Wednesday, May 1, 2024
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GiftLaw Note: Taxpayer desired to create a charitable remainder unitrust (CRUT) for himself and his spouse. However, his spouse was not a U.S. citizen and therefore did not qualify for the Sec. 2056(b)(8) marital deduction. Taxpayer planned to fund the CRUT with separate property and retain a testamentary right of revocation. The CRUT included the required provisions for a qualified domestic trust (QDOT) under Sec. 2056A(a).

The CRUT will qualify both as a unitrust under Sec. 664 and as a qualified domestic trust (QDOT) under Sec. 2056A(a). The QDOT requirements are: (1) at least one trustee be a citizen of the U.S. or a domestic corporation; (2) the U.S. trustee agrees to withhold from unitrust amounts any tax imposed by Sec. 2056A; and (3) the trustee will follow Treasury requirements to ensure collection of the tax under Sec. 2056A(b).

Taxpayer's trust also will qualify for an income tax deduction as a CRUT. There will be no gift at the time the trust is established, because under Reg. 25.2511-1(c), Husband's testamentary power of revocation renders the gift incomplete. In addition, the trust will qualify for the marital deduction under the QDOT rules. Finally, the remainder to charity after the death of the spouse will qualify for a charitable estate tax deduction. While the U.S. trustee may be required under Sec. 2056A(b)(1)(A) to withhold tax from unitrust payments, the withheld amount will come from the income interest of the surviving spouse and will not affect the trust qualification.
On March 10, 1992, your attorney asked us to rule as to the federal income, gift and estate tax consequences of the transaction set forth below. The facts submitted are as follows.

The taxpayer proposes to establish a charitable remainder unitrust. The unitrust amount is to be paid to the taxpayer during his lifetime and then to his spouse, if she survives him. The taxpayer's spouse is not a citizen of the United States. The charitable remainder trust instrument follows the format promulgated under Rev. Proc. 90-30, 1990-C.B.534, for a two life, consecutive interest, intervivos charitable remainder unitrust.

Paragraph First of the trust provides that in each taxable year of the trust, the trustee shall pay to the taxpayer during his lifetime, and after his death, to his wife, during her lifetime, a unitrust amount equal to 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 unitrust amount shall be paid in equal quarterly installments from income and to the extent income is not sufficient, from principal. At the death of the last to die of the taxpayer and his spouse the remainder interest is to be distributed to a charitable foundation established by the taxpayer. The taxpayer reserves the right to change the remainderman to such one or more charitable organizations described in sections 170(c), 2055(a), and 2522(a) as the taxpayer shall appoint by written instrument delivered to the trustee or by his last will making reference to this power of appointment. If any organization appointed as a remainder beneficiary is not an organization described in sections 170(c), 2055(a) and 2522(a) of the Code when any distribution of principal and income is to be distributed to it, the trust principal and income is to be distributed in the trustee's discretion to organizations that are so described.

Paragraph First of the trust also provides that the lifetime interest of the spouse shall take effect upon the death of taxpayer only if she furnishes funds for payment of any federal and state death taxes for which the trustee is liable upon death of the taxpayer.

The taxpayer is the sole trustor and trustee of the trust and has reserved the right to revoke the successor individual beneficiary's interest exercisable by his will.

As noted above, the taxpayer's spouse and successor individual beneficiary, is not a citizen of the United States. The requirements for qualification of the trust as a qualified domestic trust (QDT) under section 2056(A) of the Internal Revenue Code of 1986, as amended, are contained in Paragraph Tenth of the trust instrument, applicable upon the taxpayer's death.

Paragraph Tenth provides that after the death of taxpayer (and assuming the taxpayer does not revoke the spouse's interest) the following provisions shall apply:

A. At least one (1) trustee shall always be an individual citizen of the United States or a domestic corporation.

B. The trustee who is an individual citizen of the United States or the domestic corporation shall withhold from any distribution (other than distribution of income) the tax imposed by section 2056A of the Code on such distribution.

C. The trustee shall follow such requirements as the Secretary may by regulation prescribe to ensure the collection of any tax imposed by subsection (b) of section 2056A of the Code.

Specifically, your attorney has requested that we rule as follows:
  1. That the proposed charitable remainder trust meets the applicable requirements of Section 664(d)(2) of the Code as a charitable remainder unitrust.

  2. No taxable gift from the taxpayer to his spouse results from the creation of the charitable remainder unitrust and the contribution of assets to the trust.

  3. Upon the death of the taxpayer and assuming his spouse survives him, no federal estate tax will arise as a result of the trust because the interest of the spouse will qualify for the federal estate tax marital deduction, notwithstanding her status as a non U.S. citizen (assuming appropriate elections are made to qualify the trust for the estate tax marital deduction).

