Estate Planning FAQs

Q: What are examples of ISPS that provide an online tool for post-death access?

Facebook’s Legacy Contact. Facebook permits the legacy contact to write a pinned post for the decedent’s profile, respond to new friend requests, update the profile picture, and download an archived copy of what the decedent posted on Facebook. To access more, such as messages, the decedent would need to have specified in a will or trust. Google’s Inactive Account Manager. Google permits a user to name an individual to have access to his or her Google account information, with the option to close the account and/or obtain data from the account (including Gmail, Google Photos, YouTube, Google+, Google Drive, etc.) with a court order.

Question 1

If I move to a new state that has lower income and estate taxes, what should I do to establish my "residence" for income tax purposes and my "domicile" for estate tax purposes?

Accepted Answer

The concept of &ldquo;residence&rdquo; and &ldquo;domicile&rdquo; are similar and are easily confused.  While frequently the state of one&rsquo;s domicile is also the state of one&rsquo;s residence, this does not hold true for everyone.  While a person may have a number of different residences or be a resident of a number of different states, he or she may only have one domicile at any given time.  Residence determines where one pays income tax.  Domicile determines where one&rsquo;s estate will pay estate tax on assets other than real estate.

The concept of &ldquo;residence&rdquo; is based upon objective factors.  Like domicile, a person&rsquo;s residence is dependent upon a finding of physical presence within the particular state.  Whether a person is a resident of a state may be determined, for example, based on the number of days spent within the state or the ownership of property within the state.  Reference must be made to each state&rsquo;s laws to determine the tax and legal consequences of being a resident of that state.  However, no finding of intent is required for a person to be deemed a resident of a particular state.  Thus, depending upon the laws of the particular jurisdiction, a person may be deemed a resident of more than one state and a domiciliary of yet another.

The choice of residence carries with it different legal consequences.  For most states, a strict days present test will determine whether or not you are an income tax resident in that state even if you are domiciled in a different states.  Some states have harsh rules that treat even a partial day physically present in that state as a day present in that state especially if you maintain real estate in the jurisdiction.  As with estate taxes, it is important to avoid income taxation in two different states.

A person&rsquo;s &ldquo;domicile&rdquo; is his or her permanent home, to which he or she always intends to return.  &ldquo;Domicile&rdquo; is often defined as (i) actual residence within a particular state, combined with (ii) the intention of making that state one&rsquo;s permanent home.  Actual residence in a state without the intention to live in that state permanently does not suffice.  Since domicile is a question of intent, courts often look to a person&rsquo;s overall manner of living to determine whether there has been a change of domicile.

The choice of domicile carries with it various legal consequences.  It often determines (i) jurisdiction to assess state income and death taxes; (ii) primary jurisdiction to probate wills and administer estates; and (iii) judicial jurisdiction over an individual.  Domicile also determines whether and where a person may exercise various legal rights and privileges, such as voting.

Generally, you will be subject to death taxes only in your state of domicile.  However, if you die owning real property in another state, that state may impose its own death taxes on the value of the real property located in that non-domiciliary state.

Federal courts have allowed two or more states each to make an independent determination of domicile and each to assess its own estate and inheritance taxes on that basis.  The United States Supreme Court has held that such double taxation is constitutional.  In one infamous case, New Jersey and Pennsylvania both claimed an heir to the Campbell Soup fortune as a domiciliary and each state collected $17 million in state inheritance taxes from the estate.  Since a determination that you are domiciled in more than one state could have extremely adverse and costly consequences, it is imperative to take all the steps necessary not only to establish your new domicile, but also to revoke your prior domicile.

If you wish to change your domicile to another state but retain a home in your original state, you should take steps consistent with this change of domicile that manifest your intention to abandon your original domicile.

Court cases deciding the issue of domicile indicate that no one factor conclusively establishes domicile.  As mentioned above, the determination of one&rsquo;s domicile is a matter of one&rsquo;s intent, therefore, courts often look to a variety of factors in determining whether there has been a change of domicile.  A person&rsquo;s declarations as to what he considers to be his home, residence or domicile may be used as evidence of intent.  Such declarations often are found in formal legal documents as well as in other written instruments, such as letters, hotel registrations and the like.  To make your choice of domicile clear, you should take as many of the following steps as are possible in view of your particular circumstances:

In your state of desired domicile:


	Execute a new Will or a Codicil which recites your new domicile and which complies with all the legal requirements of your new state of domicile.
	Execute new Durable Powers of Attorney, Living Wills and Health Care Proxies which recite your new domicile and which comply with the legal requirements of your new state of domicile.
	File a Declaration of Domicile, if available.
	Purchase and furnish a home to be used as your primary residence.
	Register as a voter and vote.
	File your federal income tax return with the appropriate IRS regional service center and show your state of desired domicile as your residence address.
	Pay state and local taxes as a resident.
	Obtain a driver&rsquo;s license.
	Register your automobile.
	File for any applicable tax exemptions on residential property.
	Be physically present within the state as large a part of each year as is practicable, especially during the initial year.  Some individuals may wish to keep a diary of trips out of state and of nights spent in and out of state.
	Maintain a major portion of your bank accounts and brokerage accounts.
	Open a safe deposit box for your jewelry and other valuable property.
	Pay health insurance premiums.



	Conduct your business or profession in state to the extent possible.
	Join clubs, religious and social organizations.


In your former state of Domicile:


	If you have filed a Declaration of Domicile in another state, mail a copy to the tax authorities of the non-domiciliary state.
	Have your name removed from the voting rolls.
	Surrender your driver&rsquo;s license.
	Pay any taxes due as a nonresident.  Mark your last return as a resident &ldquo;FINAL,&rdquo; using your new address.
	Spend as little time as practicable in the state.
	Close brokerage and bank accounts in the state.
	Change club, religious and social memberships to &ldquo;nonresident&rdquo; status.


In addition, you should:


	Describe yourself as a resident of your domiciliary state in all legal documents that require a recital of residence, such as passports, real estate deeds, contracts, leases and credit applications.
	When traveling, use your new address as your residence when registering at hotels, motels, etc.
	Send a change of address to all business entities with which you deal, including those that presently owe you money or that may owe you money in the future, e.g., credit card companies, insurance companies or former employers that provide pension plans or death benefits.
	Consider transferring title to any residential real estate situated in your state of former residence to other family members, or to trusts for their benefit, but only after considering the estate planning consequences of such a transfer.
	Above all, pursue a consistent course of conduct indicating an intention to abandon your former domicile and establish a home in the new state.

Question 2

If you or a family member plans to get married, what steps should be taken to protect assets or access to family assets?

Accepted Answer

Wealthy individuals contemplating marriage should consider entering into a premarital agreement.  As its name suggests, a premarital agreement is an agreement in writing entered into by the future spouses prior to marriage which contains provisions regarding ownership of property.  The Agreement may contain provisions regarding disposition of property upon marital dissolution, death, or the occurrence of any other event; modification or elimination of spousal support; ownership rights in death benefits from life insurance policies; and rights to retirement plans.  The parties may also agree to execute a Will or trust that reflects these provisions.

Each state&rsquo;s law differs on the enforceability of premarital agreements.  Generally, a premarital agreement may be deemed unenforceable if it is not properly prepared or executed.  As a general rule, to render a premarital agreement unenforceable, one must prove that: (1) he or she did not execute the agreement voluntarily; (2) the agreement was unconscionable when it was executed or when enforcement is sought; (3) he or she was not provided fair and reasonable disclosure of the amount, character and value of property, financial obligations and income of the other party before execution of the agreement; or (4) he or she was not afforded a reasonable opportunity to consult with independent counsel.  Absent the existence of any such facts, a premarital agreement may be amended or revoked only by a written agreement signed by both parties.  Generally, courts will typically enforce a premarital agreement unless the terms are unconscionable either at the time it was executed or at the time of the separation.

It is important that an estate plan accurately reflect such person&rsquo;s obligations under the premarital agreement.  The act of marriage will entitle the spouse to potentially contest the Will, elect against the Will and take an &ldquo;elective share&rdquo; of the estate.  Most states provide some sort of &ldquo;elective share&rdquo; for a spouse who was written out of his or her spouse&rsquo;s Will.  Each state differs as to what is included and what is not included in calculating the elective share.  For example, New York includes assets held in a Revocable Trust at the time of death while Connecticut, currently, does not.

Question 3

If you or a family member is getting divorced, how should it change the estate plan?

Accepted Answer

It is important for a person who has recently divorced to re-evaluate his or her estate plan, specifically the disposition of assets.  In addition, appointments of executors and trustees may need to be revisited, especially if the former spouse was named in either capacity.  While local state law may revoke any bequests or appointments in favor of the spouse automatically upon the entering of a divorce decree, it may not revoke bequests or appointments for the spouse&rsquo;s other family members.

Divorce counsel should be consulted prior to changing any estate planning documents.  Many states issue protective orders as soon as a divorce is filed that prevent the parties from changing their estate plans until the divorce is finalized.

In many states, Revocable Trusts are not automatically revoked by divorce.  Instead, Revocable Trusts are governed by the terms of the document.  Thus, the creator of the trust generally will wish to amend the provisions of the trust to remove the former spouse as a beneficiary.

Irrevocable trusts generally also are not revoked by divorce.  Unlike revocable trusts, irrevocable trusts cannot be modified or terminated.  However, irrevocable trusts are often drafted to provide contingencies in the event of a subsequent divorce.

Question 4

How should an estate plan be structured in a second marriage or blended family situation?

