Saturday, April 20, 2024
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GiftLaw Note: Taxpayer desired to fund a two-life unitrust with an insurance policy and deduct the remainder value of insurance premium payments. The Service permitted the use of an insurance policy as a unitrust investment. Since the taxpayer retained no rights except the right to change charity, the payments were deductible.

REFER REPLY TO


This is in reply to a letter dated August 2, 1978, submitted by your authorized representative in which certain rulings are requested concerning the qualification of a trust as a charitable remainder unitrust under section 664 of the Internal Revenue Code and the applicable regulations. The trust was entered into between you, as donor, and M, as trustee on June14, 1978. You funded the trust with a permanent policy of life insurance for $50,000 on your life. It is represented that the trustee is the owner of the policy.

Premium payments are made by you directly to the insurance company. The trustee shall pay to your wife, as income beneficiary, in each taxable year of the trust during her lifetime an amount equal to the lesser of the trust income for such taxable year and five percent of the net fair market value of the trust assets valued as of the first day of such taxable year. You have expressly reserved the power, exercisable only by your will, to revoke and terminate your wife's interest under the trust. Upon the first to occur of the death of your wife or your death if you have exercised the testamentary power to revoke and terminate your wife's interest, the trustee shall distribute all of the principal and income of the trust, other than any amount due to the income beneficiary or to her estate, to N. You have expressly reserved the power to designate, at any time, another organization satisfying the requirements of sections 170(c), 2055(a) and 2522(a) or (b) of the Code as recipient of the trust remainder in lieu of N. Such alternate designation shall be made by written notice to the trustee or by your will. If N or another alternately designated organization is not an organization described in sections 170(c), 2055(a), and 2522(a) or (b) of the Code at the time when the trust remainder is to be distributed to it, the trustee shall distribute such remainder to one or more organizations then described in each of those sections of the Code as the trustee may select in its sole discretion.

After careful consideration of the trust, we conclude that it complies with the provisions of section 664 of the Code and the applicable regulations, provided that the trust as executed will result in the creation of a valid trust under applicable local law.
  1. The trust will be treated as a charitable remainder unitrust, for federal income tax purposes, for any year in which it continues to meet the definition of and functions exclusively as a charitable remainder trust. For such year, the trust will be exempt from taxes imposed by subtitle A of the Code unless it has any unrelated business taxable income as defined in section 512 of the Code and the applicable regulations.
  2. Section 170(f)(2) of the Code provides that in the case of property transferred in trust, no deduction shall be allowed under this section for the value of a contribution of a remainder interest unless the trust is a charitable remainder annuity trust or a charitable remainder unitrust (described in section 664 of the Code), or a pooled income fund (described in section 642(c)(5) of the Code). Section 1.170A-6(b)(2) of the Income Tax Regulations provides that the fair market value of a remainder interest in a charitable unitrust shall be computed under section 1.664-4 of the regulations. Premiums paid on a life insurance policy are allowable charitable contribution deductions when the beneficiary is an exempt charitable organization, provided the beneficiary cannot be changed at the option of the insured. See Adler v. Commissioner, 5 B.T.A. 1063 (1927).

    In the instant case, you as grantor of the trust will pay the insurance premiums on the life insurance policy held by the trust. The remainder beneficiary of this policy is a charitable organization described in section 170(c)(2)(B) of the Code. You have expressly waived any right to change the beneficiary except for the reservation to designate an alternate charity instead of N. Thus the premium payments are irrevocably committed or earmarked for the ultimate benefit of a charitable organization.

    Your wife is the measuring life of the life insurance policy. Each premium payment made by you is considered an additional contribution to the trust. The fair market value of the remainder interest attributable to each such contribution is determined by the regulations under section 1.664-4. Since your wife is the measuring life for the unitrust the appropriate method of determining the present value of the contribution under section 170 of the Code is found in Table E(2) of section 1.664-4(b)(5) of the regulations.

    Accordingly, we conclude that you are entitled to a charitable contribution deduction under section 170 of the Code for each insurance premium payment. The fair market value for each premium payment is equal to the present value of the charitable remainder interest attributable to each such payment. Table E(2) of section 1.664-4(b)(5) is the appropriate reference for determining that value.
  3. The qualification of the trust as a charitable remainder unitrust is not affected by your reservation of the power to terminate your wife's income interest by an appropriate provision in your will pursuant to section 1.664-3(a)(4) of the regulations.
  4. The qualification of the trust as a charitable remainder unitrust is not affected by your reservation of the power to substitute another charitable organization for N by written notice to the trustee or by your will. See Rev. Rul. 76-8, 1976-1 C.B. 179.
No opinion is expressed as to the federal income tax consequences of the formation or operation of the trust under the provisions of any other section of the Code. Furthermore, no opinion is expressed as to any amendments which may be made to the trust. A copy of this letter should be attached to the return filed for the first taxable year of the trust. A copy is provided for that purpose. In accordance with the power of attorney on file, we are sending a copy of this letter to your authorized representative.

Related Topics On Insurance in a Unitrust

3.1.10  Income, Gift, Estate and GSTT:    The donor to a charitable remainder annuity trust will receive an income tax deduction equal to the present value of the remainder interest. It is calculated using the applicable federal rate for the current month or one of the prior two months, as permitted under Sec. 7520.


3.10.10  Investments of Unitrust Corpus:    One of the major decision points when creating a charitable remainder trust (CRT) is developing an investment strategy. Under the four-tier accounting rules, the type of income paid out of the trust is determined by the trust investments.



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