Thursday, April 25, 2024
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GiftLaw Note: PLR 9202033, an elected official created a blind trust. However, the trustee had the power to create charitable trusts in order to preserve as much flexibility as possible. The independent trustee was also given the power to select charities. This was held to be a valid power for a charitable trust. In addition, the ruling cited Rev. Rul. 77-285,1977-2C.B.213 and noted that a grantor could retain a power to change trustee.
This is in reference to a letter dated September 23, 1991, and previous correspondence, submitted on your behalf by your authorized representative, requesting rulings concerning the formation of Unitrust, a proposed trust intended to qualify as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Internal Revenue Code, and a proposed transfer to Unitrust of stock presently held in Blind Trust for Grantor's benefit.

Grantor, presently serving as Elected Official, owns a minority interest in Corporation, a closely held corporation. Corporation plans to develop a project in the state in which Grantor holds office, and Grantor intends to promote and support such project. In order to prevent the appearance of a conflict of interest, Grantor has contributed his interest in Corporation into Blind Trust.

Under the terms of the governing instrument, Blind Trust will terminate on the earlier of Grantor's death or the end of his term in his present position as Elected Official. Upon termination of Blind Trust, all the assets will be distributed to Grantor or Grantor's representative. Based on the representation to Grantors age, the value of Grantor's reversionary interest in Blind Trust from the inception of Blind Trust is greater than 5% of the value of Blind Trust.

During the term of blind Trust, Grantor can request Trustee to distribute to him cash or cash equivalents. Grantor also reserves the power to direct Trustee to create one or more charitable trusts or charitable remainder trusts, and to contribute part or all of the assets of Blind Trust to these trusts. Such a direction by Grantor must be in writing and must include a copy of the trust agreement to be used for the charitable trusts or charitable remainder trusts.

Grantor now proposes to direct Trustee to create Unitrust, which is intended to qualify as a charitable remainder unitrust under section 664(d)(2) of the Code, and fund it with some of the assets currently held by Blind Trust.

Article II of the governing instrument of Unitrust provides in part as follows:

"In each taxable year of the trust, the trustee shall pay to [Grantor] during his lifetime, and after his death, to [Spouse] (hereinafter referred to as the "recipients") for such time as he or she survives, a unitrust amount equal to the lesser of (a) the trust income for the taxable year, as defined in [section] 643(b) of the Code and the regulations thereunder, and (b) ten percent (10%) of the net fair market value of the assets of the trust valued as of the first day of each taxable year of the trust (the "valuation date"). The unitrust amount for any year shall also include the amount of any trust income for such year that is in excess of the amount required to be distributed under (b), above, to the extent that the aggregate of the amounts paid in prior years was less than the aggregate of the amounts computed as ten percent (10%) of the net fair market value of the trust assets on the valuation dates. During the term of [Blind Trust] ... the unitrust amount will be paid to the trustee of [Blind Trust] and become an asset of [Blind Trust]."

[Grantor] reserves the right, exercisable by Last Will and Testament, to terminate the interest of [Spouse] in all or part of the trust property. If [Grantor] exercises such right and terminates the interest of [Spouse] in all or part of the trust property, then the charitable remainder interests shall appropriately accelerate.

Article V of the governing instrument of Unitrust contains the following provisions:

"Upon the death of the survivor recipient, the trustee shall distribute all of the then principal and income of the trust (other than any amount due either of the recipients or their estates under the provisions above) to the charities, in the percentages or amounts, listed on Schedule C, attached, to be their property absolutely, and free and discharged of all trust. If a charitable organization is not an organization described in [sections] 170(c), 2055(a) and 2522(a) of the Code at any time when any principal or income of the trust is to be distributed to it, then the trustee shall distribute such principal to such one or more organizations described in sections 170(c), 2055(a) and 2522(a) as the trustee shall select in its sole discretion.

During [Grantor's] lifetime, [Grantor] reserves the power to change any of the above charitable organizations to different charitable organizations which are public charities and are described in [sections] 170(c), 2055(a) and 2522(a) of the Code. After [Grantor's] death, if [spouse] survives [Grantor], then [Spouse] has the right to change any of the above charitable organizations to different charitable organizations which are public charities and are described in [sections] 170(c), 2055(a) and 2522(a) of the Code.

