January 25, 2001 | Read Time: 2 minutes
By ELIZABETH SCHWINN
The Internal Revenue Service has issued final rules aimed at closing down a type of charitable lead trust in which gravely ill people are exploited to help wealthy ones save on taxes. The revenue service relaxed some of the restrictions it had suggested when it first proposed the rules last year.
The rules aim to block so-called “vulture” trusts, a version of charitable lead trusts.
In a typical charitable lead trust, donated assets are invested and a percentage is paid to charity until the donor’s death, after which the remainder goes to the donors’ heirs. Because the trust benefits charity, donors get an income-tax break when they set up the trust, which is calculated by using actuarial tables that gauge the life expectancy of the person on whom the trust is based. The greater the amount of trust assets that are expected to flow to charity, the larger the donor’s tax deduction.
Creators of vulture trusts found a way to tilt the odds in their favor by designating a young but gravely ill person for the trust. When the ill person dies, payments to the charity stop prematurely. Most of the trust principal passes to the heirs while almost no inheritance tax is paid on the money. Meanwhile, the charity receives far less than the amount of the charitable deduction enjoyed by the donor.
To end that practice, the service narrowly defined the person upon whose life expectancy such a trust can be based.
Under the proposed rules the service issued last April, only donors, donors’ spouses, and parents, grandparents, and other direct predecessors of all those who would benefit from the trust would qualify.
The final regulations expand that group to include the spouses of the parents and grandparents, so that stepchildren can now benefit from the trusts.
Vulture trusts have been prohibited since April 4, 2000, when the I.R.S. issued its proposed rules. Estate-planning experts say that few vulture trusts were ever set up, but that those that were involved large sums of money.
The regulations appeared in the January 5 issue of the Federal Register, which can be found on the Web at http://www.access.gpo.gov/su_docs/aces/aces140.html.
