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Wednesday, April 24, 2024
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GiftLaw Pro |
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GiftLaw Note:
A charitable remainder unitrust for the lesser of the term of 15 years or the life of seven beneficiaries was created in 1988. The grantor retained a testamentary power of revocation. Since the testamentary power of revocation under Reg..25.2511-2(f) precluded a current gift, there was no transfer to the beneficiaries in 1988. Rather, any distributions made during 1988 would then vest and qualify for the present interest annual exclusion under Sec. 2503(b).
However, the grantor desires now to relinquish the testamentary power of revocation. If the grantor releases this power, then there will be a gift to each of the seven beneficiaries. The gift will be the present value on the date of release of the term interest for the lesser of the balance of the term of years or the life of the respective beneficiaries.
When the donor releases this right, if the donor survives for more than three years, the trust will not be includable in the donor's gross estate. Sec. 2035(a).
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LTR 8949061 (12 Sep 1989)
This is in reply to a letter dated February 16, 1989, and subsequent correspondence, submitted by your authorized representative, concerning the qualification of the Trust as a charitable remainder unitrust under section 664 of the Internal Revenue Code and the applicable regulations.
The Trust was funded in December, 1988. Under the terms of the Trust the remainder is irrevocably transferred to a designated charity. It has been represented that the designated charity is a qualified charitable organization under sections 170(c), 2522(a), and 2055(a).
The Trust instrument provides that the trustee shall distribute a unitrust amount equal to six percent of the net fair market value of the trust assets, valued as of the first day of each taxable year of the trust, pro rata among seven Individual Beneficiaries. The interest of each Individual Beneficiary shall terminate upon the earliest to occur of (i) such Individual Beneficiary's death, (ii) December 31, 2003 and (iii) in the event the Taxpayer exercises his retained power to terminate the interest of any Individual Beneficiary in his last will, the date of the Taxpayer's death.
The Taxpayer wishes to release his retained power to terminate the interest of each Individual Beneficiary in 1989.
REQUESTS NUMBERS 1, 2 AND 3:
The governing instrument as amended on June 13, 1989, 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 meets the requirements of a charitable remainder unitrust under section 664 of the Code, provided the Trust is a valid trust under applicable local law.
Accordingly, the Trust 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, 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 regulations applicable thereto.
Because the Trust qualifies as a charitable remainder unitrust, section 170(f)(2)(A) of the Code will not disallow a deduction under section 170. Therefore, a charitable contribution deduction will be allowed under section 170 based upon the present value of the remainder interest created. The amount of the charitable contribution deduction in respect of such remainder interest is determined in accordance with section 170 and the applicable regulations.
We have calculated the actuarial factors required for computing the value of the charitable remainder and have provided an example illustrating the use of these factors.
The unitrust has an adjusted payout rate of 6 percent times 0.909091 or 5.455 percent and has annual payments made at the end of each year for which they are paid. Each 1/7th of the unitrust falls in 15 years hence or upon the prior death of one of seven persons, aged 10, 14, 17, 17, 20, 42, nd 43.
By way of illustration, if we assume that the initial trust corpus is $75,896.00, then the total present worth of the remainder interest is calculated as follows:
(1)
Ages | (2)
Portion of Corpus | (3)
Remainder Factor | (4)
Present Worth Remainder Interesst
Col.(2) x Col.(3) |
| 10 | $10,842.00 | 0.43371 | $4,703.30 |
| 14 | $10,842.00 | 0.43532 | $4,719.70 |
| 17 | $10,842.00 | 0.43621 | $4,729.40 |
| 17 | $10,842.00 | 0.43621 | $4,729.40 |
| 20 | $10,842.00 | 0.43657 | $4,733.30 |
| 42 | $10,842.00 | 0.45107 | $4,890.50 |
| 43 | $10,842.00 | 0.45280 | $4,909.20 |
| | | Total | $33,413.80 |
Therefore, in this illustration, the present worth of the remainder interest in the Trust is $33,413.80.
The factors above are based on the "Life Table for the Total Population: United States 1969-71" with interest at 10 percent.
REQUEST NUMBERS 4, 5, 6, 9 AND 10:
Section 2501 of the Code imposes a tax on the transfer of property by gift by an individual.
