimCrut interests be sold?
Yes. A NimCrut is a net income trust with a provision for making up income amounts which are not earned and therefore not paid out in a given year. If the indicated payout percentage on a NimCrut is high, it might be difficult to earn the payout amount each year. This is a consideration in the valuation of a NimCrut, but generally does not affect the salability of the NimCrut interest.
Can CRAT interests be sold?
Yes. A CRAT is a charitable remainder annuity trust. In a CRAT, the annual payout to the income beneficiary is a fixed dollar amount. In general, CRAT income interests can be sold. However, unlike CRUTs, it is theoretically possible to exhaust a CRAT. If a CRAT becomes exhausted, the income payments cease. The possibility of exhaustion must be taken into account in determining the value of a CRAT income interest.
Can CLAT interests be sold?
Yes. A CLAT is a Charitable Lead Annuity Trust. It is very similar to a CRAT, except the lead and remainder beneficiaries are reversed. The analysis is similar to the analysis for a CRAT.
Can an interest in a term CRT be sold?
Yes. Most CRTs are lifetime CRTs. That is, the income beneficiaries (or beneficiary) are entitled to receive income payments as long as at least one of them is living. A term CRT, in contrast, terminates at the end of a stated period of years. The maximum allowable such period is twenty years. For example, if a twenty year term CRT has been in existence for eight years, it will have twelve years remaining. The income interest will therefore be valued on the basis of the known number of years remaining on the term.
Can income interests in term NimCruts be sold?
Yes. Both the term and the payout rate affect the value of a term NimCrut income interest. In general term NimCrut interests can be sold very much in the same way as standard Crut interests.
What age people can sell their interests?
Any age person can sell their interest. The younger the person, the longer the life expectancy, and therefore, everything else equal, the greater the value of the income interest. Sterling has completed transactions for people in their thirties all the way up to people well into their eighties.
How do you calculate life expectancy?
Life expectancy is determined by reference to IRS table 2000 CM. Sterling, as is standard practice, relies upon software from third party vendors to obtain life expectancies.
Does it matter how the trust assets are invested?
Not usually. If the trust assets are invested in marketable securities, such as stocks, bonds, mutual funds, money market instruments and the like, there is generally no issue.
What if the trust owns illiquid assets?
Illiquid assets need to be looked at on a case by case basis. They are not necessarily a barrier to a sale. Sterling has successfully completed transactions in which illiquid assets were among the assets of the CRT.
Does the seller need to be medically underwritten?
No. In general, the seller is not required to be medically underwritten. However, if the potential seller is very ill, to the point of being terminal, this may likely preclude a sale.
Can a person sell an interest even if they are not insurable?
Yes, provided that they are not too seriously ill. In general, as people get quite old, insurability becomes more difficult. Sometimes a person's lack of insurability is even a reason for them to consider selling their income interest, because they are uncomfortable bearing the financial risk that they might not receive all the expected payments. Sterling has successfully completed a number of transactions in which the seller was not insurable.
Does the seller receive cash?
Yes. In the great majority of cases, the seller receives their full sales proceeds in cash immediately upon closing.
When does the seller receive payment?
Usually the seller receives full payment in cash immediately upon closing.
Who is Sterling?
Founded in 1998, Sterling Foundation Management, LLC is the nation's leading provider of private foundation administration services and liquidity for CRT interests. Sterling's principals have written and spoken widely on the subject of philanthropy, foundations, and CRTs. Sterling's founders co-authored Creating a Private Foundation, which was published by Bloomberg Press in 2003 and is now in its second printing, and Managing Foundations and Charitable Trusts published in 2011.
How do I keep up with the latest news, trends and best practices for secondary planning options of CRTs?
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