Wednesday February 21, 2024
Case of the Week
Closing a Gift of Real Estate with Little Time Left on the Clock - Year End Gifts - Part 1
Case:Gregory, 60, is a very control-oriented businessman. In fact, his business philosophy is best summed up as “my way or the highway.” While sometimes difficult to work with, Gregory nevertheless has achieved substantial business success in his life. His quick decision-making skills and solid commitment to a plan has catapulted his company onto the Fortune 1000 list. It seems Gregory’s “way” proved financially fruitful over the past 20 years.
Gregory recently attended a seminar on charitable remainder trusts (CRTs) with his attorney, Bob. After hearing about the tax benefits and increased income potential of a CRT, Gregory turned to his attorney and exclaimed, “I want one of those Bob – and I want one by year’s end.” The date was December 1.
Gregory is now anxious to create a CRT, because he has a significant tax bill looming over his head. The thought of a nice, large charitable income tax deduction excites him. In addition, Gregory has some investment land that would be perfect for the CRT. The land has appreciated significantly but produces little income. Bob is worried that there is not enough time to create and fund a CRT with real property.
Question:Can Gregory create and fund a CRT with real property? What steps need to be completed? What rules govern the timing of charitable deductions?
Solution:Bob must first draft the CRT. Bob decides to draft a FLIP unitrust, since the trust is being funded with an unmarketable asset. Because Bob has drafted CRTs and has CRT resources in-house, Bob completes the trust document in just one day. Bob names Gregory as trustee to avoid the delay of finding and hiring a third-party trustee. While Gregory may serve as trustee of his CRT, he may not perform the yearly trust valuation while the trust holds unmarketable assets. See Reg. 1.664-1(a)(7). Thus, Bob included a trust provision that requires an independent trustee to perform the valuation. Once the property is sold and the trust holds only marketable securities, Gregory or a successor trustee may perform the yearly trust valuation.
During the remaining time, Bob obtains a tax identification number for the trust. Since CRTs can be drafted with numerous payout percentages and durations, Bob also runs several tax calculations for Gregory. This allows Gregory to elect the best CRT variables, thereby providing him with the maximum tax and income advantages. As a result, Gregory selects a 5% payout FLIP unitrust with a large income tax deduction. Soon thereafter, Bob obtains Gregory’s signatures as both creator of the trust and as trustee.
Next, Bob must transfer the land to the trust. The basic rule is that a gift to a charity is deductible when the property or cash is delivered to a charity. In the case of funding a charitable trust, the gift date will be the date the asset is delivered to the trustee. Because state law normally governs title to property, the delivery is usually complete when the charity has legal ownership of the property. However, in some specific circumstances, there are examples contained in the income tax regulations that supersede state laws. In other words, the transfer occurs when the deed is passed or at the time possession of the benefits and burdens of ownership are transferred to the donee. See Rev. Rul. 69-93.
Generally, legal title to real estate under state law passes when a valid deed is delivered from one party to a second party. While it is permissible to maintain that the property has been transferred by delivery of a deed to the charity, it is always preferable to have the deed recorded at the appropriate county Registrar of Deeds before the end of the year. The recording of the deed bars questions that might be raised about the timing of the transfer.
In this case, the laws of the state where Gregory resides provide that the delivery of a valid deed constitutes a legal transfer. Therefore, Bob simply deeds the property to the trustee of the trust (e.g., “to Gregory, trustee of the Gregory Charitable Remainder Trust”). The transfer occurs on December 28. Thus, for federal tax purposes, the gift was completed on December 28. Accordingly, Gregory is entitled to a charitable income tax deduction for the current year. However, to be safe, the deed is recorded on December 30.
Gregory is thrilled with his new FLIP unitrust and his tax benefits. He is also pleased that Bob began and completed the process before the end of the year. Gregory is now eager to sell the land in the upcoming year. Therefore, Gregory, as trustee, will list the property for sale and begin seeking buyers for the trust’s land as soon as possible.
Published November 17, 2023