Accepted Answer

A thorough estate plan should take into account the possibility that one&rsquo;s surviving spouse, children or grandchildren may be married, and also potentially divorced, during their lifetimes.  The impact of marriage and divorce law thus is quite relevant when structuring gifts or bequests to a spouse, children and grandchildren.

Many clients rightfully worry that gifts made now to a spouse, children or grandchildren may eventually inure to the relative&rsquo;s spouse.  As a general rule, property one spouse receives by gift or inheritance should be accorded a somewhat different status than property resulting from earnings during the marriage, depending upon how long the property was held during the marriage, whether it has appreciated in value, whether the appreciation was the result of one spouse&rsquo;s efforts and whether there is other property available for division.  Nevertheless, as discussed above, all or any part of the estate of one spouse may be awarded to the other spouse in a divorce and there can be no certainty as to how a judge will treat property received by gift or inheritance.

To reduce the risk that a spouse&rsquo;s, child&rsquo;s or grandchild&rsquo;s gift or inheritance could be lost in the event of divorce, many clients chose to establish &ldquo;spendthrift&rdquo; trusts for their spouse, children or grandchildren rather than making outright gifts or bequests.  Children of spouses or spouses of children and grandchildren generally do not acquire any rights in properly-drafted spendthrift trusts created for the benefit of such person.  In a divorce or remarriage, the court may still consider the value as one factor when making an equitable distribution of property.  Nevertheless, the trust property should still enjoy greater protection than it would if such person owned such property outright.

Question 5

With the rise of Alzheimer's and other cognitive mental health issues, how do you plan for a potential long period of incapacity?

Accepted Answer

Every estate plan should provide for the management of assets in the event of incapacity.  Depending on the jurisdiction, each family member should have a durable power of attorney, living will and health care proxy (or Advanced Medical Directive) and a Designation of Conservator or Guardian.  In some states, these documents may be combined or each a separate document.

A durable power of attorney allows the named person to manage assets in the event the principal is no longer capable of doing so.  This should be effective to avoid the expense and complications involved in having to petition a Court to appoint a Conservator or Guardian for that purpose.  In some states, a Court will have continuing jurisdiction over the Conservator or Guardian which may require costly annual accountings.

A Living Will and Health Care Proxy or Advanced Medical Direction document contains two main parts.  The &ldquo;Living Will&rdquo; expresses wishes regarding the removal or withholding of extraordinary life support measures in the event you are in a terminal medical condition or a permanent coma.  The &ldquo;Appointment of a Health Care Representative&rdquo; appoints an individual to make medical decisions on the persona&rsquo;s behalf in the event he or she is incapacitated and authorizes that individual to communicate wishes relating to the withdrawal of life support under circumstances which are not expressly covered by the Living Will.  It is important that this document contain an authorization to give the agent access to protected health information so as to make important decisions concerning care.

Finally, most states allow a person to execute a separate document or incorporate into a durable power of attorney or living will the appointment of a guardian or conservator in case one is needed.  If the hospital or nursing home has concerns about relying on a durable power of attorney, a guardianship or conservatorship proceeding may be required.  If the person has named a conservator or guardian in their documents, it is extremely difficult for a Court to name someone other than the named guardian or conservator.

We have found that a Revocable Trust that has been funded prior to incapacity is the best vehicle to manage incapacity.  Without the practical complications of a durable power of attorney, the Trustees of a Revocable Trust can manage the family member&rsquo;s funds for a long period of incapacity.

Question 6

What should you do to preserve, protect and pass on valuable tangible personal property (i.e., artwork, cars, jewelry)?

Accepted Answer

Tangible personal property in a legal sense means any property that is movable, that you can touch and feel, but is not real property like a house or real estate and is not intangible property such as cash and marketable securities.

In order to preserve and protect family heirlooms, it is important to take an Inventory from time to time to document what each person has in their possession.  The Inventory can be useful in make sure the items are all adequately insured against fire, theft or other casualty losses.  Appraisals should be updated from time to time as the market for collectibles is volatile and does not correlate to the financial markets.  In addition, documents proving the authenticity of items should be maintained in a safe place.

In developing an exit strategy for tangibles, it is important to ask if the next generation would even want such items.  While the senior generation may have great affinity for an item, the next generation may have little to no interest in retaining the item.

If the next generation is interested in receiving the property, a gift strategy described in this paper can be used to gift the property to the children.  Keep in mind that the recipients will most likely have the same income tax basis in the property as the donor.

If it is decided to gift items to charity, a donor should enter into an agreement with the charity that dictates the term of the donation.

If the donor wishes to keep a collection of items in one place, the donor should consider setting up a charity or foundation to house the items.  Caution will be required to avoid the prohibitions on self-dealing with respect to charities.

If the owner wish to sell the property and the property is a collectible, keep in mind that there is a special capital gains rate of 28% for the sale of collectibles.

Finally, if the owner wishes to retain the property until his or her death, the owner&rsquo;s estate plan should address the disposition of tangibles.  Large value items or emotionally valuable items should be specifically addressed in the estate plan.  Many states now allow a person to create a separate memorandum with respect to the disposition of tangible person property that is legal binding.  Other states still require that a disposition must be in a Will or Revocable Trust in order for the bequest to be legally binding.

Question 7

What steps should a fiduciary take with respect to digital assets?

Accepted Answer

Locate computers, smartphones and similar devices, backup and flash drives, and online storage and accounts.
	Identify digital assets, accounts, and information.
	Access them as permitted by law and discussed above.
	Value them for inventory, tax and distribution purposes.
	Protect and preserve them.  For example, if the ownership of a domain name is not maintained and expires, the domain is suspended for two months, then put up for auction.
	Retain knowledgeable, technical help.
	Transfer them to the intended beneficiaries.

Question 8

What are examples of "outside the envelope" non-content information?

Accepted Answer

Logs of email communications, including email addresses of senders and recipients and date/time sent or received.
	Catalogs of photo or music titles


.

Question 9

Upon an individual's death, is a fiduciary (e.g., executor, personal representative, trustee, agent, attorney-in-fact, or guardian) permitted to access the decedent's digital assets?

Accepted Answer

In July 2015, the National Conference of Commissioners on Uniform State Laws revised a model law, referred to as the &ldquo;Revised Uniform Fiduciary Access to Digital Assets Act&rdquo; (RUFADAA), to help states enact uniform legislation nationwide.  At present, 47 states have enacted this uniform Act that allows a fiduciary to &ldquo;step into the shoes&rdquo; of the decedent.  What a fiduciary may access depends upon the type of information sought and what the decedent authorized during life.  Pursuant to the uniform Act, a fiduciary may access a catalog of &ldquo;non-content&rdquo; information (i.e., the outside of the envelope) without the express prior consent of the decedent.  However, to grant access to &ldquo;content&rdquo; information upon death (e.g., the letter inside the envelope), the user/decedent has options:


	First, the user may use the ISP&rsquo;s online tool to provide direction to the fiduciary, which will supersede a will, trust or power of attorney.
	Second, in the absence of the online tool, the user may provide a written direction in a will, trust or power of attorney.
	Finally, if there is no written direction, the ISP&rsquo;s terms of service agreement controls.
	If the ISP&rsquo;s terms of service are silent about fiduciary access, the default rules of RUFADAA apply.

Question 10

What are "digital assets"?

Accepted Answer

Digital assets include photos and videos to music, whether on devices or in the cloud, as well as email accounts, social networking accounts, internet domain names, blogs, online gaming items, client lists and other electronic files.  According to a market research survey conducted by McAfee in 2011, &ldquo;people placed an average value of $37,438 on the digital assets they owned at the time.&rdquo;  However, in its 2023 article, McAfee noted that &ldquo;with the growth of streaming services, digital currency, cloud storage, and more in the past decade, that figure feels conservative."

Question 11

What are examples of "inside the envelope" content information?

Accepted Answer

The subject line and body of emails, texts and other messages between the user and private parties.
	Digital photos and videos stored in a cloud-based account.
	Bitcoin and other virtual currency accounts.

Question 12

What are examples of ISPS that provide an online tool for post-death access?

Accepted Answer

Facebook&rsquo;s Legacy Contact.  Facebook permits the legacy contact to write a pinned post for the decedent&rsquo;s profile, respond to new friend requests, update the profile picture, and download an archived copy of what the decedent posted on Facebook.  To access more, such as messages, the decedent would need to have specified in a will or trust.
	Google&rsquo;s Inactive Account Manager.  Google permits a user to name an individual to have access to his or her Google account information, with the option to close the account and/or obtain data from the account (including Gmail, Google Photos, YouTube, Google+, Google Drive, etc.) with a court order.

Question 13

What are the challenges facing digital assets that are different than traditional assets?

Accepted Answer

There are millions of internet-based accounts that belong to decedents.  Some internet service providers (ISPs) have explicit policies on what will happen when an individual dies, whereas others do not.  Even where ISPs include their policies in the terms of service agreements, most consumers only click through these agreements without a thought.  Historically, few laws exist on the rights of fiduciaries over digital assets.  Federal law, enacted more than three decades ago, imposes criminal penalties and possibly civil liability for the unauthorized access of computer hardware, devices and stored data.

Question 14

Who should serve as a trustee?

