Approximate Unitrust Deduction Factors

Approximate Unitrust Deduction Factors

Approximate Unitrust Deduction Factors

 “FAIL” based on Disqualification if deduction (remainder) is less than 10%

(based on 8% AFR, quarterly distributions at the following CRT payout levels)

Example below of aCRT §664Trust that would be disallowed under the new law:

Under the new tax law, the couple above would be prevented from using a CRT because the income tax charitable deduction is just less than 10% of the fair market value of the property they transferred to their CRT. The charitable organization they would have named as beneficiary would also be denied the benefit of a future gift of over $1 million. While some argue that the 10% limit on present value of the charitable gift limit any future value to the charity, the real effects are going to be based on what the trust actually earns in the intervening years. It is unrealistic to assume that a young couple creating a CRT for 40 years or more would invest in financial products that would return only the applicable federal rate (AFR) of return instead of investing prudently for growth and income in a well-diversified investment portfolio. In this case, an 8% AFR is typically a bond rate and the S&P stock market returns would be in the 12% to 14% range; under these conditions, the charity would receive far more than the projected future value. For another example of this law’s effect, see the following case study.

This law was signed into legislation with the Taxpayer Relief Act of 1997 and is effective as of July 28, 1997. Existing testamentary trusts may also need to be modified to meet these requirements and additional contributions to existing trusts now must also meet the 10% remainder rules.

Henry & Associates