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Heed the New Rules for Charitable Trusts
Alert: The IRS has established new requirements for charitable remainder trusts (CRTs) established after June 27, 2005. Essentially, a donor must obtain permission from his or her spouse to ensure the trust's viability.
With a CRT, you transfer assets to the trustee of a charity while you (or another beneficiary) retain the right to receive the income from the assets. Upon your death or a specified term, the remaining assets go outright to the charity. Based on the value of the remainder interest, you can claim a current tax deduction in the year of the transfer. In addition, there is no current tax on the buildup of funds.
However, the IRS became concerned that CRTs could conflict with some state laws that prevent a surviving spouse from being disinherited. Thus, it instituted the waiver requirement, even though detractors claim it is highly unlikely a surviving spouse would pursue a claim from CRT funds.
For trusts created before June 28, 2005, the CRT will remain valid unless a spouse actually exercises a right of election against the trust assets. For post-June 27 CRTs, however, the trust will not qualify without a timely waiver. Generally, the failure will date back to the inception of the trust. Furthermore, a waiver is required for a change of address, marriage or any other occurrence that would result in a claim for a surviving spouse.
What happens if the trust fails to qualify? The donor forfeits the generous tax deduction and the funds will revert to his or her taxable estate. Moreover, the trust will be taxed on capital gains from the sale of assets as well as the accumulation of funds. All in all, this is a dire result that should be avoided.