Accepted Answer

Choosing a Trustee can be a challenging decision, especially since Grantors commonly want a family member to be the Trustee.  For a Revocable Trust, the Grantor will typically serve as a Trustee during his or her lifetime, either alone or together with the Grantor&rsquo;s spouse, another family member, or an Independent Trustee.  After the Grantor&rsquo;s death, the Grantor&rsquo;s surviving spouse, if any, or one or more children of the Grantor are a common appointment.  It is important that that the successor Trustee named to act upon the Grantor&rsquo;s death is able to work with the Executor of the Grantor&rsquo;s estate, as those two persons will have to work closely together during the estate administration.  After the division of the trust assets for the beneficiaries, if there are ongoing trusts, many more factors enter into the equation.  For an Irrevocable Insurance Trust, the Grantor cannot serve as Trustee, and an Independent Trustee may be the best option.

Question 15

What is the purpose of the trust?

Accepted Answer

The purpose of a trust can help to narrow down who should serve as Trustee.  If the trust is a spendthrift trust, the beneficiary should not be a Trustee, but asking a family member of the beneficiary to be a Trustee, especially a sibling, may cause additional problems.  If the trust is primarily for asset protection, the beneficiary may serve as Trustee, but in some instances, for maximum protection, it is preferable for an Independent person or Corporate Trustee to serve as a Trustee or co-Trustee with the beneficiary.

Question 16

What is the nature and value of the assets?

Accepted Answer

The nature and value of the assets also has an impact on the selection of a Trustee.  If a trust consists of a residence and cash, the beneficiary may be able to manage the assets without any assistance.  If the trust consists of a closely held business, one or more family members who have been involved in running the business for multiple years may be the best choice to serve as Trustee, either alone or together with the beneficiary.  If the trust consists of many complicated investments, real property held in limited liability companies, and requires sophisticated tax decisions, the beneficiary may prefer to not be a Trustee at all, and a professional Trustee, such as a bank, trust company, or attorney, is the best choice to serve as Trustee.

Question 17

What are the family dynamics?

Accepted Answer

Choosing a family member or a friend to serve as Trustee may put additional strain on the relationship between the beneficiary and the Trustee.  The beneficiary and the Trustee will have to work together and be able to get along with each other, so if there are any questions about the ability to do that, it may be better to appoint an unrelated person as the Trustee.

Question 18

What skills should be considered in selecting a trustee?

Accepted Answer

A Trustee will need an attention to detail, time and organizational skills, interpersonal skills to communicate well with the beneficiaries, honesty and integrity to safeguard the trust assets, expertise to invest and manage the trust assets, and the knowledge on how to handle tax issues, or, the Trustee will need to be able to recognize the need for these skills and seek out help from professionals.  The Trustee does not have to be an expert in every area, but the Trustee should have a sufficient enough grasp of the issues to recognize when help is needed and to be able to hire the appropriate professionals.

Question 19

What is a revocable trust?

Accepted Answer

A Revocable Trust is a document created during an individual&rsquo;s lifetime to manage his or her assets and distribute the remaining assets after the individual&rsquo;s death.  The &ldquo;Grantor&rdquo; or &ldquo;Settlor&rdquo; is the individual who created the Trust and the &ldquo;Trustee&rdquo; is the person responsible for administering the Trust.  The Grantor can serve as Trustee, or may appoint another person, bank or trust company to serve as the Trustee. The trust is &ldquo;revocable&rdquo; since the Grantor may amend or revoke the trust during his or her lifetime.

The Trustee manages the assets of the trust by making investment decisions, maintaining brokerage and other financial accounts, loaning or borrowing funds, retaining, acquiring, or selling real or personal property, hiring attorneys, accountants, investment counsel or other agents, and in any other manner as provided under the trust agreement or state law.  Generally, the Trustee does not have to keep all of the beneficiaries informed of the trust, only the Grantor (if the Grantor is not the Trustee or co-Trustee).

Question 20

How is the revocable trust funded?

Accepted Answer

To fund the Revocable Trust, assets must be formally transferred to the trust.  Failure to formally transfer the assets into the Revocable Trust could result in the assets being subject to probate.  To accomplish this, the Grantor must transfer the assets to the legal name of the Revocable Trust, which is generally referred to as follows:

&ldquo;John. M. Smith, Trustee of the John M. Smith Revocable Trust dated November 1, 2016&rdquo;

The exact method of the transfer will vary depending on the nature of the assets.  Accounts with financial institutions will require new documents to be signed by the Grantor and the Trustee to open a new account or re-title an account in the name of the Revocable Trust.  Transfers of real estate will require the preparation of a new deed, which will need to be recorded, but, it is important to consider the impact such a transfer may have on homeowners&rsquo; insurance, title insurance, and any mortgage on the property.  Ownership interests in closely held business interests must be formally assigned to the Revocable Trust, taking care to follow the requirements found within an operating agreement or similar document.

Question 21

Who pays the income tax for the revocable trust?

Accepted Answer

During the Grantor&rsquo;s lifetime, the Revocable Trust is not a separate taxpayer, and the Grantor must include all items of income earned by the trust and all corresponding deductions on his or her personal income tax return.  When the Grantor is also a Trustee or co-Trustee of the Revocable Trust, the Grantor&rsquo;s social security number serves as the taxpayer identification number of the trust.  When the Grantor is not a Trustee, the Revocable Trust must apply for a separate taxpayer identification number and the trust will be required to file a separate income tax return (unless there is no income for that tax year), although the Grantor is still responsible for the payment of income taxes during his or her lifetime.

Question 22

What happens upon the death of the grantor?

Accepted Answer

Upon the death of the Grantor, the trust becomes irrevocable.  If the Grantor was the Trustee, the person appointed to be the successor Trustee must formally accept the position.  The Trustee will generally work closely with the Executor or Personal Representative of the Grantor&rsquo;s estate during the estate administration process.  The Trustee is responsible for paying claims and taxes of the Grantor&rsquo;s estate, and then distributing the assets to the beneficiaries as described in the trust agreement.  The Trustee will generally have a duty to inform and disclose certain information regarding the trust to all of the qualified beneficiaries, except as otherwise provided for in the trust agreement or state law.

Question 23

What is a GRAT?

Accepted Answer

A Grantor Retained Annuity Trust, or &ldquo;GRAT&rdquo;, is an &ldquo;estate freeze approach&rdquo; that allows a Donor to give away the appreciation of an asset gift tax free.  The Donor transfers high income-producing assets or assets with substantial growth potential (or cash to be invested in such assets) to a trust from which the Donor will receive a fixed amount annually (an &ldquo;annuity&rdquo;) for a designated period of years (&ldquo;GRAT Term&rdquo;).  At the end of the GRAT Term, if the Donor is living, the beneficiaries named in the trust instrument (individuals or a continuing trust) will receive the assets remaining in the GRAT after payment of the final annuity free of gift and estate tax.  Depending on the GRAT&rsquo;s cash flow and/or the appreciation of the GRAT&rsquo;s assets (the &ldquo;total investment return&rdquo;), substantial estate and gift tax savings may be achieved.

Question 24

How does the GRAT work?

Accepted Answer

The tax advantage of this technique results from the way the taxable value of the gift to the GRAT is calculated.  The value of the Donor&rsquo;s taxable gift is not the value of the assets transferred to the GRAT, but the current value of the beneficiaries&rsquo; right to receive the assets remaining in the GRAT upon the end of the GRAT Term after payment to the Donor of the required annuity payments.  The duration of the GRAT and the amount of the annuity payments are fixed to reduce the taxable gift to zero or a nominal amount.  This form of GRAT is commonly called a &ldquo;zeroed-out&rdquo; GRAT.

If the total investment return of a GRAT exceeds the anticipated return based on the rate prescribed by the IRS for the month the GRAT is funded (the &ldquo;7520 rate&rdquo;), this &ldquo;excess&rdquo; investment return will pass gift and estate tax-free to the Donor&rsquo;s beneficiaries at the end of the GRAT.  If the total investment return is less than the 7520 rate, no assets will remain to be transferred to the Donor&rsquo;s beneficiaries upon the expiration of the GRAT, but as long as the taxable gift upon funding the GRAT is zero, nothing will be lost other than the expense of establishing and administering the GRAT.

Question 25

What is an example of a GRAT?

Accepted Answer

Jane Jones transfers $1,000,000 worth of stock to a 2-year GRAT.  Jane believes that the stock is undervalued and expects it to increase by 25% per year for the next two years.  Assuming an IRS 7520 interest rate of 4.4%, Jane must receive an annuity of $533,248 for the two years of the GRAT to reduce the taxable gift to a nominal amount.  If the stock appreciates in value at the 25% annual rate that Jane expects, $362,693 of stock will pass tax-free to her children at the end of the two year term.

Question 26

What are the terms and conditions to be considered in a GRAT trust agreement?

Accepted Answer

The Donor can be a Trustee or the only Trustee.
	A specified annual annuity payment will be made to the Donor for a term of years.  If the Donor dies during the term of years, the annuity payments would continue to be paid to the Donor&rsquo;s estate.
	The determination of the amount of the annuity payment needed to reduce the taxable gift to a nominal amount involves a fairly complex tax calculation which takes into account the following factors:
	
		the current value of the property;
		the term of the GRAT; and
		the 7520 rate for the month of transfer.
	
	
	After the term of the GRAT expires, the trust principal will be distributed to the beneficiaries specified in the trust agreement.  The beneficiaries can receive the principal outright or the principal can be held in further trusts.
	Once assets have been gifted to the GRAT, no additional contributions may be made to the GRAT.

Question 27

What are the tax implications of the GRAT?

Accepted Answer

Gift tax.

