Wills and Trusts

Wyatt, Tarrant & Combs, LLP

Charitable Lead Annuity Trust Funded With Illiquid Assets Payable to Family Foundation

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PLR 201323007 involved a CLAT carefully drafted to avoid problems arising from funding with non-marketable assets where the annuity would pass to a family foundation.  The ruling recites these provisions of the CLAT agreement:

Trust further provides that Taxpayer shall never exercise the power of the trustee described in the immediately preceding sentence. The trustee shall pay Foundation the Annuity Amount each year for the X-year term on the last day of Trust’s taxable year. Notwithstanding any existing or later enacted state law, except on termination of the Annuity Period, no amount may be paid from Trust to or for the use of any person other than an organization describe in each of §§ 170(b)(1)(A), 170(c), 2055(a) and 2522(a).

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Section III(p) provides that on or immediately prior to any valuation of trust assets, the trustee shall report to the valuation trustee the identity of all assets of Trust that do not have a readily ascertainable fair market value. The valuation trustee shall then have any of those assets valued as of the appropriate valuation date and report the value to the trustee. The valuation shall be made independent of the trustee and of any related or subordinate party or disqualified person with respect to Trust. In all events, the valuation trustee and any successor must be an independent trustee. An independent trustee is any party other than a related or subordinate party with respect to Trust within the meaning of § 672(c) or a disqualified person with respect to Trust within the meaning of § 4946 (other than a party who is a disqualified person with respect to Trust solely by reason of service as the trustee of Trust).

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On Date 3, the Board of Directors of Foundation amended Foundation’s bylaws, as follows. Article III, Section 3.2 provides that if at any time Foundation is a beneficiary of a charitable lead trust, a charitable remainder trust or other similar trust, and the charitable trust was established by a director or officer of, or substantial contributor to, Foundation, the director, officer or substantial contributor establishing the charitable trust shall be prohibited from acting on or involvement in matters concerning the receipt, investment, grant or distribution of, or any other decisions involving funds received by Foundation from such charitable trust. In addition, any funds received from a charitable trust shall be segregated into a separately established and dedicated account and separately accounted for on the books and records of Foundation in a manner that clearly allows the tracing of the funds into and out of such separate account.

Article III, Section 3.9 provides that a director who establishes a charitable trust for the benefit of Foundation may not be counted when establishing a quorum to vote on matters relating to the receipt, investment, grant or distribution of, or any other decisions involving funds received by Foundation.

Article VI, Section 5.1 provides that no committee established by the Board of Directors, including a standing committee established under Section 5.5 of the bylaws, shall include as a member a director or officer of, or a substantial contributor to, Foundation who has established a charitable trust of which Foundation is a beneficiary.

On Date 4, a quorum of the Board of Directors, excepting Taxpayer, established a standing committee (Committee) under Section 5.5. of the bylaws, with the sole authority to receive, separately invest and make all investment decisions and administrative, grant and distribution decisions on behalf of Foundation with respect to and regarding all funds received by Foundation from Trust. The bylaws provide that Committee consists of at least three members, at least one of whom is not a director of Foundation and at least one of whom is not related or subordinate to any director of Foundation as defined by § 672(c). All actions by Committee shall require unanimous consent.

Turney P. Berry
Louisville, Kentucky


Author: robmalinesq

I am an estate planning and probate attorney in Memphis, Tennessee.

Leave a reply. Please note that although this blog may be helpful in informing clients and others who have an interest in information privacy and security, it is not intended to be legal advice. The information on this blog also should not be relied upon to form an attorney-client relationship.

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