The general trustee may, in the trustee's discretion, at any time or times, after obtaining the written consent of [Spouse] if she is alive and has capacity and if not after obtaining the consent of [Grantor], direct that any amount, other than the unitrust amount described in paragraph 2, above, shall be paid to one or ore of the above-described charitable organizations specified by [Grantor] or [Spouse], provided that, in the case of distributions in kind, the adjusted basis of the property distributed is fairly representative of the adjusted basis of the property available for payment on the date of the payment."

Section A of Article VI of the governing instrument of Unitrust contains the following provision:

"In order to eliminate any appearance of possible conflict of interest caused by [Grantor's] ownership of [Corporation] stock, ... [Grantor has decided to create one or more charitable trusts, including this trust. To the extent [Blind Trust] still owns [Corporation] stock, then such stock will be contributed to these charitable trusts. All appreciation in value of the [Corporation] stock from the beginning of [Grantor's] term of office to the earlier of the date of sale of the stock or the end of [Grantor's] term of office would be distributed on such date (sale or end of term) to certain charities named in this and any other charitable trusts."

Article XIII of the governing instrument of Unitrust provides in part that during the present and any consecutive terms of Grantor as Elected Official, the sole trustee shall be Trustee, a trust company. After that time, Grantor's two children, Child 1 and Child 2, shall serve as general trustees, and Trust Company shall serve as independent trustee.

Paragraph 2 of section C of Article XIII of the governing instrument of Unitrust provides that the functions, powers and duties of the independent trustee shall include the following:
  1. "To perform all valuations necessary and incident to the administration of the trust, with respect to closely held stock (stock not traded on a national securities exchange or in a regularly quoted over-the-counter market), real estate and other difficult-to-value assets owned by the trust.
  2. With respect to closely held stock, including any such stock contributed by the settlor to this trust, to sell, purchase, exercise in person or by proxy all voting, option, subscription, reorganization, consolidation, merger and liquidation rights, and all other rights and privileges of whatsoever nature, incident, appurtenant or pertaining to such closely held stock."
Paragraph 2 of section E of Article XIII of the governing instrument of Unitrust provides as follow:

"[Grantor] reserves the right to remove the general trustee for any reason and substitute any other person (including [Grantor]) or entity as general trustee. If the independent trustee has resigned or has been removed by judicial process, then [Grantor] may appoint a successor independent trustee. After [Grantor's] death, the general trustee may remove the independent trustee and substitute any other person or entity as independent trustee who qualifies as an independent trustee."

Paragraph S of section G of Article XIII of the governing instrument of Unitrust defines the term "independent trustee" to mean:

"... a trustee who has no interest vested or contingent in the trust property, who cannot be benefitted by the exercise or nonexercise of the powers vested exclusively in the independent trustee, and who is not a "related or subordinate party," as defined in [section] 672(c)of the Code, and its successors. In addition, as an independent trustee must be one who can possess the Code provides that it may not be used or cited as precedent. the powers vested exclusively in the independent trustee without causing trust income or principal to be attributable to a trust beneficiary for federal income, gift or estate tax purposes prior to the distribution of the trust income or principal to that beneficiary."

ISSUE 1


Section 1.664-3(a)(3)(ii) of the Income Tax Regulations provides in part that a trust is not a charitable remainder unitrust if any person has the power to alter the amount to be paid to any named person other than an organization described in section 170(c)if such power would cause any person to be treated as the owner of the trust, or any portion thereof, if the grantor trust rules contained in subpart E, part 1, subchapter J, chapter 1, subtitle A of the Code were applicable to such trust.

Section 671 of the Code provided the general rule that if the grantor or another person is treated as the owner of any portion of a trust, his taxable income and credits shall include those items of income, deduction, and credits against tax of the trust that are attributable to that portion of the trust to the extent that such items would be taken into account in computing the taxable income or credits against tax of an individual.

Sections 673 through 677 of the Code specify the circumstances under which the grantor is regarded as the owner of portion of a trust.

Section 674(a) of the Code provides the general rule that the grantor shall be treated as the owner of any portion of a trust in respect of which beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party.

Section 672(a) of the Code defines the term "adverse party" as any person having a substantial beneficial interest in a trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust. Section 672(b) of the Code defines the term "nonadverse party" as any person who is not an adverse party.

