Tuesday, October 30, 2012

Romney Charitable Tax Avoidance Device

I am one that rare species of Nonprofit Law profs who is not a tax expert, so this post falls under the category of "stories that look interesting but I don't really understand."  According to The Chronicle of Philanthropy, Mitt Romney uses a tax sheltering device, called a "charitable remainder unitrust," that "permits him to use a charity's exemption to defer taxes on capital gains from the sale of assets . . .."  The device, akin to "renting from your favorite charity of its exemption from taxation," was outlawed in 1997 but individuals who had existing trusts at that time are permitted to continue benefiting from them.  Perhaps one of our tax experts can explain further.



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the assertion is that the present value of the remainder would have been less than ten pct., which would mean that the unitrust was being used primarily to stage recognition of gains over the lives of the two beneficiaries, rather than to benefit the nominal remainder charity. the practice was "outlawed" in 1997 when the minimum ten pct. remainder value rule went in (along with the maximum fifty pct. payout). however, the same story on bloomberg,
says the stated unitrust payout was eight pct., which (despite what some expert quoted in the article says) would have left a remainder value of about 16.9 pct. so if the info in the bloomberg article is correct, this trust did not fall into the category blattmachr is talking about.

Posted by: r. willis | Oct 30, 2012 2:41:59 PM

CRATs and CRUTs (the former creating a fixed annuity, the latter recalculating the annuity as a % of trust assets each year) are fairly vanilla estate & tax planning devices, so none of this strikes me as a terribly big idea. The charity gets a future interest in trust assets that it might not get otherwise, while the donor gets an immediate deduction based on the remainder value and can defer tax until the annuity stream payments are received. In ye olden days, the grantor could "zero out" the calculated remainder interest: very little to no remainder interest (and, therefore, little to no charitable deduction). The benefit is that they could fund the CRAT/CRUT with appreciated assets, have the trust sell the asset, and then defer the tax, recognizing gain as the annuity stream was received. As long as the assets appreciated, the charity still got the remainder, so they loved them even when they were zeroed out CRATs. People can still use them, but the calculated remainder has to equal or exceed 10% of the initial contribution.

It's all statutory (IRC 664) and pretty basic.

Posted by: jpe | Oct 31, 2012 8:58:27 AM

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