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Thursday, April 25, 2024
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GiftLaw Pro |
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GiftLaw Note:
The donor created a charitable remainder trust for a term of 13 years. Beneficiaries S and T will each receive one-half of the income for the lesser of the first four years or their respective lifetimes. Beneficiaries U, V and W will each receive one-third of the income for the lesser of the succeeding nine years or their respective lifetimes.
Since the income interests to S and T are current, Reg. 25.2503-3(a) indicates that these current income interests qualify for the annual gift exclusion. The income interests of U, V and W are future interests and do not qualify for the annual exclusion.
Finally, the remainder interest for the lesser of 13 years or the lives of the income recipients qualifies for a charitable income tax deduction in the amount of the present value.
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This is in reply to your letter dated March 21, 1986, and previous correspondence, requesting rulings concerning the qualification of X as a charitable remainder unitrust under section 664 of the Internal Revenue Code and the applicable regulations.
The governing instrument as submitted with the request, and amended on March 21, 1986, contains provisions set forth in Rev. Rul. 72-395, 1972-2 C.B. 340, as modified by Rev. Rul. 80-123, 1980-1 C.B. 205, and Rev. Rul.
82-128, 1982-2 C.B. 71, and clarified by Rev. Rul. 82-165, 1982-2 C.B. 117.
Therefore, we conclude that the governing instrument will meet the requirements of a charitable remainder unitrust under section 664 of the Code, provided the trust will be a valid trust under applicable local law.
Accordingly, X will qualify 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 unitrust. For such year, X 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 regulations applicable thereto.
Section 2501 of the Code provides for a gift tax on the transfer of property by gift. Section 2503(b) provides that for gifts of a present interest made to any person by the donor during the calendar year, the first $10,000 of such gifts to such person shall not be included in the total amount of gifts made during such year.
Section 2511 of the Code provides that the gift tax imposed by section 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible.
Under section 2522(c) of the Code, in order to qualify for a gift tax charitable deduction, a remainder interest passing to charity, other than an interest described in section 170(f)(3)(B), must be in a trust which meets the requirements of section 664, or a pooled income fund which meets the requirements of section 642(c)(5).
Section 2522 of the Code and the regulations thereunder provide that, in computing taxable gifts for a calendar year, a charitable deduction is allowed for the present value of gifts made during the calendar year to the organizations and entities referred to therein. However, not all transfers to charity are deductible. Section 2522(c) of the Code provides for disallowance of deductions in certain cases.
Under section 25.2503-3(a) of the Gift Tax Regulations no part of the value of the gift of a future interest may be excluded in determining the total amount of gifts made during the "calendar period". "Future interests" is a legal term, and includes reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession or enjoyment at some future date or time.
Under section 25.2522(c)-3 of the regulations, if a transfer for charitable purposes is dependent upon the happening of a precedent event in order that it might become effective, no deduction is allowable.
In the present case, the donor has made gifts of term of years unitrust interests to S, T, U, V and W during their respective periods. The Donor is entitled to exclusions pursuant to section 2503 of the Code for S and T. However, since U, V and W are to receive future unitrust interests, the donor is not entitled to exclusions for the interests of U, V, and W, pursuant to section 25.2503-3(a) of the regulations.
Based on the Life Table for the Total Population: United States 1969-71, with interest at ten percent, an adjusted payout rate of 8.4 percent x 0.93127 (or 7.823 percent) and with semi-annual payout made at the end of each semi-annual period for which they are paid, the present worth of the right to receive one-half of the payout for four years, or until the prior death of a person aged nineteen, is $0.167089 for each dollar of unitrust corpus. On a similar basis, the present worth of such right for a person aged twenty is $0.167069. These two factors may be used to compute the present interest of S and T, respectively, for purposes of allowance of the annual exclusion under section 2503 of the Code.
The donor also made a completed gift to the charitable beneficiaries of the remainder of the trust. The interests of the charitable beneficiaries between the years 1986 to 1990 and 1991 to 1993 (term of years) are subject to the condition of one or all of the term of years unitrust beneficiaries dying. Consequently, a gift tax charitable deduction is not allowable with respect to the possible unitrust interest from 1986 to 1993. However, a gift tax charitable deduction is allowable with respect to the remainder interest in the trust.
Based on the Life Table for the Total Population: United States with interest at ten percent, an adjusted payout rate of 8.4 percent x 0.931277 (or 7.823 percent) and with semi-annual payouts made at the end of each semi-annual period for which they are paid, the present worth of the remainder interest in a unitrust that falls nine years hence, provided two persons aged three and five are then deceased, at the death of the last to die of the two persons aged three and five, provided such death occurs after the first nine years or thirteen years hence, whichever occurs first, is $0.34683 for each $1.00 of the initial trust corpus.
No opinion is expressed as to the federal tax consequences of the formation or operation of X under the provisions of any other section of the Code. No opinion is expressed as to any further amendments to the provisions of X.
This ruling that X will qualify as a charitable remainder unitrust is subject to the condition that there are no changes in the law that would cause X to be disqualified.
A copy of this letter should be attached to the federal tax return for the taxable year X is established A copy is enclosed for that purpose.
This ruling letter is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.
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