Avoiding “too good to be true” charitable structures

Even for accountants, attorneys, and financial advisors, the rules and regulations governing taxation in the United States can become overwhelming if you are not paying attention every day to the developments in your area of practice. (There is even a proposed word to mean “fear of taxes”: forosophobia!)  

The laws governing charitable giving are no exception. A good rule of thumb? If it sounds too good to be true, it probably is.

For example, the IRS has caught on to a charitable remainder annuity trust technique where the taxpayer’s transferred assets are allegedly eligible for a step-up in basis and then sold by the trust (with no recognition of capital gains). Under this dubious arrangement, with the sale proceeds, the trust purchases an immediate, single-premium annuity inside the trust. The income beneficiary of the charitable remainder annuity trust claims that only a small portion of the annuity payment is taxable income on the grounds that the rest of the payment is a return of investment. Although there likely are very few taxpayers and advisors who would attempt to pull off a sketchy strategy like this, the IRS’s position is a good reminder for every advisor that the charitable nature of a transaction does not shield that transaction from IRS scrutiny. 

The IRS’s focus on questionable charitable remainder annuity trusts is also an important reminder that the IRS will strive to unravel even the most complex transactions to discern substance over form. Indeed, transactions in which form overshadows substance are consistently frowned upon by the IRS. From time to time, taxpayers attempt to have their cake and eat it too, which was the situation in a Ninth Circuit case, Moore v. Commissioner. Here, the taxpayer’s estate plan included a clause attempting to set the amount passing to charity so that the amount would match the precise amount needed to avoid taxes. The IRS disallowed the charitable estate tax deduction on grounds that the value passing to charity was not ascertainable because of the formulas and contingencies, citing nearly century-old case law holding that transfers to a charity must be “fixed in fact and capable of being stated in definite terms of money.” 

For more information, check out our blog post on the IRS’s “Dirty Dozen” tax-avoidance traps. 

As always, the Community Foundation for Greater Atlanta is here to help you serve your clients by setting up a charitable fund, providing guidance regarding their charitable giving plan, discussing strategies to maximize their charitable impact, involving multiple generations in their philanthropy, and much more.

For more information, please contact Alison O’Carroll, director and philanthropic counsel, at 404.333.0421 or aocarroll@cfgreateratlanta.org.