  4. Upon the death of the spouse and assuming she survives the taxpayer, a charitable deduction will be allowed in computing the tax imposed under Section 2056A(b)(1)(B)

RULING REQUEST NO.1


The governing instrument submitted with the request contains the provisions set forth in Rev. Rul. 90-30, 1990-1 C.B. 534. 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./1/

RULING REQUEST NO. 2


Section 25.2511-2(b) of the Gift Tax Regulations provides that as to any property or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another, the gift is complete. But, if upon a transfer of property (whether in trust or otherwise) the donor reserves any power over its disposition, the gift may be totally complete, or may be partially complete and partially incomplete depending upon all the facts in the particular case.

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 name new beneficiaries or change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed or ascertainable standard. Thus, if an estate for life is transferred but, by an exercise of a power, the estate may be cut down by the donor to one of less value, and without restriction upon the extent to which the estate may be so cut down, the transfer constitutes an incomplete gift.

In the instant case, because the taxpayer has reserved the right to revoke the spouse's successor life estate by will, the transfer to the spouse is incomplete. The allowable charitable deduction is determined in accordance with Rev. Rul. 79-243, 1979-2 C.B. 343.

RULING REQUESTS NOS: 3 AND 4.


Section 2055(a) provides that for purposes of the tax imposed by section 2001, 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 any corporation, organized and operated exclusively for religious, charitable, scientific, literary or educational purposes.

Section 2055(e)(2)(A) of the Code provides that where an interest in property passes or has passed from the decedent to a person, or for a use, described in subsection (a), and an interest in the same property passes or has passed (for less than an adequate and full consideration in money or money's worth) from the decedent to a person, or for a use, not described in subsection (a), a deduction shall be allowed under this section for the interest which passes or has passed to the person, or for the use, described in subsection (a) if, in the case of a remainder interest, such interest is in a trust which is a charitable remainder annuity trust or a charitable remainder unitrust (described in section 664) or a pooled income fund (described in section 642(c)(5).

Section 2056(a) provides that for purposes of the tax imposed by section 2001, the value of the taxable estate shall, except as limited by subsection (b), be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from to 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) provides that where, on the lapse of time, on the occurrence of an event or contingency or on the failure of an event or contingency to occur, an interest passing to the surviving spouse will terminate or fail, no deduction shall be allowed under this section with respect to such interest (a) if an interest in such property passes or has passed (for less than an adequate and full consideration in money or money's worth) from the decedent to any person other than such surviving spouse (or the estate of such spouse); and (b) if by reason of such passing such person (or his heirs or assigns) may possess or enjoy any part of such property after such termination or failure of the interest so passing to the surviving spouse.

Section 2056(b)(8) of the Code provides that if the surviving spouse of he decedent is the only noncharitable beneficiary of a qualified charitable remainder trust (i.e. a trust described in section 664), 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.

Under section 2056(d) of the Code, a marital deduction is not allowed for a interest passing to the surviving spouse if the spouse is not a citizen of the United States, unless the interest passes to the spouse in a "Qualified Domestic Trust)" (QDT).

Under section 2056A(a) of the Code provides that the term "Qualified Domestic Trust" is a trust that would otherwise qualify for a marital deduction and meets certain additional requirements. Specifically: (1) the trust instrument requires that at least 1 trustee of the trust be an individual citizen of the United States or a domestic corporation; (2) the trust provides that no distribution "other than a distribution of income" may be made from the trust unless a U.S. trustee (an individual citizen of the U.S. or a domestic corporation) has the right to withhold from the distribution the additional estate tax imposed under section 2056A(b)(1) on the distribution; (3) the trust meets such requirements as the Secretary may by regulation prescribe to ensure the collection of any tax imposed by section 2056A(b) and (4) an election under section 2056A by the executor of the decedent applies to such trust.

Section 2056A(d) of the Code provides that the election shall be made by the executor on the return of tax imposed by section 2001. Such election, once made, is irrevocable.

Section 2056A(b)(1)(A) of the Code provides that an additional estate tax is imposed on any distribution before the death of the surviving spouse from a qualified domestic trust. However, under section 2056A(b)(3) distributions of income, and distributions of principal on account of hardship are exempt from the additional estate tax. In addition, under section 2056A(b)(1)(B), an additional estate tax is imposed on the value of the trust corpus remaining at the spouse's death.

