Thursday, March 28, 2024
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GiftLaw Note: A unitrust may be created for a life, lives or a term of 1 to 20 years. However, it is also possible to combine lives and term of years trusts. In PLR 9331043, the Service permitted a remainder unitrust for two lives to include a guaranteed 20 year provision. If mother and father pass away prior to 20 years, then the balance of the term of 20 years is distributed to children. However, if mother and father live past the term of 20 years, then the trust functions as a typical two-life unitrust.

Since the trust cannot last longer than either a term of 20 years or 2 lives, the Service concluded that this trust is within the Sec. 1.664-3(a)(5)(i) regulation. In effect, if the parents pass away early, then the trust converts to a straight term of years trust. If they live past the selected term, then the trust is a one or two life trust. The possibility that the trust may be in one form or the other is permissible so long as both are qualified periods of time and the deduction reflects the appropriate contingencies.

This is in response to your letter dated November 8, 1992, submitted on behalf of A and B, concerning the qualification of the Trust as a charitable remainder unitrust under section 664 of the Internal Revenue Code and applicable regulations.

The Trust, intended to be a charitable remainder unitrust under section 664 of the Code, was created in 1991. The terms of the Trust provide that the unitrust amount is payable in equal shares to the Grantors, A and B, during their joint lives and then to the survivor for life. The Trust also provides that if both A and B die before the end of 20 years after the date of the Trust agreement, then the unitrust amount is payable to the Grantors' children, C and D, in equal shares.

The Trust will terminate upon the death of the last to die of the Grantors, or if both Grantors die within 20 years from the date of the trust agreement, then upon the earlier of the 20th anniversary of the date of the agreement or the death of the survivor of C and D. Upon termination of the Trust, the balance in the Trust will be paid to organizations described in sections 170(c), 170(b)(1)(A), 2055(a) and 2522(a) of the Code.

Under the Trust agreement, the Grantors A and B, reserve the power, exercisable by inter vivos or testamentary notice delivered to the trustee, to substitute for the named charitable remainderman another charitable organization described in sections 170(c), 170(b)(1)(A), 2055(a) and 2522(a), or to add such a charitable organization to receive a share of the charitable remainder interest.

The requested rulings are as follows: (1) the Trust qualifies as a charitable remainder unitrust as defined under section 664(d)(2) of the Code; (2) the provision in the Trust agreement providing for the payment of the unitrust amount to C and D until the end of the 20 year period after the date of the creation of the Trust if both A and B die before the end of this period will not disqualify the Trust as a charitable remainder unitrust under section 664 and the applicable regulations; and (3) the provision in the Trust agreement reserving the power with the Grantors to add or substitute other qualified charitable organizations for the named charitable remaindermen will not disqualify the Trust as a charitable remainder unitrust under section 664 and the applicable regulations.

Section 664(d)(2) of the Code sets forth the requirements for a charitable remainder unitrust. Section 664(d)(2)(A) provides that the unitrust amount must be paid 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 the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals.

Section 1.664-3(a)(5)(i) of the Income Tax Regulations provides that, in any event, the period of payment of the unitrust amount may not extend beyond either the life or lives of a named individual or individuals or a term of years not to exceed 20 years. For example, the governing instrument may not provide for the payment of a unitrust amount to X for his life and then to Y for a term of years because it is possible for the period to last longer than either the lives of recipients in being at the creation of the trust or a term of years not to exceed 20 years.

Under the terms of the Trust Agreement as submitted to us, the Trust provides for the payment of the unitrust amount to C and D for the shorter of their lives or the balance of the 20 year period after the creation of the Trust if both A and B die before the end of this 20 year period. Under this provision, the payment of the unitrust amount will not, under any circumstances, extend beyond either the lives of the names recipients or a term of 20 years from the creation of the Trust. Accordingly, we conclude that this provision will not disqualify the Trust as a charitable remainder unitrust under section 664 of the Code and the applicable regulations.

Section 1.664- l(a)(4) of the regulations provides that for a trust to be a charitable remainder trust, it must meet the definition of an function exclusively as a charitable remainder trust from the creation of the trust. Solely for purposes of section 664 of the Code and the regulations thereunder, the trust will be deemed to be created at the earliest time that neither the grantor nor any other person is treated as the owner of the entire trust under subpart E, part 1, subchapter J, chapter 1, subtitle A of the Code (subpart E). For purposes of the preceding sentence, neither the grantor nor the grantees spouse is treated as the owner of the trust merely because the grantor or the grantor's spouse is named as a recipient of the annuity or unitrust amount.

Section 1.664-3(a)(3)(ii) of the regulations provides 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) of the Code if such power would cause any person to be treated as the owner of the trust, or any portion thereof, if subpart E were applicable to such 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 the 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 674(b)(4) of the Code provides that section 674(a) shall not apply to a power to determine the beneficial enjoyment of the corpus or the income therefrom if the corpus or income is irrevocably payable for a purpose specified in section 170(c) (relating to the definition of charitable contributions).

Section 1.674(a)-I(b) of the regulations provides that, in general terms, the grantor is treated as the owner of a portion of a trust if he or a nonadverse party or both has a power to dispose of the beneficial enjoyment of the corpus or income unless the power is one described in section 1.674(a)- l(b)(1) through section 1.674(a)- I (b)(3). Pursuant to section 1.674(a)- l(b)(1)(iii), the power to choose between charitable beneficiaries or to affect the manner of their enjoyment of a beneficial interest (section 674(b)(4)) will not cause the grantor to be treated as an owner of a portion of the trust.

In Rev. Rul. 76-8, 1976-1 C.B. 179, the Service considered the case of a charitable remainder trust in which its governing instrument provides that the grantor may, at any time, designate, in lieu of the charitable organization named in the trust instrument, another organization satisfying the requirements in section 170(c), 2055(a), and 2522(a) of the Code as the recipient of the remainder. Rev. Rul. 76-8 concludes that the reserved power retained by the grantor that pen-nits a discretionary right to designate a substitute remainderman is not a retention of power that would disqualify an otherwise qualifying charitable remainder trust under section 664 of the Code and the applicable regulations.

Therefore, we conclude that the existence of the reserved powers in the Grantors to change the remainderman during their lifetimes or by will, as provided by the terms of the Trust agreement as submitted to us, does not disqualify the Trust as a charitable remainder unitrust under section 664 of the Code and the applicable regulations.

The governing instrument of Trust A as submitted 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.

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 and the applicable regulations.

No opinion is expressed as to any other provisions of the Trust or any amendments to the provisions of the Trust. 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.

A copy of this letter should be attached to the Trust's next federal income tax return. 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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