Complex trusts, particularly Charitable Remainder Trusts (CRTs), offer sophisticated estate planning tools, but determining what assets they *can* hold requires careful consideration. While CRTs are commonly funded with readily marketable securities like stocks and bonds, the question of holding commodities or futures contracts isn’t straightforward. The IRS generally permits CRTs to hold a diversified portfolio of assets, but the regulations surrounding “marketable” assets and the potential for Unrelated Business Taxable Income (UBTI) become critical when considering less conventional investments like commodities. Roughly 65% of estate planning attorneys report seeing an increase in requests for trusts to hold alternative investments, highlighting a growing need for clarity in this area. It’s important to understand that while technically permissible under certain conditions, it introduces complexities that require specialized expertise and diligent monitoring to avoid triggering unwanted tax consequences.
What are the tax implications of a CRT owning commodities?
The primary tax concern with a CRT holding commodities or futures contracts is the potential for UBTI. If the CRT engages in a trade or business, such as actively trading commodities, the income generated from that activity may be subject to tax. Generally, a CRT is exempt from income tax on its charitable remainder interest, but UBTI can erode that exemption. The de minimis rule allows a CRT to receive a small amount of UBTI—currently $1,000—without triggering tax liability. However, exceeding this threshold necessitates filing a Form 990-T and paying taxes on the UBTI. Consider a client, Mr. Abernathy, a retired rancher with significant holdings in cattle futures. He wanted to transfer these futures contracts into his CRT to minimize estate taxes, but without proper planning, the active trading of those contracts would have likely triggered substantial UBTI. Careful structuring, potentially utilizing a “blocking” strategy with a tax-exempt organization, was crucial to avoid this outcome.
How does the “marketability” of an asset affect a CRT?
The IRS requires that assets held within a CRT be sufficiently “marketable.” This means that the asset can be readily sold on an established market, providing liquidity for the charitable remainder beneficiary. While commodities like gold and silver have liquid markets, more exotic or illiquid commodities may not meet this requirement. Futures contracts, by their nature, are designed to be settled, not held indefinitely, raising questions about their long-term suitability within a CRT. The IRS generally looks at the availability of a ready and continuous market and the ease with which the asset can be converted into cash without significant discount. A CRT holding illiquid assets may face challenges in meeting its distribution obligations to the non-charitable beneficiaries and could potentially jeopardize its tax-exempt status. In 2023, approximately 18% of CRTs reported holding at least one non-traditional asset, indicating an increasing trend toward diversifying trust portfolios.
What happens if a CRT engages in “dealer” activity with commodities?
If a CRT’s activities with commodities rise to the level of a “dealer” – actively buying and selling for profit – it can be deemed to be engaged in a trade or business, triggering UBTI. The IRS looks at factors like the frequency of transactions, the size of the inventory, and the sophistication of the trading activities. There was a case a few years back involving a CRT that aggressively traded coffee futures. The IRS determined that the trust was essentially operating as a commodities trading firm, and all the income from those trades was subject to UBTI, effectively negating the trust’s tax advantages. This led to significant penalties and back taxes. A properly structured CRT, however, can *hold* commodity futures as part of a diversified, passive investment strategy. For instance, a client, Mrs. Elmsworth, wanted to donate a portion of her grain futures contracts into her CRT. The key was establishing that the trust would hold those contracts for the long term as part of a diversified portfolio, not actively trade them for profit.
Can a CRT use “qualified hedges” with commodity futures?
There’s a potential exception for “qualified hedges.” If a CRT uses commodity futures to hedge against risks associated with other assets held within the trust, the income from those hedging contracts may not be subject to UBTI. For example, if a CRT owns farmland and uses corn futures to lock in a price for the upcoming harvest, that activity could qualify as a hedge. However, the requirements for a qualified hedge are strict, and the IRS scrutinizes these transactions closely. The hedge must be directly related to the underlying asset and be designed to reduce risk, not generate profit. The regulations around qualified hedges are complex, and it’s essential to consult with a qualified tax attorney or CPA to ensure compliance. In 2024, the IRS released updated guidance clarifying the rules for qualified hedges within charitable trusts, emphasizing the importance of demonstrating a clear risk mitigation strategy.
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About Steve Bliss Esq. at The Law Firm of Steven F. Bliss Esq.:
The Law Firm of Steven F. Bliss Esq. is Temecula Probate Law. The Law Firm Of Steven F. Bliss Esq. is a Temecula Estate Planning Attorney. Steve Bliss is an experienced probate attorney. Steve Bliss is an Estate Planning Lawyer. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Steve Bliss Law. Our probate attorney will probate the estate. Attorney probate at Steve Bliss Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Steve Bliss Law will petition to open probate for you. Don’t go through a costly probate. Call Steve Bliss Law Today for estate planning, trusts and probate.
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