Section 2056A(b)(10)(A) of the Code provides, in general, if any property remaining in qualified domestic trust on the date of death of the surviving spouse is includible in the gross estate of such spouse (or would be includible if such spouse were a citizen or resident of the United States), any benefit which is allowable (or would be allowable if such spouse were a citizen or resident of the United States) with respect to such property to the estate of such spouse under Sections 2032, 2032A, 2055, 2056 or 6166 shall be allowed for purposes of the tax imposed under section 2056A(b)(1)(B).

In the instant case, the trust satisfies the requirements of section 664 of the Code. Therefore, on the death of the taxpayer, assuming the taxpayer does not revoke the spouse's unitrust interest, the spouse's unitrust interest will satisfy the requirements for a marital deduction under section 2056(b)(8). Further, the trust contains provisions required under section 2056A(a) of the Code. Accordingly, if the executor makes the election under section 2056A(d) of the Code, the trust will qualify as a qualified domestic trust under section 2056A(a) of the Code.

Therefore, assuming proper election is made by the taxpayer's executor under the QDT provisions of the Code, the spouse's interest will qualify for the marital deduction, under sections 2056(b)(8) and 2056A of the Code, and the remainder interest will qualify for the charitable deduction under section 2055(a) of the Code in the estate of the taxpayer. We note however, that to the extent any unitrust payment consist of trust corpus, that part of the distribution will be subject to the additional estate tax imposed under section 2056A(b)(1) and the trustee must withhold from the payment the tax imposed.

Further, on the death of the spouse, in computing the additional estate tax imposed under section 2056A(b)(1)(B) on the value of the trust corpus at the time of the spouse's death, in accordance with section 2056A(b)(10)(A), an estate tax charitable deduction will be allowed under section 2055(a) because the remainder interest must be distributed to an organization which is qualified under section 2055(a) of the Code.

Except as we have specifically ruled herein, we express no opinion on the federal tax consequences of the transaction under the cited provisions of the Code or under any other provisions of the Code.

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. Temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted. Therefore, this ruling will be modified or revoked by adoption of temporary or final regulations to the extent that the regulations are inconsistent with any conclusion in this ruling. See section 11.04 of Rev. Proc. 92-1, 1992-1 I.R.B. 9, 30. However, when the criteria in section 11.05 of Rev. Proc. 92-1 are satisfied, a ruling is not revoked or modified retroactively except in rare or unusual circumstances.

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 transaction considered in this ruling takes 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 the ruling should be submitted to this office.

In accordance with the power of attorney and declaration of representative currently on file with this office, a copy of this letter is being sent to your representative.

ENDNOTES


/1/ In this regard, we note that the requirement that the trustee, after the taxpayer's death, must withhold from each payment any tax imposed on the distribution under section 2056A(b)(1)(A) does not disqualify the trust under section 664, since the trustee is merely withholding a tax on a portion of the unitrust payment payable to the spouse. Further, as discussed below the trust corpus will be deductible under section 2055 in computing the additional estate tax imposed under section 2056A(b)(1)(B) on the spouse's death. Compare Rev. Rul. 82-128, 1982-2 C.B. 71.

END OF ENDNOTES

Related Topics On QDOT and Unitrust

1.2.5  Marital Deduction:    Since 1981, there has been an unlimited marital deduction. Sec. 2523(a). This unlimited marital deduction allows free transfer of assets between spouses. This free transfer is very helpful in balancing estate sizes to make full use of the available exemption equivalent in each estate.


1.3.4  Marital Deduction:    Since 1981, there has been an unlimited marital deduction. Individuals who are married may transfer any assets outright to a surviving spouse, with the entire transfer qualifying for a marital deduction. Since it is desirable to preserve the value of the applicable exclusion amount for the first spouse to pass away in a bypass or family trust, a common plan is to fund a bypass trust to the maximum amount and transfer the balance of the estate outright or in trust to the surviving spouse.

3.10.9  Income, Gift, Estate and Generation-Skipping Transfer Taxes:    The donor to a charitable remainder unitrust 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.


3.11.4  IRA to Testamentary Unitrust:    During life, an IRA is an excellent asset. It grows tax free, the minimum withdrawals under the regulations are fairly modest and it provides both retirement income and liquidity for the IRA owner. However, for the children or other individual heirs of the IRA owner, the IRA is not nearly as desirable an asset.


6.7.5  Testamentary Charitable Remainder Unitrust:    The testamentary charitable remainder unitrust (CRUT) is beneficial in that it allows for an income stream to be paid to selected beneficiaries after the donor's death. This is often a nice planning tool because it spreads out the inheritance and ensures the beneficiary an income stream for life, lives, a selected term of up to 20 years or a combination of life or lives and a term of up to 20 years.



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