Tom Cullinan, Scot Kirkpatrick, Steve Wyatt, Asher Fried and Emily Dabney's article “Some CRATs Are in the Crosshairs, Yet CRTs Remain Viable,” in Tax Notes Federal and Tax Notes State
In an article published in Tax Notes Federal and Tax Notes State on August 7, 2023, Shareholders Tom Cullinan, Scot Kirkpatrick, Steve Wyatt, Senior Counsel Asher Fried and Associate Emily Dabney discuss charitable remainder annuity trust transactions, which the IRS has included on its “Dirty Dozen” list, and they explore options for taxpayers who may have invested in them.
For the second year in a row, the IRS’s annual “Dirty Dozen” list includes a strategy involving a charitable remainder annuity trust (CRAT). When it comes to promoted transactions, the list operates as the proverbial canary in the coal mine— if the transaction appears on the list, rest assured that significant IRS time and resources follow. The identified CRAT transaction proves that point, as we have already seen two court cases involving investors and one involving an alleged promoter. Most recently, in May, a U.S. district court permanently barred five defendants from promoting a CRAT transaction (among other sanctions).
It appears that the IRS intends to increase the pressure even further. The IRS has historically “listed,” by notice, transactions that it has determined are abusive. There has been a great deal of recent litigation, however, about whether the listing must be done through a regulation after notice and comment. Given the hazards on that issue, the IRS (and Treasury) have turned to listing transactions through regulations instead of a simple notice. One consequence of that is that the public can now see what the IRS and Treasury are working toward listing, as the government publishes a list of regulations in progress. That list shows that Treasury and the IRS are working on regulations that would “identify certain charitable remainder annuity trust (CRAT) transactions and substantially similar transactions as listed transactions.” We suspect the transaction that the IRS is working on listing is the same as the one identified on the “Dirty Dozen” list.
We begin this article with a brief with a brief overview of how CRATs work and the conventional tax benefits they provide. We then examine some generally accepted planning techniques that can make CRATs even more appealing. Finally, we discuss the CRAT transaction that the IRS has placed on the list, and we provide some thoughts for taxpayers who may have invested in one.