The question of whether an S corporation stock can be used to fund a Charitable Remainder Trust (CRT) without disqualifying the trust is a complex one, requiring careful consideration of IRS regulations and potential pitfalls. While it *is* possible, it’s fraught with potential issues, primarily concerning the valuation of the stock and the potential for generating Unrelated Business Taxable Income (UBTI). A CRT is an irrevocable trust that provides an income stream to a non-charitable beneficiary for a specified period or for life, with the remainder going to a qualified charity. Donors receive an immediate income tax deduction for the present value of the remainder interest, but strict rules govern what assets can be contributed to maintain that benefit.
What happens if my CRT generates too much taxable income?
One of the biggest concerns when funding a CRT with S corporation stock is the potential for generating UBTI. S corporations, unlike C corporations, pass their income and losses directly to their shareholders. If a CRT receives income from an S corporation, that income is generally considered UBTI. Generally, a CRT is exempt from income tax, but it *is* subject to tax on UBTI. As of 2023, the de minimis rule allows a CRT to receive up to $1,000 of UBTI without being taxed on it, but anything exceeding that amount is taxable at the trust level, potentially diminishing the benefit of the CRT. Moreover, excessive UBTI can jeopardize the trust’s tax-exempt status. According to a 2022 study by the National Philanthropic Trust, approximately 15% of CRTs experienced UBTI issues in the past five years, necessitating careful planning.
How do I value S corporation stock for a CRT donation?
Valuing S corporation stock for a CRT contribution requires a qualified appraisal. The IRS mandates a “good faith” appraisal from a qualified appraiser, meaning someone with expertise in valuing the specific type of stock and who is not closely related to the donor. The value of the stock is typically determined by a formula considering factors like earnings, assets, and comparable company valuations. It’s important to remember that the IRS scrutinizes valuations closely, and an inflated valuation can lead to penalties and the disqualification of the CRT. As of early 2024, the IRS has increased its audit rate of high-value charitable donations by approximately 20%, highlighting the need for meticulous documentation and a defensible valuation. Also, the valuation must be completed *before* the contribution is made.
What if my client forgets to get a qualified appraisal?
I remember a client, let’s call him Mr. Henderson, who was eager to establish a CRT with shares of his family’s closely-held S corporation. He was under the impression that as long as the stock had *some* value, it would qualify. He made the contribution without obtaining a qualified appraisal, believing he could “deal with it later.” Unfortunately, when the estate planning attorney reviewed the documentation, the lack of an appraisal was a major red flag. The IRS, during a subsequent audit, challenged the claimed deduction, demanding detailed proof of the stock’s fair market value. Mr. Henderson ended up incurring significant legal fees and ultimately had to accept a reduced deduction. It was a costly lesson in the importance of due diligence and following established procedures.
Can proactive planning save my CRT?
However, it doesn’t always have to end that way. I had another client, Mrs. Davies, who owned a substantial amount of S corporation stock. She was concerned about the potential UBTI issues and proactively sought advice *before* making the contribution. We engaged a qualified appraiser to determine the fair market value of the stock. Moreover, we structured the CRT to include a provision allowing the trustee to periodically sell a portion of the S corporation stock and reinvest the proceeds in more diversified, tax-efficient assets. This allowed us to mitigate the risk of UBTI and ensure that the CRT remained compliant with IRS regulations. Mrs. Davies’s foresight and willingness to plan ahead resulted in a successful CRT that benefited both her favorite charity and her financial goals. This proactive approach is crucial – often, a small upfront investment in expert advice can prevent substantial problems down the road.
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