Answers in Genesis: believing it. defending it. proclaiming it.

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 solely owns the 45-acre parcel and home.

She enjoys the peaceful country view out 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 eventually 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 which incorporated an outright sale, a unitrust, a gift annuity and a gift of a remainder interest in her home. (See Case Study "Peace in the Countryside" for a full explanation.)

In addition, another component of the plan involves the potential sale of the home to Son after Mother's death. Specifically, Son enters into an option agreement with the university. It is a contingent agreement that permits Son to purchase the home from the university. This transaction is not an act of self-dealing, (See Case Study "Son's Intentions Paved with Gold, Part 1.") So, naturally, it is part of the final plan.

However, Son wants an additional option contract with Mother's unitrust. Specifically, Mother's unitrust will receive the 20-acre rear parcel, that university intends to develop. In the event university does not develop the land itself, Son wants the right to purchase back the "family land" from the unitrust.

Can Son and Mother's unitrust enter into an option agreement? May Son later purchase the 20-acre rear parcel from the unitrust at fair market value?

Charitable remainder trusts, charitable lead trusts and private foundations are subject to Sec. 4941 that 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, Son's spouse is also a disqualified person.

Accordingly, Son is prohibited from engaging in any transactions with the unitrust. This is true regardless of the potential benefit to the unitrust. In other words, Son's offer to pay a price above fair market value does not negate the application of the self-dealing rules.

Therefore, Son should not enter into an option agreement with unitrust. Further, Son should not attempt to purchase the 20-acre rear parcel from the university. In either case, the Service may impose significant excise taxes and, thus, these considerations should clearly be avoided.