Rev. Rul. 77-285, 1977-2 C.B. 213, holds that the grantor of a charitable remainder trust may reserve the power to dismiss the initial trustee and to appoint himself as successor trustee, as long as the trustee does not have the power to sprinkle the unitrust amount among possible recipients.

The Committee Reports to the Tax Reform Act of 1969 (P.L. 91-172, H.R. Rep. No. 91-413, (Part I), 91st Cong. (1st Seas. 1969), 1969-3 C.B. 200, 239) contain the following paragraph:

"It is contemplated that a charitable contribution deduction [for a transfer to a charitable remainder unitrust] would be denied where assets which do not have an objective, ascertainable market value such as real estate or stock in a closely held corporation, are transferred in trust, unless an independent trustee is the sole party responsible for making the annual determination of value."

Article V of Unitrust's governing instrument gives the general trustee, with the consent of Grantor or Spouse, the power to direct that any amount, other than the unitrust amount, shall be paid to one or more of the charitable remaindermen. If this power is exercised, the amounts paid to charitable organizations will reduce the fair market value of Unitrust's assets. The unitrust amount payable to Grantor for life and then to Spouse is a fixed percentage of the fair market value of Unitrust's assets determined annually. Because the exercise of this power would adversely affect the amounts payable to Grantor and Spouse, Grantor and Spouse are adverse parties with respect to exercise of this power. The general trustee can exercise this power only with the consent of Grantor or Spouse, both of whom are adverse parties. Therefore, irrespective of whether the general trustee is Child 1, Child 2, Spouse or Grantor, the provisions of section 674(a) are not applicable to treat the grantor as the owner of any portion of Unitrust.

In addition, none of the other provisions of subpart E would cause Grantor to be treated as the owner of all of Unitrust under subpart E.

In this case, Grantor has retained no powers that fall under the grantor trust rules of subpart E. In addition, the trustee of Unitrust has no authority to allocate any part of the unitrust amount among different recipients. The assets of Unitrust include assets that do not have a readily ascertainable market value, but a separate independent trustee is charged with the duty of valuing these assets. Therefore, there is no provision in any of the applicable Code sections nor the accompanying regulations that would prohibit Grantor, Spouse, Child 1 or Child 2 from serving as general trustee of Unitrust.

ISSUE 2


Grantor has retained the right to remove the general trustee and to substitute anyone, including himself, as the general trustee. Retention of this right will not adversely affect the status of Unitrust as a charitable remainder unitrust or Grantor's right to claim the applicable income tax deduction. See Rev. Rul. 77-285, supra.

Grantor has also retained the right to appoint a successor independent trustee if the independent trustee resigns or is removed by judicial process. In view of the fact that Grantor does not have the right to dismiss and replace an independent trustee, his right to appoint a successor does not give rise to an issue of whether the independent trustee is, in fact, independent. Therefore, retention of this right by Grantor will not adversely affect the status of the status of Unitrust as a charitable remainder unitrust or Grantor's right to claim the applicable income tax deduction.

ISSUE 3


Section 1.664-3(a)(4) of the Income Tax Regulations provides in part that a grantor to a charitable remainder unitrust may retain the power exercisable only by will to revoke or terminate the interest of any recipient other than an organization described in section 170(c)of the Code. Under the provision, Grantor's reservation of the right to revoke by will his spouse's interest in all or part of the trust property (see the second paragraph of Article II of the governing instrument) is allowable and will not adversely affect the status of Unitrust as a charitable remainder unitrust.

ISSUE 4


Section 1.664-3(a)(4) of the regulations states in part that the governing instrument of a charitable remainder unitrust may provide that any amount other than the unitrust amount shall be paid (or may be paid in the discretion of the trustee) to an organization described in section 170(c). Under this provision, the trustee's authority to make distributions to charitable organizations, subject to the consent of Grantor and Spouse, (see the last paragraph of Article V of the governing instrument) is allowable and will not adversely affect the status of Unitrust as a charitable remainder unitrust.

