Charitable Remainder Trust

Ottoline Framlingham transfers $4,000,000 of assets into an irrevocable trust that will pay a fixed annual amount to a named charity for 15 years, after which whatever remains passes outright to her two children. Which statement BEST describes this arrangement?

1. A.A charitable remainder trust, because a charity is named in an irrevocable trust that ultimately benefits her family.Incorrect and inverted. In a charitable remainder trust the INDIVIDUAL receives the payment stream and charity takes what remains. Here charity is paid first.
2. B.A grantor retained annuity trust, because a fixed annual amount is paid out of the trust for a term of years.Incorrect. In a GRAT the annuity is paid back to the GRANTOR. Here the fixed payments go to a charity, not to Ottoline.
3. C.A charitable lead trust: the taxable gift is only the present value of the remainder, so appreciation above the assumed valuation rate passes to her children at a reduced transfer tax cost.Correct. Charity holds the lead interest, the family takes the remainder, and discounting the remainder is the central planning benefit.
4. D.A qualified terminable interest property trust, because the remainder is fixed and cannot be redirected by the beneficiaries.Incorrect. A QTIP provides a lifetime income interest to a surviving SPOUSE to qualify for the marital deduction. No spouse or marital deduction is involved here.

Why: This is a charitable LEAD trust, the mirror image of a charitable remainder trust. Charity holds the LEAD interest, receiving a stream of payments for a term of years or a measuring life, and the noncharitable beneficiaries take whatever is left at the end. Because the family interest is postponed, the taxable gift is not the full $4,000,000 but only the present value of the REMAINDER, computed by subtracting the actuarially determined present value of the charitable lead interest. That discount is the central planning attraction: it moves assets to the next generation at a reduced transfer tax cost, and any appreciation above the assumed rate used in the valuation accrues to the children free of further gift or estate tax. The structure works best when the applicable federal valuation rate is low, since a lower assumed rate raises the computed value of the charity stream and shrinks the taxable remainder gift. In a non-grantor lead trust the donor takes no upfront income tax deduction, but the trust itself deducts the amounts it pays to charity each year.

A donor transfers highly appreciated stock to a CHARITABLE REMAINDER TRUST, which sells it and pays her a lifetime income, with the remainder passing to charity. The tax advantages include:

1. A.No immediate gain on the trust's sale, a partial current deduction, and lifetime incomeCorrect. All three benefits define the CRT strategy.
2. B.Tax-free income for lifeWrong-but-tempting. Distributions carry out taxable income under the tier rules.
3. C.A full deduction equal to the property's valueWrong. Only the REMAINDER interest's present value is deductible.
4. D.The right to revoke and reclaim the assets laterWrong. CRTs are irrevocable - that is the price of the benefits.

Why: The tax-exempt CRT sells appreciated assets without immediate gain recognition, diversifying fully; the donor deducts the remainder interest's present value now and receives the income stream, taxed under the four-tier system. Citation: IRC Sec. 664. Takeaway: CRT = deferred gain, partial deduction, lifetime income, charity remainder.