The goal of the GRAT is to transfer wealth to the designated beneficiaries without the imposition of gift or estate tax.  It is similar to an outright gift in that it avoids estate and gift tax on the future income and appreciation on the gifted property.  Unlike an outright gift that uses up lifetime gift tax exemption equal to the value of the gifted property on the date of the gift, a &ldquo;zeroed out GRAT&rdquo; will use up only a nominal amount of gift tax exemption.  Also, unlike an outright gift, a GRAT gift will result in either a &ldquo;win&rdquo; or a &ldquo;tie&rdquo;, but never a &ldquo;loss&rdquo;.  An outright gift on the other hand can have a negative result if the property declines in value after the gift is made.

Income tax.

During the term of the GRAT, the GRAT is treated as a grantor trust for income tax purposes.  This means the Donor will be taxed on all of the income and capital gains earned by the trust, without regard to the amount of the annuity paid to the Donor. 

At the end of the GRAT term, the beneficiaries&rsquo; tax basis in the trust property will be equal to the Donor&rsquo;s tax basis at the time the assets were transferred to the GRAT.  Therefore, if appreciated property is gifted to the GRAT and the beneficiaries sell the property after the GRAT terminates, any capital gains tax on the difference between the sales price and the Donor&rsquo;s tax basis will reduce the net value of the property transferred.  If the property instead were included in the Donor&rsquo;s estate at death, the beneficiaries would receive a &ldquo;step‑up&rdquo; in the property&rsquo;s tax basis to the fair market value of the property at the Donor&rsquo;s death.  As long as the federal capital gains tax rate is less than the combined federal and state estate tax rate (up to 50%) which otherwise would have been due had the property transferred to the beneficiaries by the GRAT been retained until death, a GRAT will result in lower tax exposure for transferred assets. 

However, it is important to note that, if, after the termination of a GRAT, the appreciated property is sold while it continues to be held in a trust that is treated as a grantor trust for income purposes, the grantor will pay the capital gains tax.

Estate tax.

If the Donor dies before the GRAT annuity payments cease, the trust assets will be taxable in the Donor&rsquo;s estate.  Consequently, it is important to consider the Donor&rsquo;s life expectancy in selecting the GRAT term.  Also, if the Donor is married, careful consideration should be given as to whether and how to qualify the GRAT for the estate tax marital deduction if the Donor does not survive the GRAT term in order to avoid paying estate tax at the death of the Donor that could otherwise be postponed until the surviving spouse&rsquo;s death.

Question 28

Can you give me an example of the GRAT tax calculations?

Accepted Answer

Example of $1,000,000 GRAT established when IRS interest rate is 4.4%, assuming total annual investment return of 10%.  NOTE:  The IRS interest &ldquo;hurdle&rdquo; rate is set monthly by the IRS.

 


	
		
			
			Term   of GRAT (in years)
			
			Annual Annuity Payment Made to Donor (Assumming 4.4% IRS Rate)
			 "Tax Free" Gift to Beneficiaries at End of Term (Assuming 10%  Total Return)
		
		
			2
			$533,248
			$90,180
		
		
			3
			$363,082
			$129,200
		
		
			5
			$227,159
			$223,682
		
		
			10
			$125,758
			$589,490
		
		
			15
			$92,474
			$1,239,107
		
		
			20
			$76,211
			$2,362,498

Question 29

What if the GRAT's investment performance is equal to or less than the IRS interest rate?

Accepted Answer

If the GRAT&rsquo;s annual compounded investment return equals the IRS interest rate, then the Grantor&rsquo;s annuity interest will be fully paid, but there will be only a small remainder in the GRAT to pass on to the Donor&rsquo;s children.  If the GRAT&rsquo;s annual compounded investment return is less than the IRS interest rate, then the trust principal will be exhausted before the end of the GRAT term.  There will be no tax savings, but nothing will be lost except the time and expense associated with establishing and maintaining the GRAT.

Question 30

If there is insufficient income to pay the annuity in one year, can the deficiency be paid in another year, rather than using principal?

Accepted Answer

No. The IRS regulations provide that an annuity interest is only valid if it is paid no later than the due date for the trust tax return to which it relates. Therefore, deficiencies must be made up from principal.  Under current law, trust assets can be distributed in kind to pay the annuity without causing capital gains taxes to be paid on the distributed property.

IRS regulations also prohibit the Donor from loaning the GRAT funds with which to make the annuity payment.

Question 31

Can an interest in a closely held business be transferred to a GRAT?

Accepted Answer

Yes. The GRAT can be an effective method of &ldquo;freezing&rdquo; the value of the business.  It can also minimize any risk from a valuation of the business interest transferred to the GRAT that is challenged by the IRS. For example, if a 55 year-old business owner&rsquo;s interest in his business is valued at the amount of the owner&rsquo;s remaining gift tax exemption (assume $5,000,000), the business owner may be able to make an outright gift of the interest to his children and avoid gift tax by using his lifetime exemption.  But if the value of the interest is doubled ($10,000,000) upon audit of the business owner&rsquo;s gift tax return, gift tax will be due equal to the gift tax rate multiplied by the amount of the gift that exceeds the business owner&rsquo;s remaining gift tax exemption (in our example, the additional gift tax would be $2,000,000).  If the interest is instead transferred to a &ldquo;zeroed-out&rdquo; GRAT to pay him for 20 years an annuity equal to 7.6211% of the initial value of the property contributed to the trust ($762,113), then assuming an IRS interest rate of 4.4%, the value of the taxable gift will be $10.48.  If the value of the business interest is increased upon audit by the IRS, the annuity payments required to be paid to the Donor would increase, but there would be no appreciable increase to the taxable gift. That being said, because there is an absolute obligation to make the annuity payment every year, it is important to fund the GRAT in a manner that will preserve the ability to make these payments.. In other words, funding a GRAT with illiquid or difficult to value assets will be more complicated.

Question 32

What are the costs of managing a GRAT?

Accepted Answer

The costs of the GRAT include attorneys&rsquo; fees for preparing the trust agreement and the gift tax return, and some cost if professional assistance is required in making certain the annuity payments are made correctly.

Question 33

What is a grantor trust?

Accepted Answer

A grantor trust, also known as an &ldquo;intentionally defective&rdquo; grantor trust, is a trust which requires the grantor to report the income generated by the trust assets on the grantor&rsquo;s individual income tax return.

Question 34

What are the advantages of grantor trusts?

Accepted Answer

Many gifting vehicles are intentionally designed as grantor trusts so that the grantor can continue to bear the income tax burden associated with assets that have been removed from the grantor&rsquo;s estate through a completed gift.  In short, the gift by the grantor is complete for gift tax purposes but not for income tax purposes.  This allows the trust property to grow inside of the grantor trust without the drag of an income tax burden.  Thus, grantor trust status is a powerful tool that a family can use to allow previously gifted trust assets to grow undiminished by taxes.  Under current law, the payment of taxes by the grantor is not considered a gift.

Question 35

What gives a trust grantor trust status?

Accepted Answer

There are many administrative &ldquo;defects&rdquo; that can be used to intentionally trigger grantor trust status, but among the most popular are the ability for the grantor to &ldquo;swap&rdquo; assets with the trust, the ability of the trust to make premium payments for a life insurance policy on the life of a grantor, and the appointment of a Trust Protector who has the right to add beneficiaries to the trust.

Question 36

What is an installment sale?

Accepted Answer

An installment sale in the estate planning context is usually structured as a sale for a Note which provides for payments of interest only for a term of years with a balloon principal payment at the end of the term.  This technique is useful to transfer investments or business interests to the next generation while simultaneously providing income to the seller.  This is also useful if the buyer, usually a descendant of the seller, does not have the financial resources to purchase the interest with cash, or if the buyer/descendant cannot or will not obtain outside financing.

Question 37

What are the basics of an installment sale to a grantor trust?

Accepted Answer

The grantor sells assets to the Trustee of an irrevocable trust.  The Trustee will pay for the interest by issuing a promissory note for the purchase price. The Trustee often does not make any down payment for the sale.  Prior to the sale, the trust should either have its own assets or be &ldquo;seeded&rdquo; to provide enough trust assets to equal at least 10% of the property being purchased.  If the assets in the trust are not sufficient for the transaction to be considered an arm&rsquo;s-length sale, the Internal Revenue Service (&ldquo;IRS&rdquo;) could argue that the sale is really a contribution to the trust with a retained income interest, which could cause the entire value of the trust assets to be includible in the seller&rsquo;s estate for estate tax purposes.  In exchange for the interests, the Trustee would give the seller/grantor a promissory note for the value of the interests it receives.

Question 38

What are the advantages of an installment sale?

Accepted Answer

The installment sale offers several benefits:

The grantor pays income taxes on behalf of the grantor trust.

If the trust is designed to be a grantor trust, the grantor pays the tax liability on the annual income generated by the interests held by the trust, as well as the trust&rsquo;s capital gains in the event that the interest were to be sold inside of the trust.  This results in an estate tax benefit because the grantor pays the income taxes on earnings that accrue to the benefit of descendants, but the payment of those income taxes is not treated as a taxable gift under current law.  Having said that, however, the grantor must be willing and able to absorb the demands on his or her personal assets to pay these taxes. 

No gift tax on the sale.

As discussed above, the transfer of the interests to the trust would be structured in the form of an arm&rsquo;s-length sale, i.e., an exchange of an interest for an installment note bearing at least an IRS &ldquo;safe harbor&rdquo; rate of interest (for example, the mid-term rate for notes 3-9 years in November 2023 is 4.69%).  As a result, this transfer should be respected as a sale for fair market value, in which case there should be no gift tax consequences, provided that the fair market value of the asset sold is in fact the same as the face amount of the promissory note.

