Trusts & Estates

Trusts & Estates

Rising interest rates favor charitable remainder annuity trusts, in which a donor transfers cash or other assets to an irrevocable trust; the trust takes the donor’s tax basis in the assets; and the trust pays an annuity to the donor or another person for a set term, with the remainder going to charity. The donor gets an up-front charitable deduction for the present value of the remainder. High interest rates increase the value of the donated assets…and the deduction.

Failing to obey the rules when setting up a CRAT costs an estate. A decedent set up a CRAT to be funded upon death, with her sister as the initial beneficiary. The trust documents originally provided for annual payments to the sister in an amount equal to the greater of $50,000 or the trust’s net income. This violated the CRAT rules that require payments to non-charitable beneficiaries be either a fixed amount or a figure equal to a fixed percentage of the value of the trust’s assets. The trustees attempted a qualified reformation of the trust to satisfy the tax laws, but to no avail. The Tax Court axed the estate’s charitable write-off (Est. of Block, TC Memo. 2023-30).

IRS rules on the basis of assets in intentionally defective grantor trusts… trusts set up by a completed gift and in which the grantor is treated as the owner for income tax purposes, but the assets aren’t included in the grantor’s estate at death. For years, tax pros debated whether the excluded assets get a stepped-up basis when the grantor dies. IRS now answers that query. Those assets are not stepped up to fair market value when the grantor dies. Instead, the tax basis of the assets after the grantor’s death is the same as that before death (Revenue Ruling 2023-2).