¹A "swap fund" is a partnership established to receive contributions of nondiversified portfolios, which are then commingled into a well-diversified portfolio. Such funds are structured to avoid the Sec. 721(b) investment company provisions and to allow the transferor to eventually receive a diversified portfolio tax-free. Such funds are marketed to high-income individuals.

²The charitable contribution may be limited, due to the type of property contributed to the trust, the designated remainder beneficiary and/or the taxpayer's current adjusted gross income (AGI). The contribution value will differ from the remainder value when the contributed property is inventory or other "ordinary income" property in the grantor's hands.

³If the trust has UBTI, all trust income is taxed as if the trust were a complex trust; see Regs. Sec. 1.664-1(c) and Leila G. Newhall Unitrust, 104 TC 236 (1995).

⁴The grantor must be aware of gift tax consequences if the beneficiary is someone other than the grantor or his spouse.

⁵Although the actual value of assets passing to charity could be less than 10% of the initial value of trust assets.

⁶The Sec. 7520 rate can have a small effect on the income interest's present value if the trust payment is not made at the valuation date.

⁷The donor may be taxed on inherent gain if a sale of the property was effectively consummated before the transfer; see, e.g., Michael Ferguson, 108 TC 244 (1997), aff'd, 174 F3d 1004 (9th Cir. 1999).

⁸Although the deduction may be based on FMV, the 50%-of-AGI limit is reduced to 30% by Sec. 170(b)(1)(C)(i).

⁹Sec. 1361(c)(6) allows certain tax-exempt organizations (but not CRTs) to be S shareholders.

¹⁰The debt-financed provisions are generally a concern in CRTs, although a CRT's obligation to pay the unitrust interest does not constitute acquisition debt under Regs. Sec. 1.514(c)-1(g).

¹¹See IRS Letter Ruling 9015049 (1/16/90).

¹²IRS Letter Ruling 9952071 (9/24/99).

¹³Of course, a tax adviser would have to perform a similar analysis if he wants to compare investments with other characteristics.

¹⁴The 37-year trust term and 6% payout rate result in a 10% remainder to the charity; 7.2% was a recent Sec. 7520 rate.

¹⁵Alternatively, one could assume that the taxpayer's required payout is the same as the unitrust payout. The $800,000 non-CRT investment ($1 million reduced by the tax) would then be exhausted in year 27; the taxpayer would need to consume $98,672 (in present-day dollars) to continue to fund the required payout through year 37.

¹⁶At a 7.2% growth rate and a 6% payout rate, the payments will be taxed similarly whether inside or outside a CRT. In other words, the payments are not a return of basis in the non-CRT investment.

¹⁷A detailed illustration of the advantages of a CRT investment is available from the authors on request.

¹⁸In the case of a CRUT, the degree of this cushioning effect depends on the payout structure (e.g., percentage, income only or NIMCRUT).

¹⁹It is assumed that the trust has a FMV basis in the assets.

²⁰Specific figures are available from the authors on request.

²¹IRS Letter Ruling 7803029 (10/19/77).

²²IRS Letter Ruling 9143030 (7/25/91).

²³IRS Letter Ruling 7802037 (10/14/77).

²⁴IRS Letter Ruling 7803029, note 21 supra.

²⁵IRS Letter Ruling 9825001 (6/19/98).

²⁶Sec. 72(u)(2) determines the annuity income taxable to a NIMCRUT in any year; Sec. 72(u)(1)(B) provides that such income is ordinary. However, a NIMCRUT is exempt from tax (other than UBTI), under Sec. 664(c).

²⁷See Letter Ruling 9825001, note 25 supra; for a discussion, see Wiesner, "IRS Permits NIMCRUT to Invest in Deferred Annuities," 29 The Tax Adviser 368 (June 1998).

²⁸Principal and interest acts may vary among states and should be consulted before using a SMLLC to defer income from a CRT.

²⁹See Letter Ruling 9825001, note 25 supra.