Removal of appreciation from the taxable estate.

By exchanging a potential growth asset for a non-growth asset (the promissory note), the grantor would be &ldquo;freezing&rdquo; the value of property remaining in the taxable estate for estate tax purposes.  If the interests sold to the trust outperform the interest rate on the promissory note, the transaction enables the grantor to pass that excess amount of value to the trust free of gift and estate taxes.  Further, limiting the annual payments to interest, at least initially, it is easier to shift value to younger generations by deferring the payment of the principal to the maximum extent possible.

Generation-Skipping Transfer (&ldquo;GST&rdquo;) planning.

Property held in a trust may be subject to a GST tax upon the death of the grantor&rsquo;s children and future generations of descendants.  In 2023, the GST exemption is $12,920,000 (less any used for prior lifetime gifts), which means that the grantor can provide for up to $12,920,000 (less any used for prior lifetime gifts) to be held in trusts for the grantor&rsquo;s descendants, without any GST tax being imposed upon the death of each descendant.  If structured as an installment sale, the grantor may immediately allocate her GST exemption to the trust upon its creation (i.e., the initial &ldquo;seed money&rdquo;).  By allocating GST exemption to any transfer made to the trust upon its creation, any assets purchased by the trust (including the transferred interests) would be GST-exempt.  This provides a better ability to leverage the use of GST exemption to maximize GST tax avoidance for successive generations.

Question 39

What are the disadvantages of a traditional installment sale?

Accepted Answer

An installment sale has the following primary disadvantages:

The sold assets will not receive stepped-up basis in the event of your death.

If you were to hold your interest in the asset until your death, such interest will be included in your taxable estate and will receive a step-up in cost basis at that time to its then fair market value.  In that case, a sale of the interest shortly after your death would not generate capital gain.  However, by selling your interest in the asset to a grantor trust (and thereby removing the interest from your estate), the property will not obtain the step-up in cost basis upon sale or at your death.  Thus, a subsequent sale of the interest by the Trustee would generate a capital gains tax even if the sale occurs immediately after your death.  Despite this concern, if the maximum federal estate tax rate is much higher than the capital gains tax rate, the advantages outlined above (i.e., the avoidance of gift tax on the transfer and on the future income tax liability paid by you, the avoidance of estate tax on future appreciation, and the leverage of your GST Exemption) may outweigh this disadvantage.

Promissory note included in your taxable estate.

If you die before the promissory note is satisfied in full, it would be an asset held by you and included in your taxable estate.

Reversal of traditional IRS income tax position.

Even if you sold your interest in the asset to a grantor trust, the IRS may claim that the sale results in capital gain to you at the time of the transaction.  If the IRS successfully took this position, you would recognize a capital gain on the sale of the interest at the time of transfer to the trust.

Estate may recognize capital gain.

If you die holding the promissory note, your estate may recognize capital gain on any unpaid principal. 

IRS may treat the entire transaction as a gift.

The IRS may assert that the transaction was really a gift and not a sale.  To avoid this risk, it is important that there is no pre-arrangement to forgive any interest or principal due under the promissory note, and the value of what is sold should be supported by the appropriate valuation, including, possibly, an appraisal.  The transaction should be structured like a commercial or &ldquo;arm&rsquo;s length&rdquo; transaction. 

IRS may treat a portion of the transactions as a gift.

Even if the IRS is unsuccessful in attacking the entire transaction as a gift as described above, the IRS could attack the transactions on another front by asserting that the fair market value of the transferred interests is greater than the fair market value of the promissory note given back to you.  The IRS could argue that (1) the promissory note was not worth its face value because the trust was not a creditworthy borrower or (2) the appraised value of the interest in the asset was simply too low.  It is important to support the sales price with an appropriate valuation or appraisal.

Sold interests may under-perform the IRS interest rate.

In this case, you will have actually increased the size of your estate and decreased the value sold to the trust because the interest and principal payments on the promissory note will exceed the value of the interests sold to the trust.  Of course, this is always a risk that needs to be taken into account, and is difficult to predict or plan for.

Absence of express statutory sanction.

The installment sale to a grantor trust is a technique that does not have an express statutory sanction.

Question 40

Are there income tax consequences of using a traditional installment sale?

Accepted Answer

Often in this type of planning, the sale is structured to be made to a trust that is designed as a &ldquo;grantor trust&rdquo; (that is, a trust the assets of which are treated as being wholly-owned by the grantor for income tax purposes).  If the trust is a grantor trust, the sale of the interests would be treated as if you were selling the interest to yourself.  As a result, you could take a reporting position that no capital gain is recognized when the trust buys the interests.  For the same reason, the trust&rsquo;s interest payments under the promissory note should not be treated as income to you. 

If the trust is treated as a separate &ldquo;person&rdquo; for income tax purposes (referred to as a &ldquo;nongrantor trust&rdquo;), the sale would be a taxable event for income tax purposes and income reported under the installment method.  Further, the trust would be liable for any income or capital gains earned by it, which, generally, are taxed at the highest rates that apply to individuals because the tax brackets that apply to trusts are very compressed.

Question 41

What is the primary "trap for the unwary" related to the management of a family limited liability company or limited partnership?

Accepted Answer

Family limited liability companies and limited partnerships (referred to herein as &ldquo;family companies&rdquo;) are ordinarily formed in order to take advantage of a number of tax and asset protection opportunities.  However, those opportunities are jeopardized if the family company fails to adhere to a number of legal formalities.  In sum, these formalities revolve around a single concept, which is the importance of respecting the family company as an operating business.  Once a family company is in place, it is critically important to convey to the family members that the failure to respect the formalities associated with the operations of the company as a business imperil the very objectives that led to the family company&rsquo;s formation.

Family members must understand at the outset that the family company cannot operate as a &ldquo;piggy bank&rdquo; for members of the family.  Assets which will be needed in order to satisfy family expenses unrelated to the business of the family company should not be contributed to the company.  Once the company is in place, the owners must continue to adhere to this principal and avoid the temptation to commingle personal funds with the family company or add assets unrelated to the business to the family company.  Most importantly, family company funds should only be used to pay company expenses; company funds must not be used to pay personal expenses of family members, or be tied to a pattern of distributions which correlates with the expenses of individual family members.  Distributions to owners should be made following a pattern consistent with other for-profit businesses.

The family business must be identified as a business when interacting with the public.  Accounts for the business must use the tax identification number and name of the family company, and not the name or Social Security number of an individual family member.  Correspondence related to the business of the family company should appear on company letterhead, to clearly distinguish the business of the company from the business of individual family members.

A family company should keep scrupulous records of its activities.  In addition to formation documents, the company should retain copies of bank statements and regular expense and income activity, including receipts.  Experienced professional advisors should be in place to ensure that this recordkeeping function is satisfied.  An experienced accountant should prepare tax returns, issue Schedule K-1s to the owners on a timely basis, track capital account changes and maintain books and records.  An attorney should supervise the retitling of assets in the name of the family company, review the corporate records to confirm that they are in good order, attend to annual state filings and prepare annual written consents to memorialize decisions made in periodic meetings.

Question 42

What is a family bank?

Accepted Answer

Most wealthy individuals who are receiving tax advice are fully utilizing their $18,000 annual exclusions from the gift tax in order to make gifts to their children and any grandchildren.  For the family member who would like to provide for siblings, nieces or nephews or more remote family members, a logical next step is to use the annual exclusions available with respect to that group of individuals in order to establish an Estate Reduction Trust for their benefit, sometimes referred to as a &ldquo;family bank.&rdquo;  The purpose of the family bank is to remove assets from the estate of the donor by placing them in a trust for the benefit of specified family members.  That trust, which is ordinarily structured as an intentionally defective grantor trust for income tax purposes, is frequently used to provide for the needs of non-lineal family members, including weddings, educational expenses, down payments for homes, etc.  The Trustees can have complete discretion over the circumstances under which distributions from the family bank will be made, and, it is important to note, this technique is not limited to benefiting only family members.  Some wealthy families have more than one family bank, including separate family banks for different branches of their family and/or a family bank for non-relatives who are close friends of the family.

Question 43

What factor should trigger a discussion about a dynasty trust?

Accepted Answer

A wealthy family will ordinarily begin to consider a Dynasty Trust when they have reached the point at which they believe that their assets are likely to last beyond the lives of their children.  The dynastic aspect of a Dynasty Trust ordinarily takes advantage of two concepts: (i) the statutes of one of the more than two dozen states (among  the more popular jurisdictions are Connecticut, Alaska, Delaware, Florida, Nevada and South Dakota) that allow trusts to last for 360 years or more, and (ii) the application of exemption from the generation-skipping transfer tax to property held in the Dynasty Trust.  By appointing a Trustee in one of the favorable jurisdictions in order for the Dynasty Trust to have a nexus in that jurisdiction, and then allocating exemption from the generation-skipping transfer tax to trust property, trust assets can be made available to multiple generations without being exposed to the estate tax or generation-skipping transfer tax.

A Dynasty Trust can be funded at the donor&rsquo;s death by the donor&rsquo;s Will and Revocable Trust.  However, if the donor&rsquo;s circumstances allow, a powerful planning opportunity is to fund the Dynasty Trust during the donor&rsquo;s life, thereby allowing the gifted property to appreciate in value outside of the donor&rsquo;s taxable estate.  Moreover, the Dynasty Trust can be structured as a &ldquo;grantor trust&rdquo; for income tax purposes, so that the donor can continue to bear the income tax burden for the Dynasty Trust property during the donor&rsquo;s life.  Finally, funding the Dynasty Trust during the donor&rsquo;s life enables the donor to leverage the use of the donor&rsquo;s exemption from the generation-skipping transfer tax.  The donor can fund the Dynasty Trust with assets that have unusual potential to appreciate or have subjective value (for example, an interest in real estate, art or a business) that a formal written appraisal might not capture.  In fact, the best candidate for a Dynasty Trust is the donor who not only can afford to give valuable assets to a Dynasty Trust, but one who is holding an asset with substantial potential to appreciate.

