April 20, 2000 | Read Time: 2 minutes
The Internal Revenue Service has issued proposed rules that close down a controversial form of charitable trust in which gravely ill people are exploited to help wealthy ones save on gift and estate taxes.
So-called vulture trusts involve what the I.R.S. says are “abusive” forms of charitable lead trusts, a common giving technique. Estate-planning experts say few vulture trusts have been set up but that those that exist involve large sums of money.
The I.R.S. rules, which are subject to revision, affect trusts created on or after April 4.
In a typical lead trust, donated assets are invested and a percentage is paid to charity until the donor’s death, after which the remainder goes to the donor’s heirs. Because the trust benefits charity, donors get a break on estate taxes, which are paid on the portion of the assets that go to the heirs. The tax break is calculated by using actuarial tables that gauge the life expectancy of the donor. The longer the donor’s life expectancy and the greater the amount of trust assets that flow to charity, the larger the donor’s tax deduction.
In a vulture trust, wealthy people select someone who is young but expected to die prematurely as the person upon whom the tax deduction is based. The revenue service generally doesn’t know that the person selected is likely to die early.
When the ill person dies, payments to the charity stop prematurely. Most of the trust principal passes to heirs but almost no inheritance tax is paid on the money.
The proposed I.R.S. rules limit the people upon whose life expectancy such a trust can be based. Only donors, donors’ spouses, and parents, grandparents, and other direct predecessors of all those who would benefit from the trust would qualify.
Some estate-planning experts say the proposed rules, as currently worded, may go too far because they might preclude same-sex couples or families with stepchildren, as examples, from participating in legitimate forms of lead trusts.
The regulations appeared in the April 5 issue of the Federal Register, Pages 17,835 to 17,839.
Comments on the I.R.S. proposal may be submitted by June 23 to CC:DOM:CORP:R (REG-100291-00), Room 5226, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington 20044.
Comments also may be sent to the I.R.S. electronically by following the instructions on the revenue service’s Web site at http://www.irs.gov/tax_regs/regslist.html.
