By: A.J. Cook


The Internal Revenue Service is out to bury a sick practice of using ghoul trusts. These trusts use the names of seriously ill patients to reap inflated charitable deductions.

These trusts, also called vulture trusts, comply with the letter - but not the spirit - of the law. Hopefully, new IRS proposed regulations will curb this abuse.

To show how the scheme works, here's a description of a legitimate charitable trust, an illustration of one and the exploitation using one to shave taxes.

Description of a legitimate charitable trust. A person called the grantor puts money into a trust that first will benefit a charity then a beneficiary who is not a charity. Annually the charity gets a percent of the assets, resulting in the charity receiving more or less than the income the trust money generates. The charity receives this percent for a fixed number of years or someone's lifetime. What is left over in the trust goes to the remainder beneficiary.

Illustration of the trust. A grandmother knows her son doesn't need money, but she is concerned about the support of his children after he dies. She sets up a trust with $1 million that will benefit a charity until her son dies, then her grandchildren would receive the remainder. Grandmother gets a charitable deduction based on computations partly involving her son's life expectancy. Consider this is 40 years, but he dies in three. Grandmother still gets a deduction as if her son lived the estimated life for someone that age. Say, based on that life expectancy and assumed interest rates, Grandmother gets a deduction of $900,000 whereas the charity actually receives only $240,000.

Exploitation using the trust. Some unprincipled promoters, though a small number, see an opportunity here. They seek out young seriously ill people to serve as the measuring life in order to use the long life expectancy of someone that age. They need the patient's medical records and permission. To get permission, the promoter sometimes implies that the person's favorite charity will benefit or makes a token payment to the patient.

To stop this practice, the regulations say you can measure only with lives of relatives. This means people related to the grantor or remainder beneficiary.

Why would someone establish a legitimate charitable trust? Grandmother, in my example, gets a deduction, helps her favorite charity and still provides some security for her grandchildren. A charitable trust can be a good tax-planning device but stay clear of ghoulish gimmicks.

The Moral: If you can't trust a trust, who can you trust?


A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
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Released 7-10-00