January 25, 2001 | Read Time: 2 minutes
By ELIZABETH SCHWINN
In a second set of rules on charitable remainder trusts, the I.R.S. spelled out its prohibition against so-called chutzpah or “full Monty” trusts, named for the technique’s brazenness for sheltering capital gains from taxes.
The trusts were marketed mainly by for-profit financial planners and accounting firms, according to the National Committee on Planned Giving, which had opposed them. Critics had argued that the approach provided little financial benefit to charities and abused federal laws on charitable deductions (The Chronicle, July 15, 1999).
A chutzpah trust uses complicated borrowing and “forward-sales-contract” techniques in an effort to help wealthy donors reduce capital-gains taxes on highly appreciated assets. Donors contribute the assets to a charitable trust, which in turn uses the assets to borrow cash to pay the beneficiaries.
Promoters of the plans claimed that the payments would largely escape taxation because the trust has little or no taxable income since the money used for the repayment is borrowed.
The I.R.S., in its final rules, effectively ignores arguments by promoters of the trusts and says payouts from the trusts to the beneficiaries should be treated as a sale of assets subject to capital-gains tax.
The revenue service provides some reassurances for charities in the final rules by clarifying that it will evaluate payouts on a case-by-case basis rather than assuming them to be part of a chutzpah scheme. In addition, the I.R.S. says that if it does treat a payout as a sale of assets, the money will be not be subject to unrelated-business income tax.
The revenue service also broadened a requirement in the proposed rules that trust payments be made by the end of the year. Now payments made shortly after year-end will be accepted in some circumstances.
The rules on charitable remainder trusts apply to money the trust pays out after October 18, 1999.
The regulations appeared in the January 5 issue of the Federal Register, http://www.access.gpo.gov/su_docs/aces/aces140.html.
