The 5% Solution: IRS Revenue Procedure 2016-42 Provides Relief for the Probability of Exhaustion Test

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The 5% Solution: IRS Revenue Procedure 2016-42 Provides Relief for the Probability of Exhaustion Test

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Thursday, October 20, 2016

Charitable Remainder Annuity Trusts (CRATs) can be a very effective charitable planning tool. Choosing to fund a CRAT can remove assets from the estate of the donor, provide a reliable income stream for a family member and result in income and estate tax benefits through the charitable contribution deduction. To obtain these benefits, a CRAT must follow very stringent requirements and meet a number of tests created by the IRS.

Most of these tests are tough to pass in a low interest rate environment, particularly the “Probability of Exhaustion” test. To provide relief for CRATs which would otherwise pass all the requirements, but fail the Probability of Exhaustion test, the IRS has recently released Revenue Procedure 2016-42. This procedure provides contingency language which can be inserted into the terms of the CRAT, eliminating the need to pass the Probability of Exhaustion test.

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