ISSUE 5


Rev. Rul. 76-7, 1976-1 C.B. 179, holds that the income beneficiary of a charitable remainder trust may have the power to substitute other charitable remaindermen for those named. Rev. Rul. 76-8, 1976-1 C.B. 179, holds that the grantor of a charitable remainder trust may also have such a power. Therefore, the exercise of such a power (see the next-to-last paragraph of Article V of the governing instrument) by Grantor or Spouse will not adversely affect Grantor's qualification for the income tax deduction taken in the year when assets are contributed to the Unitrust.

ISSUE 6


Section 2036(a) of the Code states in part 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 under which he has retained for his life (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the person, who shall possess or enjoy the property or the income therefrom.

Section 2038(a)(1) of the Code states in part that, in the case of transfers after June 22, 1936, 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, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power by the decedent to alter, amend, revoke or terminate.

Section 2055(a) of the Code provides that for estate tax purposes there shall be allowed a deduction from the gross estate for the value of all bequest, legacies, devises or transfers to or for the use of charitable organizations described therein.

Section 2056(a) of the Code provides that for estate tax purposes there shall be allowed (except as limited by section 2056(b)) a deduction from the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate.

Section 2056(b)(1) of the Code provides generally that the deduction allowed by section 2056(a) shall not be allowed if the interest in property passing to the surviving spouse is a life estate or other terminable interest.

Section 2056(b)(8)(A) of the Code state that if the surviving spouse of the decedent is the only noncharitable beneficiary of a qualified charitable remainder trust, section 2056(b)(1) shall not apply to any interest in such trust which passes or has passed from the decedent to such surviving spouse.

In general, a portion, if not all of, the value of Unitrust as of Grantor's date of death will be included in his estate under section 2036(a) because he will retain for life the right to receive the unitrust amount. See Rev. Rul. 76-273, 1976-2 C.B. 268. In addition, the entire value of Unitrust as of Grantor's date of death will also be included in his estate under section 2038 because he will retain the right to revoke Spouse's survivorship interest and the interests of the charitable organizations named initially and substitute other charities as remaindermen.

However, assuming Grantor does not revoke Spouses's unitrust interest, the value of the unitrust interest passing to Spouse at Grantor's death will qualify for the marital deduction under section 2056(a), because Unitrust meets the requirements set forth in section 2056(b)(8). In addition, the value of the charitable remainder interest will qualify for a charitable deduction under section 2055(a), because Unitrust is required to transfer all its assets to charitable organizations described in that section upon termination.

Consequently, the estate tax marital deduction under section 2056(a) and the estate tax charitable deduction under section 2055(a) will completely offset the amount of assets of Unitrust that will be included in Grantor's estate.

ISSUE 7


Section 673(a) of the Code provides that the grantor shall be treated as the owner of any portion of a trust in which he has a reversionary interest in either the corpus or income therefrom, if as of the inception of that portion of the trust, the value of such interest exceeds 5 percent of the value of such portion.

Rev. Rul. 85-13, 1985-1 C.B. 184, concludes that if a grantor is treated as the owner of an entire trust under subpart E, then the grantor is considered to be the owner of the trust assets for federal income tax purposes.

In this situation, Grantor has retained various powers over the assets in Blind Trust, including the power to request cash distributions and the power to direct the transfer of assets to charitable trusts. In addition, when Blind Trust terminates, all its assets will be distributed to Grantor or Grantor's representative. Grantor has a reversionary interest in the entire trust. Based on the representations made, the value of the reversionary interest at its inception is greater than 5% of the value of the trust.

Grantor is treated as the owner of all of Blind Trust under section 673(a) of the Code. Therefore, Grantor is considered to be the owner of the assets in Blind Trust for federal income tax purposes. When Grantor directs the trustee of Blind Trust to establish and fund a charitable remainder trust, such action has the same effect for federal income tax purposes as if Grantor had created and funded Unitrust.

ISSUE 8


Section 1.664-3(a)(5) of the regulations provides that only an individual or an organization described in section 170(c)of the Code may receive the unitrust amount for the life of an individual. Therefore, a unitrust amount that is payable for the life of an individual ordinarily could not be paid to a trust for the benefit of that individual.

In this case, however, Grantor created Unitrust. Further, Grantor created Blind Trust exclusively for his own benefit, and is the owner of Blind Trust under the provisions of section 673(a) of the Code. Upon the end of Grantor's term of office or his death, Blind Trust will terminate and all of its assets will revert to Grantor or his estate.

