Charitable Remainder Trust Question

What is the name of your state? IL



I want to sell real estate. To avoid tax I plan to set up a charitable remainder trust. As of now, there is no contract for sale and the trust has not been set up. Is it possible to enter into a contract in my name for sale of the property, and then assign the contract to the trust, or does the trust have to be set up first?

Any thoughts are apprecited.



Thanks

ILAttorney1 said:

What is the name of your state? IL



I want to sell real estate. To avoid tax I plan to set up a charitable remainder trust. As of now, there is no contract for sale and the trust has not been set up. Is it possible to enter into a contract in my name for sale of the property, and then assign the contract to the trust, or does the trust have to be set up first?

Any thoughts are apprecited.



Thanks

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My curiosity is piqued based on your moniker. Are you an attorney?

Yes. I ask the question not to find a definitive answer that I will rely on, but to get opinions or a lead on research. This question has proven difficult to answer.

Are you trying to get taxed on the capital gain at the capital gain rate and then get a charitable deduction on the FMV? What is your goal?

When you ask, "is it possible", the answer is yes. You can create a trust at any time and you can fund a trust with any property you have a present right to. So, it is "possible". A better question is: will that accomplish your goal? If you're talking tax issues, what you envision would need detailed facts and some research to provide an answer. An internet posting won't give you more than point out some issues.

Thanks for the response. Please see my previous post for my thoughts as to fully answering this question, or any question, by virtue of a message board.

A owns blackacre. Blackacre has appreciated nicely and A is left with a low basis. He wants to avoid capital gains tax. Normally, he could do so by deeding the land to a CRT, the CRT would sell the property, and this question would not exist.

A wants to enter into a contract for sale of the land prior to giving the land to the trust, i.e., A sells to B. He then wants to assign that contract for sale to the CRT. By virtue of the assigned contract, the CRT will sell blackacre, hold the sale profits in trust for a charity, and A will receive the benefit of those profits during A's life.

The issue is whether the CRT will be tainted (its tax status as a CRT denied and/or capital gains savings lost) because A transferred (assigned) a contract for sale of blackacre into the trust instead of transferring blackacre itself. Has A performed duties that must belong to the trustee? Because A negotiated the details of the contract and fully entered into the contract on his own behalf, as opposed to allowing the trustee to enter into the contract, will A's goals fail?

Potential help...

Palmer v. Commis., 62 TC 684

Rev. Rule 78-197

I understand your issue, but can distinguish those references. (Except for the basic theory of how they were decided.) However, I am still confused about your goal. The donation will be discounted by the tables and calculations according to the facts and the income stream will consist of both ordinary income and capital gains. Are you trying the "force" the trust to presently sell so you can get a greater income stream consisting of capital gain?

I have a more basic question before we get to the law, what is the form of what you propose? In an assignment, aren't you giving your rights under contract away? What is the basis for those rights? The land, at FMV. You are no longer giving the underlying appreciated asset, but your rights to a contract for sale. If this is what you are trying to defeat, then I don't see how.

Answer

The issue was whether one can create a valid CRT and use said trust to avoid a large amount of capital gains tax when the CRT is funded with the right to sell land (by virtue of a valid contract that has been assigned). The goal was to set up a valid, sustainable CRT and avoid capital gains on the sale of the appreciated property. The contract that will be assigned is a contract for sale of the appreciated property by A to B. This was all set out in the previous post.

The answer is that A cannot create the trust as described above. A copy of my memo follows:

When funding of a charitable remainder trust with appreciated property it is imperative that the trustees not have an express or implied obligation to sell the transferred property, or an obligation to invest the proceeds in a specific manner. PLR 9715040. Otherwise, the grantor may be taxed on the subsequent sale of the transferred property by the trust.

Rev. Rule. 60-370 concluded that if the trustee is under an obligation, either express or implied, to sell or exchange the property transferred to the trust and to reinvest the proceeds in tax-exempt securities, any gain realized on the sale will be taxed to the grantor.

The continuing validity of Rev. Rule 60-370 was demonstrated in Notice 94-78, in which the IRS warned that under certain circumstances it would tax the grantor on the gain from the sale of appreciated assets transferred to a charitable remainder trust. The Notice gave an example wherein, the grantor, who was also the unitrust beneficiary, transferred appreciated assets to a charitable remainder unitrust. There was a preexisting agreement with the trustee that the trustee would not sell the assets until the second year of the trust. Because the assets were non-income producing, the grantor was allowed to receive the first unitrust as a tax-free return of corpus. The IRS stated that it would either 1) tax the grantor on the receipt of the unitrust payment, or 2) treat the transfer of the property to the trust as an assignment of income and tax the grantor on the sale of the appreciated asset. Notice 94-78.

I:

issue was whether one can create a valid CRT and use said trust to avoid a large amount of capital gains tax when the CRT is funded with the right to sell land (by virtue of a valid contract that has been assigned)

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I:

The answer is that A cannot create the trust as described above.

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T:

The land, at FMV. You are no longer giving the underlying appreciated asset, but your rights to a contract for sale. If this is what you are trying to defeat, then I don't see how.

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Apparently, we agree.

However:

The goal was to set up a valid, sustainable CRT and avoid capital gains on the sale of the appreciated property.

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Was *NOT* your goal. It was the mechanism you/client/boss chose to accomplish your goal. Futher refining what you seek can help determine a means to accomplish the goal. However, if your goal was to

"force" the trust to presently sell so you can get a greater income stream consisting of capital gain

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then you have a problem. But, if you want an income stream of a certain amount without regard to the character of the income--that is possible.

ILAttorney1 said:

Yes. I ask the question not to find a definitive answer that I will rely on, but to get opinions or a lead on research. This question has proven difficult to answer.

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Tranquility is the one who can provide the best answers. Based on his answers thus far, I hope you have a lot of malpractice insurance.

BlondiePB said:

Tranquility is the one who can provide the best answers. Based on his answers thus far, I hope you have a lot of malpractice insurance.

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No reason for malpractice insurance. Obviously the question was asked prior to any action.