Section 2503(b) of the Code provides that the first $10,000 of gifts made by the donor to any one donee may be excluded in determining the amount of taxable gifts as long as the transfer to the donee constitutes a present interest in the property.
Section 25.2503-3(b) of the Gift Tax Regulations provides that a donee's immediate and unrestricted use of the income from a trust qualifies as a present interest.
Section 25.2511-2(c) of the regulations provides that a gift is incomplete if and to the extent that a reserved power gives the donor the power to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed and ascertainable standard.
Section 25.2511-2(f) of the regulations provides that the relinquishment or termination of a power to change the beneficiaries of transferred property, occurring otherwise than by the death of the donor, is regarded as the event which completes the gift and causes the tax to apply. The receipt of income or of other enjoyment of the transferred property by the beneficiary during the interim between the making of the initial transfer and the relinquishment or termination of the power operates to free such income or other enjoyment from the power, and constitutes a gift of such income or of such other enjoyment taxable as of the calendar period of its receipt.
In this case, because the Taxpayer has reserved the power to terminate the unitrust interest of each Individual Beneficiary, there is no completed gift to any Individual Beneficiary at the time the Trust is funded. The receipt of the annual unitrust amount by each Individual Beneficiary is a completed gift of a present interest, qualifying for the $10,000 annual exclusion, in the tax year received.
If the Taxpayer, while living, releases the retained power to terminate the unitrust interest of any Individual Beneficiary, the then present value of such Individual Beneficiary's unitrust interest shall constitute a completed gift in the year during which such release occurs. Because the gift is a gift of a present interest, it would qualify for the $10,000 annual exclusion as allowed under section 2503(b) of the Code. In addition, it would qualify for gift-splitting as allowed by section 2513(a).
Section 2522(c)(2)(A) of the Code provides that when a donor retains an interest in property or transfers an interest in property to a noncharitable donee, no deduction is allowed for the transfer of a remainder interest in the same property to a charitable donee unless the remainder interest is in a charitable remainder annuity trust or charitable remainder unitrust (described in section 664) or in a pooled income fund (described in section 642(c)(5)).
In the present case, since the Trust complies with the provisions of section 664 of the Code, a gift tax charitable deduction is allowable in the year the Trust was funded (1988) for the present value of the remainder interest passing to qualified charitable organizations within the meaning of section 2522.
REQUESTS NUMBERS 7, 8 AND 11:
Section 2001 of the Code imposes a tax upon the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.
Section 2036(a)(2) of the Code provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in the case of a bona fide sale for adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death, the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.
Rev. Rul. 76-273, 1976-2 C.B. 268, holds that the corpus of a charitable remainder unitrust, or a portion thereof, is includible in the donor's gross estate under section 2036(a)(1) when the donor retains the right to receive the unitrust amount for his life. Similarly, the corpus of a trust, or a portion thereof, is includible in the donor's gross estate under section 2036(a)(2) when the donor retains, for a period which does not in fact end before his death, the right to designate the person who shall possess or enjoy the unitrust amount of a charitable remainder unitrust.
The entire corpus of a trust in which the donor retains such a right is includible in the donor's gross estate if the unitrust adjusted payout rate is equal to or greater than the rate used to calculate the value of an income interest. For example, if the interest rate used to calculate the value of an income interest were 6 percent, then the income beneficiary of a unitrust having an adjusted payout rate equal to or greater than 5.660 percent receives in effect the entire income from the trust assets where those assets are assumed to produce a 6 percent return on investment. The rate of 5.660 percent results from the following formula:
| | Unitrust adjusted payout rate |
| Equivalent income interest rate = | -------------------------------- |
| | 1 minus adjusted payout rate |
If the unitrust had an adjusted payout rate of less than the payout rate equivalent to a full income interest in the Trust assets, a correspondingly reduced portion of the trust assets would be includible in the donor's gross estate. The includible portion is determined by using the above formula to obtain the equivalent income interest rate for the trust, and then dividing that equivalent rate by the rate used to calculate the value of a life income interest for the month in which the valuation date falls. Under section 7520 of the Code, where the valuation date occurs after May 1, 1989, the value of a life income interest is determined by using an interest rate (rounded to the nearest 2/10ths of 1 percent) equal to 120 percent of the Federal midterm rate in effect under section 1274(d)(1) for the month in which the valuation date falls.
