A grantor only qualifies for an income tax charitable deduction upon the creation of an inter vivos, qualified CLAT if the trust is considered a “grantor trust” for federal income tax purposes. While the net income of the trust is included in the grantor’s gross income each year, the grantor who itemizes can deduct the present value of the charity’s income interest in the year of the gift (subject to the 30% limitations for cash, 20% for the capital gain property).
A grantor is treated as the owner of a trust if, among other things, the present value of the grantor’s reversionary interest in the trust exceeds 5% of the trust’s value .
- A grantor must retain one of these the following rights or powers:
- A reversionary interest exceeding the 5% rule
- A power to revoke the trust
- A power to control its beneficial enjoyment
- A right to receive trust income or to have trust income applied in certain ways for the grantor’s benefit (e. g., to discharge the grantor’s support obligations, or to pay life insurance premiums on a policy on the life of the grantor or the grantor’s spouse)
- Certain administrative powers over the trust (e. g., a power to borrow from the trust on “sweetheart” terms)
Below is an application to draft a reversionary grantor charitable lead annuity trust. Although the document is simple to draft there are a number of items a donor should discuss with their own attorney to ensure this trust meets the donor’s objectives.
IRC Sec. 673(a)