Question 44

Why would a donor ever elect to pay gift taxes?

Accepted Answer

The average donor has such an aversion to voluntarily paying taxes of any kind that it is frequently much more effective to illustrate the tax-efficiency of intentionally paying gift taxes using simple numbers before describing the underlying concept.  Assume the following fact pattern: A client with $7 million of cash, who has used up all of her lifetime exemption from the Federal gift tax, decides that she would like to make a gift of $5 million to her children during her life.  She makes the gift, resulting in a gift tax payment of $2 million.  Suppose the same client instead decided to retain all of the same $7 million until her death, providing in her Will that it will pass to her children.  The inclusion of the $7 million in her estate would generate an estate tax of $2.8 million so that the children would receive $4.2 million.  This means that the children would receive $800,000 less as a result of the client&rsquo;s decision to retain these funds in her estate rather than giving them to the children during her life.

The $800,000 swing/lost benefit in this example results from the different manner in which estate and gift taxes are calculated.  Estate tax calculations are tax inclusive, meaning that the estate is also paying taxes on the dollars that are used to pay the tax.  Gift tax calculations are tax exclusive, meaning that the donor is not paying tax on the dollars that are used to pay the tax.  The IRS is fully aware of this planning opportunity, which is why tax payments made within 3 years of death are included in a decedent&rsquo;s estate.  However, for the donor who is inclined to make a gift and likely to survive that gift by 3 years, electing to pay gift taxes can result in a meaningful benefit for the donor&rsquo;s beneficiaries.

Question 45

Is there a simple way to provide a benefit for children without making a taxable gift?

Accepted Answer

Some individuals wish to provide a benefit to their children without making a taxable gift, particularly if they have used up all of their lifetime exemption from the Federal gift tax.  For wealthy families, this wish frequently results from a desire to see children enjoy the fruits of their parents&rsquo; financial success during the lives of the parents.  Loans to the children memorialized with promissory notes are an attractive option in this situation, particularly in a low interest rate environment.  A loan enables a parent to move a substantial amount to a child, and may require that the child only pay interest on the principal balance during the term of the loan with a balloon payment of principal at the end of the term.  It is important for families to adhere to the terms of the promissory note in order to support the expectation that the loan will be repaid.  This means that the child will have unlimited access to and control over the loaned amount, so that it is frequently perceived as an &ldquo;advance&rdquo; on an inheritance.  The promissory note can be refinanced if the parent survives the term of the loan, and the loan may be distributed to the child as a portion of the child&rsquo;s inheritance at the death of the parent.  From a tax efficiency standpoint, the loan operates as a partial freeze of the value of the parent&rsquo;s estate, because the loaned funds are likely to appreciate at a higher rate than the interest rate of the loan, but the real value of this simple technique is the parent&rsquo;s enjoyment in seeing the children&rsquo;s use of the loaned funds.

Question 46

What unique considerations apply to a trust that will hold an interest in a family company?

Accepted Answer

The primary concern of most business owners gifting an interest in a family company into a trust is the identity of the Trustee who will exercise voting control over the shares owned by the trust.  Obviously, the owner can appoint the Trustee who will exercise control over all of the trust activity, but it is sometimes difficult to find one individual who is the right person to exercise voting power with respect to the family company, manage other trust investments, communicate with family members concerning distribution decisions and ensure that the trust files income tax returns and keeps clear records.  One option that appeals to many business owners is to divide the Trustee role into three distinct categories to address the different skill-sets required to handle these different responsibilities.  An Investment Trustee can be responsible for managing the trust assets, which would include exercising voting power associated with the family company.  A Distribution Trustee will track the circumstances of the trust beneficiaries and exercise discretion concerning distributions.  Finally, an Administrative Trustee will retain trust records, ensure that the trust files income tax returns and attend to other ministerial functions.

This division of labor between different Trustee roles corresponds with another objective of many business owners who transfer an interest in a family company into a trust: asset protection planning.  The complete discretion of the Trustee of a trust over distributions to trust beneficiaries makes a trust structured in that manner an unattractive target for a claim by a divorcing spouse or other creditor.  This layer of protection can be further enhanced by establishing the trust in a jurisdiction which has a favorable statutory framework for asset protection planning.  Appointing an Administrative Trustee based in a jurisdiction with a desirable asset protection regime is a common manner in which to gain access to additional protection from claims against family members.

Question 47

What steps will a family business ordinarily take in order to insulate itself from the prospect of non-family owners?

Accepted Answer

Most owners of family companies fear the possibility of a non-family member becoming an owner of an interest in the family company.  Even if that owner is merely an assignee with no voting power, she will have the right to inspect company records.  To protect against this prospect, the agreement that governs a family company should give the existing owners a right of first refusal which is triggered in the event of a proposed transfer to an individual who is not a member of the family.  In the event of a proposed transfer, this provision would permit the existing owners to purchase the interest at issue under similar terms or for its fair market value.  The agreement would ordinarily provide that the right of first refusal, if exercised, would result in a sale to the existing owners under favorable terms..  For example, many of these provisions provide that the sale will occur in conjunction with a balloon promissory note using a 15 year term with the lowest permissible interest rate.  This kind of a provision serves the dual purpose of discouraging sales of interests in the family company and, should such a potential sale arise, making the purchase under the right of first refusal a palatable financial option for the existing owners.

Question 48

What is a charitable lead trust (CLAT)?

Accepted Answer

A charitable lead trust is a trust that makes annual or more frequent payments to one or more charities for the charitable term.  The charitable term can be a fixed number of years or it can be based on the lifetime of the donor or certain related individuals.  At the end of the charitable term, any property remaining in the lead trust is distributed to or held in further trust for individual beneficiaries (typically the donor&rsquo;s children or grandchildren).  The amount paid to charity each year may be an annuity (a stated dollar amount) or a unitrust interest (a stated percentage of the value of the trust assets, as calculated annually).  There is no minimum or maximum percentage that must be paid to charity.  The percentage or amount to be paid to charity can remain the same each year or can be designed to increase over the charitable term.

Question 49

Why would a CLAT be of interest to me?

Accepted Answer

A charitable lead trust can be used to make a future gift to individuals while satisfying the donor&rsquo;s charitable goals.

When the donor funds a lead trust, he or she makes one gift to charity that is deductible for gift or estate tax purposes and a second, taxable, gift to the individuals who will receive the trust property when the charitable term ends.  The value of the charitable gift is the present value of the stream of payments to be made to charity over the charitable term, determined by using the lowest applicable federal discount rate in effect at the time the trust is funded.  The value of the taxable gift to the individual beneficiaries of the lead trust is the difference between the value of the property used to fund the trust and the value of the charitable gift.

The applicable federal discount rate used to value the donor&rsquo;s taxable gift to the lead trust is the government&rsquo;s assumption as to the expected rate of return for the trust&rsquo;s investments at the time of funding.  The potential for the trust&rsquo;s actual investment performance to exceed the government&rsquo;s assumption presents an opportunity for the donor to make a tax-advantaged gift to individuals by using a charitable lead trust to make the donor&rsquo;s charitable gifts.  If the annual rate of return on a charitable lead annuity trust&rsquo;s investments exceeds the federal discount rate used to value the charitable gift to the trust, all of the excess investment return will accrue for the benefit of the individual beneficiaries at no further gift or estate tax cost.  With a charitable lead unitrust, the charity and the individual beneficiaries share the benefit of the excess investment return based on their relative interests in the trust.

The benefits of using an annuity trust to transfer property to individuals must be weighed against the generation-skipping transfer tax advantages of using a unitrust when grandchildren or more remote descendants are the beneficiaries.

A charitable lead annuity trust can be structured to &ldquo;zero out&rdquo; the taxable gift so that no portion of the donor&rsquo;s lifetime exemption from gift tax is used and no gift or estate tax liability is incurred in connection with the lead trust.  To zero out the taxable gift, the donor selects a charitable term and payment amount that, using the applicable federal discount rate, creates a charitable gift that is equal in value to the value of the entire property used to fund the lead trust.  If the trust&rsquo;s investments earn an annual rate of return that exceeds the federal discount rate, assets will be distributed to the individual beneficiaries at the end of the charitable term at no gift or estate tax cost.  A charitable lead unitrust can also be structured to reduce, but not to &ldquo;zero out,&rdquo; the taxable gift.

Question 50

Is there an income tax benefit to creating a CLAT?

Accepted Answer

Generally, when a charitable lead trust is created for gift or estate tax planning purposes, it is not structured to qualify for a federal income tax charitable deduction.

A lead trust gift that does not qualify for an income tax charitable deduction can still be useful to the donor for income tax purposes.  Although the donor receives no income tax charitable deduction for funding the trust, the trust&rsquo;s income will not be includible on the donor&rsquo;s tax return.  For a donor whose charitable deductions already exceed the amount he or she can use to offset taxable income, this type of lead trust can generate an indirect tax deduction for the donor because the trust&rsquo;s income will be taxed to the trust, instead of the donor.  Although the lead trust will report and pay tax on its own income, it is allowed an unlimited deduction for income it distributes to charity.  Generally, if the lead trust&rsquo;s taxable income each year does not exceed the amount it pays to charity for the year, the trust will not pay any income tax.

