Several years ago Mother and Father built a unique home on 45 acres of beautiful rolling hills and woods. Father passed away three years ago and Mother now owns the 45-acre parcel and home.

She enjoys the peaceful country view from her front window. However, the university adjacent to the property is very interested in acquiring the property for eventual future growth. Not surprisingly, Mother is concerned. She does not want a new dormitory filled with college students in her front yard. In fact, she enjoys the peace and protection of her lovely home in the wooded countryside. However, at age 80, she recognizes that some planning will have to be accomplished.

After a thorough understanding of Mother's needs and desires, her advisor suggested a wonderful four-part solution was suggested that incorporated an outright sale, a unitrust, a gift annuity and a gift of a remainder interest in a home. (See Case Study "Peace in the Countryside" for a full explanation.)

One part of the plan involved Mother's 20-acre rear parcel of land. Specifically, Mother's unitrust would receive the 20-acre rear parcel, which the university intends on eventually developing. To generate the necessary trust income, the university would purchase the land from the trust with a 7% interest-only note. After the payment of the 6% unitrust payout each year and trust expenses, the trust would accumulate any excess income.

Son is the sole owner of Bank Co. Wanting the very best for Mother, Son wants to provide trust and banking services to Mother's unitrust. Son knows Bank Co. would provide excellent services at very reasonable prices.

May Bank Co., Son's wholly owned company, provide trust and banking services to Mother's unitrust? Will this trigger any self-dealing taxes?

Charitable remainder trusts, charitable lead trusts and private foundations are subject to Sec. 4941 which prohibits acts of self-dealing. Self-dealing means any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation or charitable trust. Consequently, a disqualified person may not buy, sell, lease or otherwise transact business with a charitable trust or foundation. If an act of self-dealing occurs, then an excise tax may result.

In general, disqualified persons include lineal descendants of a donor. For example, children and grandchildren of a donor are disqualified persons. In this case, Mother created the unitrust and Son is clearly a lineal descendant of Mother. Therefore, Son is a disqualified person with respect to Mother's unitrust. In addition, entities controlled or owned by Son may also be disqualified persons. (See Sec. 4946 for ownership thresholds.) In this instance, Son owns 100% of Bank Co. Therefore, Bank Co. is also a disqualified person with respect to Mother's unitrust.

Accordingly, Son and Bank Co. are prohibited from engaging in transactions with the unitrust. This is true regardless of the potential benefit to the unitrust. However, Sec. 4941(d)(2)(E) provides a narrow exception. If the payment of compensation to a disqualified person is for personal services which are reasonable and necessary, then it shall not be an act of self-dealing so long as the compensation is not excessive. In addition, Sec. 53.4941(b)(3)(c)(2), Example 2, allows a disqualified person to provide investment counseling on the condition that the fees are not excessive.

Here, Bank Co. would provide general banking and trust services to Mother's unitrust for a reasonable fee. These personal services are necessary to the trust's goal of producing income while preserving the remainder value. Furthermore, this situation is similar Sec. 53.4941(b)(3)(c)(2), Example 2, which specifically allows a disqualified person to provide investment services. Therefore, so long as the fees are not excessive, Bank Co. may receive fees for trust and bank services without violating the self-dealing rules.