New IRS Guidance Allows More People to Use Charitable Trusts

Have you heard? More people can now use charitable remainder annuity trusts thanks to new IRS guidance in the form of Revenue Procedure 2016-42, issued recently.

A charitable remainder trust is an irrevocable trust that provides annuity payments to one or more non-charitable beneficiaries, with the remainder passing to charity. Due to certain restrictions, it can be difficult to qualify a charitable remainder trust in a low interest rate environment. For example, the “probability of exhaustion test” precludes qualification if there is more than a negligible chance that the annuity will deplete the trust such that charity receives nothing.

Using the current, August section 7520 interest rate of 1.4 percent, a 5 percent lifetime CRAT for a 73 year-old would flunk the probability of exhaustion test. The new Revenue Procedure, however, allows for an early termination provision in lieu of satisfying the probability of exhaustion test.

A charitable remainder trust may not be right for you; however, if you were interested in establishing a charitable remainder trust but thought it was not possible in the current low interest rate environment, you might wish to revisit this planning technique.