If the donor wishes to receive an income tax deduction for funding a charitable lead trust, the donor must create a special kind of trust that is treated as if it were owned by the donor for income tax purposes.  This means that in order to claim an income tax deduction for funding a lead trust, the donor must be willing to report all of the trust&rsquo;s annual income and gains on his or her individual tax return.  The donor&rsquo;s only income tax deduction will be for funding the trust.  The donor will not be able to claim any additional deductions when the trust makes its payments to charity each year.  If the donor dies during the charitable term, a portion of the tax deduction benefit the donor received from funding the lead trust will be included as income on the donor&rsquo;s final income tax return.

This type of lead trust can be useful when the donor is in an exceptionally high income tax bracket in the year the donor funds the trust and expects to be in a lower income tax bracket in subsequent years when the trust&rsquo;s income will be taxed to the donor.  The donor&rsquo;s deduction for funding the trust is equal to the value of the charitable gift, subject to certain limitations that are based on the type of property used to fund the trust, the status of the charity as a public charity or a private foundation, and the rules limiting how much income the donor can offset with a charitable deduction in any year (the maximum amount is 30% of adjusted gross income).

In appropriate planning situations, a &ldquo;super charitable lead trust&rdquo; can be created to combine the income, gift and estate tax advantages of the two types of charitable lead trusts.  The structure of a super lead trust is more complicated because the donor must create a trust that will be treated as if it were owned by the donor for income tax purposes, but do so in a manner that does not cause the trust to fail to achieve its intended gift and estate-tax advantages.  The donor must also be in such a financial position that the donor&rsquo;s obligation to pay tax on the lead trust&rsquo;s income and gains for a number of years (e.g., 10 to 25 years) would be viewed as a tax-planning opportunity rather than a burden.

Please note that the federal discount rate is recalculated each month.  The lower the rate, the easier it is to structure a charitable lead annuity trust that will &ldquo;zero out&rdquo; the taxable gift.  Donors have some planning flexibility because they can use the discount rate in effect in the month they fund a lead trust or the rate that was in effect in either of the two preceding months.

Question 51

What are the basics of charitable lead annuity trust administration?

Accepted Answer

Administration of a Charitable Lead Annuity Trust (the &ldquo;CLAT&rdquo; or &ldquo;trust&rdquo;) involves investing the trust&rsquo;s assets, making timely annuity payments to the Charitable Beneficiary, preparing and filing returns in a timely manner, and accounting for the trust&rsquo;s administration.

Question 52

Do the assets used for funding affect the income tax consequences to you and the administration of the CLAT?

Accepted Answer

If a donor wishes to transfer assets other than cash, cash equivalents and unrestricted publicly traded securities to a CLAT, the donor should review the funding plan with his or her accountant and legal counsel to confirm the income tax consequences of the proposed gift to the donor, as well as the tax and administration consequences to the trust and the trustees of accepting and holding the proposed gift.

Funding the CLAT with appreciated assets will not cause the donor to recognize capital gain, and the unrealized appreciation will not be a preference item for AMT purposes on the donor&rsquo;s income tax return.  However, if the CLAT must pay a large capital gains tax in order to reinvest low basis assets contributed to the trust, it will be harder for the CLAT to make all the required annuity payments and build up property to be distributed to the remainder beneficiaries when the charitable term ends.

Care should be taken to ensure that the funding of the CLAT is not deemed to be an &ldquo;assignment of income&rdquo; by the donor.  If a CLAT is funded with appreciated property that is subject to a binding sales contract or any agreement or understanding under which the trustees are obligated to sell the property to a third party, the donor will recognize gain on his or her personal income tax return when the trust sells the property.  Caution should also be exercised if the donor transfers stock in a closely held corporation during an ongoing tender offer and pending merger that the donor has participated in negotiating and planning.  In such a case, the donor could be deemed to have already converted the stock into a fixed right to receive cash at the time the stock is contributed to the CLAT.

The CLAT does not qualify as a shareholder of S corporation stock.

If the CLAT will hold more than 2% of the ownership interests in any business enterprise (corporation, partnership, other entity), the trustees should consult legal counsel with respect to the application of the excess business holdings rules.

Holding or making investments in entities that are disqualified persons, as well as co-investing with or holding investments in common with disqualified persons, can create a variety of self-dealing problems.  The trustees should review the private foundation self-dealing rules to confirm that the CLAT&rsquo;s investment plan will not give rise to any potential self-dealing issues.

Care should be taken before funding a CLAT with or investing CLAT assets in stock of a donor-controlled corporation, stock subject to a voting trust, or insurance policies on the life of the donor and/or the donor&rsquo;s spouse, and before funding a CLAT with property encumbered by a mortgage or other similar lien.  While there are certain exceptions that may be applicable in a given situation, generally a donor risks that a gift of mortgaged property to a CLAT will generate relief of indebtedness income and be taxed as a bargain sale, be a prohibited act of self-dealing at the time the gift is made and when the CLAT makes payments on the debt, and give rise to debt-financed income as to which only a portion (not more than 50%) can be sheltered from income tax by the annuity amounts paid to charity.

Question 53

Must the trustees be sensitive to certain requirements?

Accepted Answer

To minimize the income taxes that a CLAT must pay, trustees should consider avoiding borrowing and debt-financed investments (mortgaged property, margined securities accounts, partnerships with debt-financed investments) as well as interests in a partnership or other pass-through entity that operates an active trade or business or holds debt-financed property.  Such investments produce unrelated business taxable income or debt-financed income, and annuity payments made to charity will shelter only a portion (up to 50%) of such income from tax.

The CLAT is a taxable trust.  It will be subject to income tax to the extent that its gross income exceeds its deductions.  The trustees must file a federal fiduciary income tax return (Form 1041) and split-interest trust information return (Form 5227) with the Internal Revenue Service each year.  The trust&rsquo;s Form 5227 (other than Schedule A) will be open to public inspection.  The trustees may also need to file a state fiduciary income tax return depending on the situs of the trust.

The CLAT will be entitled to a charitable deduction each year for the gross income of the trust that is distributed to the Charitable Beneficiary when the annuity payment is made.

The trustees may need to register the trust and file annual reports depending on the situs of the trust.  For example, the trustees of a New York CLAT are required to register the trust within six months of its funding and to file annual reports (Form CHAR004) within six months following the end of each taxable year of the trust with the Charities Bureau of the New York Attorney General's Office.

Annuity payments must be made each year in a timely manner and in accordance with the provisions in the trust document regarding frequency of payments.  Failure to make the payments in a timely manner can give rise to private foundation excise (penalty) taxes.

CLATs are subject to the private foundation excise tax rules under Code section 4945 that prohibit the trustees from making taxable expenditures.  If the charities are named in the trust and their shares are fixed by the terms of the trust, the trustees may simply distribute the annuity amount to the named charities in the shares stated in the trust.

If, however, the trustees have discretion to select the charities to receive the annuity amount or to determine their respective shares of the annuity amount, then the trustees must follow special procedures when making annuity payments in order to avoid incurring a penalty tax and having to try to recover the payments made.  If the trustees document that the charities are 501(c)(3) tax-exempt organizations that have been classified by the IRS as &ldquo;other than&rdquo; private foundations because they are described in Internal Revenue Code section 509(a)(1) or (2) (&ldquo;501(c)(3) publicly supported charities&rdquo;), the trustees may simply pay the annuity amount to those charities.  If, however, the trustees determine that a charity is not a 501(c)(3) publicly supported charity (for example, a 501(c)(3) charity that is classified as a private foundation, a private operating foundation, or a 509(a)(3) supporting organization), then the trustees must obtain certain additional documentation required by the IRS and/or use a grant agreement and require annual grant reports from the charity in connection with any annuity payments made to that charity.

The trustees may wish to prepare informal accountings and request that the beneficiaries release them from personal liability in connection with the trust&rsquo;s administration.  The trust document describes the information to be provided in an informal account.  The trustees may opt to instead file periodic court accountings, with notice to the appropriate state&rsquo;s Attorney General&rsquo;s office (which would represent all charitable beneficiaries), in order to ensure that the trustees are effectively released from personal liability in connection with their administration of the trust.

Question 54

What is a Charitable Remainder Unitrust (CRUT)

Accepted Answer

The Charitable Remainder Unitrust (&ldquo;CRUT&rdquo;) can be an effective means for diversifying highly appreciated assets while avoiding or postponing capital gains tax, increasing cash flow during your lifetime, obtaining a current income tax deduction and providing for your favorite charities upon your death.  The concept is extremely simple:  you transfer a highly appreciated asset to a trust, retaining the right to receive payments from the trust for your life.  On your death, the charities you wish to benefit receive the assets remaining in the trust.  The trust is included in your taxable estate, but qualifies for the estate tax charitable deduction.

The tax advantages of the CRUT come primarily from its tax-exempt status, which allows the trust to sell appreciated assets without paying any capital gains tax, and from the income tax deduction generated when you fund the trust.

Question 55

Is an income tax reduction available for implementing a Charitable Remainder Unitrust?