In this case, although the Taxpayer proposes to release his right to terminate the interest of every Individual Beneficiary in 1989, if the Taxpayer does not release this power while living, the portion of the Trust to which the income rights relate will be includible in the Taxpayer's gross estate under section 2036(a)(2). The portion of the Trust corpus that will be includible in the Taxpayer's gross estate under section 2036(a)(2) will be calculated by using the above formula and dividing by the interest rate determined under section 7520 applicable on the date of Taxpayer's date of death.
Section 2035(a) of the Code provides generally the ____ value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise during the 3-year period ending on the date of the decedent's death.
Section 2035(d)(1) of the Code provides that, except as otherwise provided, section 2035(a) shall not apply to the estate of a decedent dying after December 31, 1981.
Section 2035(d)(2) provides that section 2035(d)(1) shall not apply to a transfer of an interest in property which is included in the value of the gross estate under section 2036, 2037, 2038, or 2042 or would have been included under any of such sections if such interest had been retained by the decedent.
Section 2038 of the Code provides, with respect to transfers made after June 22, 1936, that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in the case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished during the 3-year period ending on the date of the decedent's death.
In the present case, if the Taxpayer releases the retained testamentary right to terminate the unitrust interest of every Individual Beneficiary during the 3-year period ending on the date of the Taxpayer's death, the portion of the Trust to which the income rights relate will still be includible in the Taxpayer's gross estate under section 2035 of the Code. The portion of the Trust corpus that will be includible in the Taxpayer's gross estate under section 2035 will be calculated in the same manner discussed above as if inclusion were under section 2036.
In addition, the value of the Individual beneficiaries unitrust interests will be includible in the Taxpayer's gross estate under section 2038 of the Code, if the Taxpayer does not release the retained testamentary right to terminate the unitrust before his death or releases that right during the 3-year period ending on the date of the Taxpayer's death. However, since under the same circumstances the portion of the Trust to which the unitrust interests relate would be includible in the gross estate under section 2036 or 2035, no double inclusion would be required.
If the Taxpayer releases the retained testamentary right to terminate the unitrust interest of every Individual Beneficiary more than three years prior to the Taxpayer's date of death, no part of the Trust will be includible in the Taxpayer's gross estate.
Section 2055(a) of the Code provides that for purposes of the federal estate tax, the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises, or transfers to or for the use of charitable organizations.
Section 2055(e)(2)(A) of the Code provides that when an interest in property passes or has passed in trust from the decedent to a noncharitable beneficiary, no deduction is allowable for the transfer of a remainder interest in the same property to a charitable beneficiary unless the remainder interest is in a charitable remainder annuity trust or charitable remainder unitrust (described in section 664) or in a pooled income fund (described in section 642(c)(5)).
In this case, the Trust will qualify as a charitable remainder unitrust under section 664 of the Code, and the value of the remainder interest passing to charity will qualify for the federal estate tax charitable deduction under section 2055(a).
Thus, if the corpus of the Trust, or a portion thereof, is includible in the Taxpayer's gross estate under section 2036 or 2035, the value of the remainder interest in such portion of the Trust passing to charity will qualify for the federal estate tax deduction under section 2055(a). To the extent that the Taxpayer by his last will and testament exercises his power to terminate the unitrust interest of any Individual Beneficiary, the value of the remainder interest passing to charity, and correspondingly, the deduction allowable under section 2055(a), will be increased. If the Taxpayer by his last will and testament exercises his power to terminate the unitrust interest of every Individual Beneficiary, so that the Trust corpus passes to the charity on the Taxpayer's death, the Taxpayer's estate will qualify for the federal estate tax deduction under section 2055(a) to the extent the value of the Trust is includible in the Taxpayer's gross estate under section 2036 or 2035.
No opinion is expressed as to the federal tax consequences of the formation or operation of the Trust under the provisions of any other section of the Code. This ruling that the Trust will qualify as a charitable remainder trust is subject to the condition that there are no changes in the law that would cause the Trust to be disqualified. In addition, the ruling that a deduction is allowable for federal estate tax purposes is subject to the condition that there are no changes in the applicable law prior to the date of the donor's death. No opinion is expressed as to any further amendments to the provisions of the Trust.
A copy of this letter should be attached to the federal income tax return of the Trust for its first tax year. A copy is included 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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