Accordingly, Blind Trust operates exclusively for the benefit of Grantor, and Grantor is the person who initiated all of the transactions involved in this case (including the creation of Blind Trust and the creation of Unitrust). Therefore, the fact that the unitrust amount is payable to Blind Trust during Grantor's term of office will not cause Unitrust to fail to qualify, as a consequence of section 1.664-3(a)(5) of the regulations, as a charitable remainder unitrust.

ISSUE 9


As noted above in Issue 4, section 1.664-3(a)(4) of the regulations states in part that the governing instrument of a charitable remainder unitrust may provide that any amount other than the unitrust amount shall be paid (or may be paid in the discretion of the trustee) to an organization described in section 170(c). Under this provision, the requirement that there be a distribution to charity upon the sale of the Corporation stock or the end of Grantor's term as Elected Official (see Section A of Article VI of the governing instrument) is allocable and will not adversely affect the status of Unitrust as charitable remainder unitrust.

Accordingly, we rule as follows:
  1. Unitrust will not be disqualified as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Code if Grantor, Spouse, Child 1 or Child 2 serves as general trustee.
  2. Grantor's retained rights to remove the general trustee and to substitute anyone, including himself, and to appoint a successor independent trustee if the independent trustee resigns or is removed by judicial process will not cause Unitrust to be disqualified as a charitable reminder unitrust within the meaning of section 664(d)(2) of the Code.
  3. Grantor's reservation of the right to revoke by will all or part of Spouse's interest in Unitrust will not cause Unitrust to be disqualified as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Code.
  4. Trustee's discretionary authority to make discretionary distributions of Unitrust assets to charitable organizations described in section 170(c)of the Code will not cause Unitrust to be disqualified as a charitable remainder unitrust within the meaning of section 664(d)(2).
  5. The exercise of the power by Grantor or Spouse to substitute other charitable remaindermen for those initially named will not cause Unitrust to be disqualified as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Code.
  6. The estate tax marital deduction under section 2056(a) of the Code and the estate tax charitable deduction under section 2055(a) will completely offset the amount of Unitrust assets included in Grantor's gross estate.
  7. When Grantor directs the trustee of Blind Trust to establish and fund Unitrust, the effect for federal income tax purposes will be the same if Grantor had created and funded Unitrust.
  8. The fact that the unitrust amount is payable to Blind Trust during Grantor's term of office will not cause Unitrust to fail to qualify as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Code.
  9. The requirement that there be a distribution to charity upon the sale of the Corporation stock or the end of Grantor's term as Elected Official will not cause Unitrust to be disqualified as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Code.
This ruling is based on the facts and applicable law in effect on the date of this letter. If there is a change in material fact or law (local or federal) before the transactions considered in this ruling take effect, the ruling will have no force or effect. If the taxpayer is in doubt whether there has been a change in material fact or law, a request for reconsideration of this ruling should be submitted to this office.

Except as we have ruled under the cited provisions of the Code, we express no opinion as to the tax consequences of the transaction described above under those provisions or under any other provisions of the Code.

In accordance with the instructions in a power of attorney appointment form, we are sending a copy of this letter to your authorized representative.

This ruling 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.

Related Topics On Power to Change Trustee or Change Charities in Unitrust

3.1.5  Selecting the Trustee:    There are three general options for trustee of a charitable trust. These are a corporate trustee, a charity serving as trustee or a private individual trustee. Before the trust is funded, the donor should understand the three options sufficiently well to make a reasoned decision. There are benefits of each of the three options and circumstances in which one of the three is preferred over the others. Advisors need to explain these options and benefits to donors so they can make a proper choice.


3.1.7  CRAT Document Requirements:    Very specific document requirements and applicable regulations for charitable remainder annuity trusts are set forth in Sec. 664. The document must specify an annuity amount for a life, lives or a term of up to 20 years.


3.10.5  Selecting the Trustee:    Generally, there are three options for the trustee of a charitable trust. These are a corporate trustee, a charity serving as trustee or a private individual trustee. Before the trust is funded, the donor should understand the three options sufficiently well to make a reasoned decision.


3.10.7  Unitrust Document Requirements:    Very specific document requirements and applicable regulations for charitable remainder unitrusts are set forth in Sec. 664. The document must specify a unitrust percentage for a life, lives or a term of up to 20 years.



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