Short-term Charitable Remainder Trusts

On January 5, 2001, final regulations were issued that seek to eliminate the use of short-term, high-payout charitable remainder trusts that use borrowed funds to make significant distributions shortly after contribution. According to the IRS, in these situations, the donor contributes highly appreciated assets to the charitable remainder trust that has a short-term and a high payout rate. The trustee borrows money and looks to sell the assets in the second or third year (i.e., quickly). The borrowed funds are distributed early on, usually in the first year, and efforts are made to characterize these as tax-free distributions under IRC Section 664(b)(4). However, the IRS believes that certain charitable trust structures are abusive and inconsistent with the purposes behind charitable trusts. These abusive structures are described in Regulations Section 1.643(a)-8. The regulations treat the charitable trust as having sold, in the year of distribution, a pro rata portion of the trust assets. The trust assets deemed sold is the portion of the distribution that would otherwise be characterized as a distribution of trust corpus to the beneficiary.

If you believe that you may have engaged in a transaction that is the same or substantially similar to the transaction described above, Federal law may require you to disclose your and other parties’ participation in any such “listed transaction” on IRS Form 8886. For more information about Federal law requirements, please contact us.