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Wednesday, April 24, 2024
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GiftLaw Pro |
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GiftLaw Note:
In PLR 9009047, the Service approved a net income with makeup unitrust that invests the principal or corpus in a commercial annuity. Since under Sec. 72(u)(1), the trust is not a natural person, the ordinary income is received and accrued each year. However, while the ordinary income is received by the trust, it is not unrelated business taxable income and thus has no adverse effect on the trust. Under the ruling, the account value is used to set the net fair market value each calendar year.
Trusts that will hold commercial annuities must have two specific drafting provisions. First, there must be no requirement to make distribution of income until actual cash disbursements are received under the annuity contract. Second, there should be an independent special trustee who will make all decisions with respect to withdrawals, cancellations, redemptions, valuation and other aspects of managing the commercial annuity contract.
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This is in reply to your letter dated November 22, 1989, and prior correspondence, written on behalf of X, requesting a ruling concerning the qualification of X as a charitable remainder unitrust under section 664(d)(2) of the Internal Revenue Code and the applicable regulations.
The information submitted states that X was executed on December 30, 1988, by A, B, and Trustee. A and B funded X with 600 shares of Y common stock. The Trustee proposes to invest the trust assets in a deferred annuity contract issued by Z.
Under the terms of the trust instrument, the Trustee shall pay to A and B, in equal shares during their lives, and then to the survivor for his or her life, in each tax year of X, an amount equal to the lesser of (a) the trust income for the tax year, or (b) seven and a half percent of the net fair market value of the trust assets valued as of the last day of such tax year. If the trust income in any tax year exceeds seven and a half percent of the net fair market value of the trust assets, the payment to A and B shall include such excess to the extent of any shortfall in prior years.
Upon the death of the survivor of A and B, all of the then principal and income of X shall be distributed to the Trustee to establish the Fund. The income credited to the Fund shall be used for the general purposes of W. If, at such time, W is not an organization described in sections 170(b)(1)(A), 170(c), 2055(a), and 2522(a) of the Code, the Trustee will distribute the principal and income of X to one or more organizations then so described as the Trustee shall select in his sole discretion.
The governing instrument as submitted with the request 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, clarified by Rev. Rul. 82-165, 1982-2 C.B. 117, as modified by Rev. Rul. 88-81, 1988-2 C.B. 127.
Section 664(d)(2) of the Code provides that for purposes of section 664, a charitable remainder unitrust is a trust (A) from which a fixed percentage (not less than 5 percent) of the net fair market value of its assets, valued annually, is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c) and, in the case of individuals, only to an individual who is living at the time of creation of the trust) for a term of years (not in excess of 20 years) or for the life or the lives of such individual or individuals, (B) from which no amount other than the payments described in section 664(d)(2)(A) may be paid to or for the use of any person other than an organization described in section 170(c), and (C) following the termination of the payments described in section 664(d)(2)(A), the remainder interest in the trust is to be transferred to, or for the use of, an organization described in section 170(c) or is to be retained by the trust for such a use.
Section 664(d)(3) of the Code provides that notwithstanding the provisions of section 664(d)(2)(A) and (B), the trust instrument may provide that the trustee shall pay the income beneficiary for any year (A) the amount of the trust income, if such amount is less than the amount required to be distributed under section 664(d)(2)(A), and (B) any amount of the trust income which is in excess of the amount required to be distributed under section 664(d)(2)(A), to the extent that (by reason of section 664(d)(3)(A)) the aggregate of the amounts paid in prior years was less than the aggregate of such required amounts.
Section 72(u)(1) of the Code provides that if any annuity contract is held by a person who is not a natural person (A) such contract shall not be treated as an annuity contract for purposes of subtitle A (other than subchapter L) and (B) the income on the contract for any tax year of the policyholder shall be treated as ordinary income received or accrued by the owner during such tax year. For purposes of this paragraph, holding by A trust or other entity as an agent for a natural person shall not be taken into account.
Section 25.2512-6(a) of the Gift Tax Regulations provides, in part, that the value of a life insurance contract or of a contract for the payment of an annuity issued by a company regularly engaged in the selling of contracts of that character is established through the sale of the particular contract by the company, or through the sale by the company of comparable contracts.
Section 20.2031-8(a)(1) of the Estate Tax Regulations provides, in part, that the value of a contract for the payment of an annuity, or an insurance policy on the life of a person other than the decedent, issued by a company regularly engaged in the selling of contracts of that character is established through the sale by that company of comparable contracts.
We conclude that the governing instrument will meet the requirements of a charitable remainder unitrust under section 664(d)(2) of the Code, provided the trust will be a valid trust under applicable state 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 each 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.
X shall include in its ordinary income for any tax year the income on the [annuity] contracts (within the meaning of section 72(u)(2) of the Code) because X will not hold the annuity contract as "an agent for a natural person" within the meaning of section 72(u)(1).
The annuity contract shall be valued at its "account value," i.e. the value on which interest earnings are computed, for purposes of determining the annual "net fair market value of the trust assets" under the terms of the trust instrument.
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 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.
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 tax year X is established.
In accordance with the power of attorney on file, we are sending a copy of this letter to X.
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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