Charitable Lead Trust Can't Deduct Prepaid Amounts

Article excerpt

The older members of the Crown family created a nongrantor charitable lead trust (under IRC section 2522(c)(2)(B)) in 1983. They funded the trust with $15 million, which was invested in securities the income from which would be used to make the trust's required yearly charitable donations.

Charitable lead trusts are required to pay certain fixed amounts to charity for a number of years. The discounted present values of such trusts' income, as determined under IRS tables, are allowed as charitable deductions. The remainder at the end of the term goes to the remainder beneficiaries--in this case, the younger generation of Crowns. Members of the generation in between were to serve as trustees.

The trust instrument provided that the named charities receive $975,000 per year for 45 years. The discounted present value of that amount (determined to be $15 million using IRS tables) was taken as a gift-tax charitable deduction by the settlors of the trust at its creation in 1983.

The trust instrument also provided that if "as a matter of law" the trustees could prepay amounts due to the charities without endangering the $15 million gift-tax charitable deduction, they could make prepayments. …


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