Remainder Trusts, Lead Trusts and Life Expectancies

In calculating the charitable deduction for charitable remainder trusts, lead trusts and charitable gift annuities, the age of the noncharitable beneficiary is a key component.  But what about where, due to medical problems, the donor is unlikely to live to his or her full life expectancy?  In general, the IRS actuarial tables must be used in the calculations, unless the measuring life is terminally ill [Reg. §§1.7520-3(b), 20.7520-3(b), 25.7520-3(b)].  An individual is considered terminally ill if he or she “was known to have an incurable illness or deteriorating physical condition such that there is at least a 50% probability that the individual will die within one year.” 

If a charitable lead trust is to last for the life of an individual, rather than for a term of years, the measuring life is limited to the donor, the donor’s spouse, a lineal ancestor or the spouse of a lineal ancestor of all the remainder beneficiaries [Reg. §§1.170A-6(c)(2)(i)(A), 6(c)(2)(ii)(A)].  This is to prevent a “ghoul” or “vulture” trust, where the donor would use as the measuring life an individual with a terminal illness not likely to result in death within a year.  The result was a charitable deduction that bore no relation to the amount the charitable income beneficiary was likely to receive.

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