Friday, April 19, 2024
GiftLaw Pro
GiftLaw Note: One of the most attractive planning devices is the transfer of an IRA, pension plan or other income in respect of a decedent (IRD) asset to a testamentary charitable remainder trust. Crescendo Program 57 includes the capability to illustrate this device. In this ruling, the Service notes that distribution of an IRA or pension plan to a charitable remainder trust will be taxable income to the trust in the year of the distribution, but will not require payment of tax as unrelated business taxable income. In effect, the distribution of the IRA is like the payment of rent, dividends, royalties or other income to a charitable remainder trust. The primary advantage of this plan is that all of the untaxed ordinary income is accumulated in the trust, benefits family by producing income for the term of the trust and then is distributed to charity. The benefit to family and charity is maximized, since no income tax is paid on the value accumulated within the trust.
This letter is in response to your letter dated October 16, 1995 and prior correspondence requesting rulings on the federal estate and income tax consequences of the proposed contribution to a charitable remainder unitrust of the assets of a qualified plan. Specifically, you have asked us to rule that (1) no income tax will be payable by A or B or their children, or the trust, upon the distribution of the plan assets to the trust; and (2) the present value of the charitable interest in the property transferred to the trust upon A's death will qualify for the estate tax charitable deduction under section 2055.

The following facts have been represented. A and B are husband and wife. On March 15, 1995, they executed an irrevocable declaration of trust establishing the M trust. The trust is intended to qualify as a charitable remainder unitrust under section 664(d)(2) and (3) of the Internal Revenue Code. The two children of A and B will be the lifetime recipients of the unitrust amount.

A is a participant in a retirement plan which is qualified under section 401(a). A intends to designate the trust as the beneficiary of A's interest in the retirement plan. Thus, upon A's death the proceeds of this plan will be paid in a lump sum to the trust.

Under section 61(a)(14), gross income includes income in respect of a decedent. Section 691(a)(1) provides rules regarding items of gross income in respect of a decedent that are not properly includible in respect of the taxable period in which the decedent's death occurs or a prior period. Under that section, all such items are included in the gross income, for the taxable year when received, of the person who, by reason of the death of the decedent, acquires the right to receive the amount.

Section 1.691(a)-1(b) of the Income Tax Regulations provides that the term "income in respect of a decedent" refers to those amounts to which a decedent was entitled as gross income but that were not properly includible in computing the decedent's taxable income for the taxable year ending with the date of death or for a previous taxable year under the method of accounting employed by the decedent.

Section 691(a)(3) provides that the right to receive an amount of income in respect of a decedent shall be treated, in the hands of the person who acquired such right by reason of the death of the decedent, as if it had been acquired by such person in the transaction in which the right to receive the income was originally derived. In addition, the amount includible in gross income shall be considered in the hands of such person to have the character which it would have had in the hands of the decedent if the decedent had lived and received such amount.

Section 664(a) provides that notwithstanding any other provision of subchapter J, the provisions of this section, in accordance with regulations described by the Secretary, apply in the case of a charitable remainder annuity trust and a charitable remainder unitrust.

Section 664(b) provides that amounts distributed by a charitable remainder unitrust shall be considered as having the following characteristics in the hands of the beneficiary to whom is paid the unitrust amount described in subsection (d)(2)(A):
  1. First, as amounts of income (other than gains, and amounts treated as gains, from the sale or other disposition of capital assets) includible in gross income to the extent of such income of the trust for the year and such undistributed income of the trust for prior years;
  2. Second, as capital gain to the extent of the capital gain of the trust for the year and the undistributed capital gain of the trust for prior years;
  3. Third, as other income to the extent of such income of the trust for the year and such undistributed income of the trust for prior years; and
  4. Fourth, as a distribution of trust corpus.
Section 664(c) provides that a charitable remainder unitrust is exempt from tax unless it has unrelated business taxable income within the meaning of section 512.

Based on the information submitted and the representations made, we conclude that the income from the distribution of the proceeds from A's retirement plan to the trust will be income in respect of a decedent under section 691. See Rev. Rul. 69-297, 1969-1 C.B. 131, and Rev. Rul. 75-125, 1975-1 C.B. 254. The income attributable to the retirement plan will be includible in the gross income of the trust for the taxable year the distribution is received by the trust as the designated beneficiary of A's retirement plan. Provided the trust is a qualified charitable remainder unitrust within the meaning of section 664(d)(2) and (3), the trust will not be taxable on its income for that year unless, for that year, it has unrelated business taxable income within the meaning of section 512. Neither A nor B will be taxable on the income from the distribution of the retirement plan to the trust.

In the hands of the trust and for purposes of section 664(b), the income in respect of a decedent from the A's retirement plan will have the same character that it would have had in the hands of A if A had lived and received such amounts. Provided the trust is a qualified charitable remainder unitrust, the character of the unitrust amounts payable to A's children will be determined under section 664(b) and will consist first of income (other than gains, and amounts treated as gains, from the sale or other disposition of capital assets) includible in gross income to the extent of such income of the trust for the year and such undistributed income of the trust for prior years. The income attributable to A's retirement plan will be included in this category of income. Thus, A's children will be taxable on the income from A's retirement plan only to the extent the distributions of the unitrust amount are characterized as income from the retirement plan in accordance with the provisions of section 664(b) and the regulations thereunder.

With regard to the second issue, section 4 of Rev. Proc. 96-3, 1996-1 I.R.B. 88, lists issues on which the Service will not ordinarily issue letter rulings. Among these issues is whether a transfer to a charitable remainder trust that provides for unitrust payments for one or two lives qualifies for a charitable deduction under section 2055.

However, provided the trust is a qualified charitable remainder trust, we conclude that the present value of the remainder interest in A's retirement plan that is transferred to the trust will qualify for the federal estate tax charitable deduction under section 2055(a).

Except as specifically set forth above, no opinion is expressed or implied concerning any other provision of the trust or as to the federal tax consequences of the formation or operation of the trust under the provisions of any other section of the Code. Specifically, no opinion is expressed as to whether the trust qualifies as a charitable remainder trust under section 664.

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.

This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) provides that it may not be used or cited as precedent.

Sircerely yours,
Assistant Chief Counsel
(Passthroughs and Special Industries)
By ____
Frances Schafer
Senior Technician Reviewer
Branch 4

Related Topics On IRD to Testamentary Unitrust

4.6.4  IRA to Trust for Surviving Spouse:    Many estate plans include creation of a bypass trust equal to the exemption amount at date of death, with the balance of the estate transferred to a marital deduction trust for the surviving spouse. The most popular spousal trust is a qualified terminable interest property (QTIP) trust. If the IRA or other retirement plan is transferred to a QTIP trust, the distributions will be based on the Single Life Table. This will result in much larger distributions and greater income tax than would be applicable if the IRA were rolled over by the spouse and he or she could use the Uniform Lifetime Table.


4.6.5  IRA to Unitrust for Children:    There are two basic methods for transferring an IRA to a unitrust for children. One option is to transfer the IRA to a term of years trust for the children. The second option is to transfer the IRA to a trust that will pay the children for their lives.


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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