Accepted Answer

Your income tax deduction for funding a CRUT is limited to the present value of the charity&rsquo;s right to receive the assets remaining in the trust at your death.  If you fund the CRUT with assets that, if sold by you, would generate a long-term capital gain, your income tax deduction generally will be calculated using the fair market value of the appreciated assets.  Nevertheless, you will not be required to recognize any gain when you fund the trust, either for regular income tax or for AMT purposes.  If your CRUT will benefit a private foundation, then your deduction will be calculated using your basis in the assets contributed to the CRUT unless you fund the CRUT with &ldquo;qualified appreciated stock&rdquo; (basically, unrestricted publicly traded securities).  There are &ldquo;percentage limitation&rdquo; rules that limit how much of your adjusted gross income can be sheltered from income tax in any year with a charitable deduction.  Excess deductions can be carried forward for up to five years.  It is important to work with your accountant to confirm the actual tax benefits that can be achieved by funding a CRUT with a particular asset.

The value of the charitable remainder interest in the CRUT must be at least 10% of the value of the assets contributed to the trust.  The value of the charitable interest is a function of (i) the length of time that payments will be made to you; (ii) the percentage of the trust assets that will be distributed to you each year, and the frequency with which payments will be made during the year (monthly, quarterly, semi-annually, or annually); (iii) the fair market value of the property being contributed to the trust at the time of the contribution; and (iv) the current IRS actuarial tables and interest rates used to calculate future values.

Question 56

What provisions may be included in the CRUT?

Accepted Answer

The CRUT trust document may allow for the following:


	The trust would make distributions to you for life, and upon your death, the remaining trust property would be transferred to one or more U.S. charities.
	During the term of the CRUT, you would receive a set percentage (at least 5%, but not more than 50%) of the fair market value of the trust&rsquo;s assets, as redetermined each year (the &ldquo;unitrust amount&rdquo;).  The unitrust amount must be paid in accordance with the terms of the trust, that is, in monthly, quarterly or semi-annual installments, or annually.  The CRUT may not make any other distributions to you.
	When you receive the unitrust amount, it will be taxable to you under the Four Tier system applicable to CRUTs, which treats the unitrust amount as paid first from the trust&rsquo;s ordinary taxable income (from the current year and any undistributed ordinary taxable income from prior years), next from the trust&rsquo;s net capital gains (current and prior years), and then from the trust&rsquo;s tax-exempt income.  If the amount distributed to you exceeds all the trust&rsquo;s current and previously undistributed income and gains, the excess will be a tax-free return of principal.
	You can be the sole Trustee of your CRUT.  If your CRUT holds assets that are difficult to value (restricted stock, closely-held stock, real estate, partnership interests), you must either appoint an Independent co-Trustee to value those assets each year or obtain a qualified appraisal of the hard-to-value assets each year.

Question 57

What are the tax implications of creating the CRUT?

Accepted Answer

If you and/or your spouse are the beneficiaries of the CRUT, the objective is to diversify highly appreciated assets in a tax-efficient manner and to secure an income tax deduction for funding the trust.  Your retained interest in the trust is not a taxable gift.  If your spouse has an interest in the trust, then gift and estate tax deductions will be allowed for your spouse&rsquo;s interest as long as your spouse, or you and your spouse, are the only non-charitable beneficiaries and your spouse is a U.S. citizen.  Gift and estate tax deductions also will be allowed for the charitable remainder interest in the trust.

If someone other than you or your spouse is the beneficiary of the CRUT, the objective will be to benefit that individual with a stream of payments over the individual&rsquo;s life.  The charitable remainder interest in the trust will reduce your taxable gift to the beneficiary of the CRUT, but you will use a portion of your gift tax exemption and/or will pay gift tax on that gift.  When you use a CRUT to make a taxable gift, it is important to structure the trust in a manner that will avoid having it included in your taxable estate should you predecease the beneficiary.

Question 58

Who can be the beneficiary of the CRUT?

Accepted Answer

Any individual can be a lifetime beneficiary of a CRUT, as long as the value of the charitable remainder interest in the CRUT is at least 10% of the value of the assets transferred to the trust.

Any individual, class of individuals (whether or not then living) or any entity (trust, corporation) can be the beneficiary of a CRUT for a term of up to 20 years.

CRUTs that are funded during the donor&rsquo;s life generally benefit the donor and/or the donor&rsquo;s spouse.

CRUTs that are funded upon the donor&rsquo;s death often benefit the donor&rsquo;s spouse or children.

If there are multiple beneficiaries, their interests in the CRUT may be successive interests or joint interests.

If a CRUT benefits both the spouse and other family members, the spouse&rsquo;s interest will not qualify for the marital deduction for gift or estate tax purposes.  In such cases, it may be preferable to create a marital trust for the spouse, followed by a CRUT for the children, securing a marital deduction for funding the marital trust, and delaying and reducing the transfer tax to be paid at the spouse&rsquo;s death for the children&rsquo;s interest in the CRUT.

Question 59

How long can the CRUT last?

Accepted Answer

A CRUT can last for the lifetime of a beneficiary or the lifetimes of multiple beneficiaries, or for a term of years (not to exceed 20), as long as the value of the charitable remainder interest in the CRUT is at least 10% of the value of the assets transferred to the trust.

Question 60

What are the costs of administering a CRUT?

Accepted Answer

Depending on who serves as trustee and handles the investment of the trust&rsquo;s assets, the CRUT may have to pay trustee fees and/or investment management fees.  The trustee must file an information return for the trust each year, and must prepare a Schedule K-1 informing the beneficiary how to report the unitrust payments for income tax purposes.  Usually there is no court supervision or associated costs  involved during the beneficiary&rsquo;s life.  Some states (for example, New York) require a court accounting to be filed after the interests of the non-charitable beneficiaries expire.  There also are costs involved in establishing the trust, such as fees to prepare the trust agreement and gift tax return.

Question 61

What property should I use to fund a CRUT during life? What property should I use to fund a CRUT at death? What property should I not use?

Accepted Answer

Generally, funding a CRUT during life with low basis assets that if sold would produce a long-term capital gain will produce the greatest benefit for the donor.  If the CRUT will benefit a private foundation, it is generally preferable to fund the CRUT with qualified appreciated stock (unrestricted publicly traded securities that if sold would produce a long-term capital gain).

When funding a CRUT at death, it may be advantageous to use assets that are subject to income tax, such as a retirement account.

You should avoid funding a CRUT with mortgaged property, property in which you will continue to own an interest (property that you would own with the CRUT as tenants in common), interests in partnerships that hold debt-financed property or that operate an active trade or business, S corporation stock, assets that are subject to a binding sales contract or any agreement or understanding under which the trustees of the CRUT would be obligated to sell the property to a third party, and during your life, retirement accounts and other assets that would cause you to recognize ordinary income if you transferred them to the trust.  Illiquid assets, life insurance policies, options, and tangible personal property also may present issues.

It is advisable to work with your attorney and your accountant to confirm that your plans for funding a CRUT will produce the desired results both with respect to the income tax consequences of your gift and with respect to the administration of and tax consequences to the CRUT.

Question 62

What are the general administration concerns involved with administering a CRUT?

Accepted Answer

Administration of a Charitable Remainder Unitrust (the &ldquo;CRUT&rdquo; or &ldquo;trust&rdquo;) involves investing the trust&rsquo;s assets, revaluing them annually, making timely unitrust payments to the beneficiaries, preparing and filing returns in a timely manner, providing the beneficiaries with tax information regarding their unitrust payments, and accounting for the trust&rsquo;s administration.

Question 63

What type of assets should be used to fund the CRUT?

Accepted Answer

Funding a CRUT with appreciated property generally produces the greatest income tax benefit for the donor.  A donor does not recognize capital gain, for regular income tax, AMT or net investment income tax purposes, when he or she funds a CRUT with long-term capital gain property (appreciated property that, if sold by the donor, would have produced a long-term capital gain).  Since the CRUT is a tax-exempt trust, the trustee can sell the appreciated property without incurring any tax liability and re-invest the entire proceeds.  The beneficiary of the CRUT will be taxed on the capital gain from the trust&rsquo;s sale only when and to the extent that such gain is received by the beneficiary as part of a unitrust payment.  This deferral, and possibly avoidance, of tax on the capital gain makes it advantageous for income tax purposes to fund a CRUT with highly appreciated long-term capital gain property during life.

Question 64

Is it possible to make gifts to a charity using an IRA?

Accepted Answer

Yes. For individuals 70&frac12; or older, this is yet another way to make charitable contributions in a tax efficient manner.  These donors may make direct charitable gifts from an IRA of up to $105,000 annually to public charities.  This distribution to charity would not be reported as taxable income on the donor&rsquo;s federal income tax return.  For those donors who have reached age 73, these direct charitable gifts count towards the account owner&rsquo;s required minimum distribution for that year.  Donor advised funds, supporting organizations and most private foundations are ineligible donees, but private-operating and pass through (conduit) foundations are allowed.  While there is no charitable deduction for IRA distributions, this method avoids tax on otherwise taxable income.  A donor may also make a one-time gift of up to $53,000 to a split-interest gifting vehicle, such as a charitable gift annuity or charitable remainder trust.

Donors must be mindful of several rules to ensure their distribution is not taxed as income.  Only distributions made on or after reaching age 70&frac12; will avoid taxation as income, so donors should make sure to wait until they have actually reached 70&frac12; before making the distribution.  Distributions from most IRAs qualify for this tax-free treatment.  Distributions from employer-sponsored retirement plans (like SIMPLE IRAs and simplified employee pensions (SEPs)), profit sharing plans, 403(b) plans, 401(k) plans or Keoghs do not qualify for this tax-free treatment.  In addition, any charitable distribution from an IRA must be made directly by the IRA&rsquo;s administrator or trustee to a qualified charity and cannot be distributed to the donor first.

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