Thursday, April 25, 2024
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GiftLaw Note: The charitable remainder unitrust agreement which was the subject of this ruling contained provisions allowing the grantor to change the charitable remainder beneficiary of a trust, allowing the grantor to instruct the trustee of the trust to distribute all or a portion of the trust assets to a qualifying charity during the term of the trust, providing for a proportionate reduction in the unitrust amount in the wake of any such early distribution to charity and the retained right to negotiate the trustee's compensation. Based on the facts in this ruling, the IRS held that these provisions would not invalidate an otherwise valid charitable remainder trust.
This responds to your letter on behalf of Grantor dated October 22, 1996, and prior correspondence, requesting a ruling that certain trust provisions contained in Trust A and Trust B do not disqualify the trusts under section 664 of the Internal Revenue Code and section 1.664 of the Income Tax Regulations.

REPRESENTED FACTS


Grantor proposes to contribute appreciated stock in a publicly traded corporation to Trust A and Trust B. Trust A and Trust B contain substantially the same provisions as each other and as the sample charitable remainder unitrust for two lives with consecutive interests outlined in Rev. Proc. 90-30, 1990-1 C.B. 534. Trust A and Trust B provide for a fixed annual payout of 7 percent of the value of the trust principal in equal quarterly payments for Grantor's life and then to Grantor's wife, for her life. The trustee will determine the trusts' net fair market value on the first business day of each taxable year. Upon the death of the survivor of Grantor and his wife, the remaining principal in each trust will be distributed to an organization described in sections 170(b)(1)(A), 170(c), 2055(a), and 2522.

Pursuant to Rev. Proc. 96-3, 1996-1 I.R.B. 82, the Internal Revenue Service has generally discontinued issuing rulings concerning whether an inter vivos charitable remainder unitrust with two lives satisfies the requirements of section 664. Trust A and Trust B, however, contain provisions not addressed in Rev. Proc. 90-30, and therefore we will issue a ruling on whether those provisions disqualify the proposed trusts under section 664. In accordance with Rev. Proc. 96-3, however, we will not rule on whether the trusts satisfy the requirements of section 664. The provisions not addressed in Rev. Proc. 90-30 are as follows:
  1. Paragraph SIXTH B. This provision provides that the Grantor retains the right to change the designation of the ultimate charitable beneficiary of the trusts by his last will and testament or other writing executed prior to his death or incapacity and delivered to the trustee. The Grantor may change the ultimate charitable beneficiary to any organization described in sections 170(c), 2055(a), and 2522.
  2. Paragraph SIXTH E (Trust B only). This provision provides that the Grantor retains the right to instruct the trustee to distribute a portion or all of the trust assets to qualifying charitable organizations during the term of the trust. This provision mandates that any distribution occur on the last day of Trust B's taxable year. After any distribution under this paragraph, the unitrust amount for the next year is calculated by multiplying the fixed percentage by the net fair market value of Trust B's assets as of the next succeeding valuation date. The unitrust percentage used to determine the unitrust amount will not change upon an early termination of a portion of the trust.
  3. Paragraph TWELFTH. This provision allows the Grantor to negotiate the trustee's compensation.
  4. Paragraph SEVENTEENTH. This provision allows the Grantor to remove the trustee with or without cause and appoint a successor corporate fiduciary as trustee.
  5. Paragraph EIGHTEENTH. This provision provides the Grantor with the right to appoint investment managers and to remove such investment managers with or without cause.
Based on these provisions, Grantor requests the following rulings:
  1. That Grantor's retention in Paragraph SIXTH B of the power to change the designation of the ultimate charitable beneficiary of the trusts by his last will or testament or other conforming writing is not a retained power that disqualifies the trusts as charitable remainder unitrusts under section 664.
  2. That Grantor's retention of the power in Paragraph SIXTH E of Trust B to instruct the trustee to distribute all or a portion of the trust assets to a qualified charity during the term of the trust is not a retained power that disqualifies Trust B as a charitable remainder unitrust under section 664.
  3. That in the event Trust B distributes a portion or all of its trust assets to qualifying charitable organizations during the term of the trust the unitrust amount for the next year is calculated by multiplying the fixed percentage by the remaining trust value on the next valuation day without disqualifying Trust B as a charitable remainder unitrust under section 664.
  4. That Grantor's retention of the power in paragraph TWELFTH allowing the Grantor to negotiate the trustee's compensation is not a retained power that disqualifies the trusts as charitable remainder unitrusts under section 664.
  5. That Grantor's retention of the power in paragraph SEVENTEENTH allowing the Grantor to remove the trustee with or without cause and appoint a successor corporate fiduciary as trustee is not a retained power that disqualifies the trusts as charitable remainder unitrusts under section 664.
  6. That Grantor's retention of the power in paragraph EIGHTEENTH providing the Grantor with the right to appoint investment managers and to remove such investment managers with or without cause is not a retained power that disqualifies the trusts as charitable remainder unitrusts under section 664.

LAW AND ANALYSIS


Section 664 defines charitable remainder trusts. Under section 664(d)(2)(A), a charitable remainder unitrust is a trust that pays, not less than annually, a fixed percentage (not less than five percent) of the net fair market value of the trust's assets valued annually to one or more persons, at least one of which is not an organization described in section 170(c), for, in the case of an individual, a term of years (not in excess of 20 years) or for the life or lives of such individual or individual.

Under section 664(d)(2)(B), a charitable remainder unitrust may not pay any amount other than the fixed percentage described in section 664(d)(2)(A) to or for the use of any person other than an organization described in section 170(c).

Section 664(d)(2)(C) requires that a charitable remainder unitrust transfer its remainder interest to, or for the use of, an organization described in section 170(c), or retain it for such use, after the trust completes paying the fixed percentage payments under section 664(d)(2)(A).

Section 1.664-1(a)(4) states that for a trust to be a charitable remainder trust it must meet the definition of, and function exclusively as, a charitable remainder trust from its creation. For section 664 purposes, the trust is 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, subtitle A of the Code.

Section 1.664-3(a)(1) requires that a charitable remainder unitrust pay at least annually a fixed percentage of the net fair market value of the trust assets to person or persons, at least one of which is not an organization described in section 170(c), each taxable year.

Section 1.664-3(a)(1)(iv) explains the rules applicable in computing the net fair market value of the trust assets for section 664(d)(2)(A) purposes. This section allows the trust to determine the net fair market value of its assets on any one day during the trust's taxable year or by taking the average of valuations made on more than one day during the trust's taxable year so long as the trust uses the same valuation dates and methods each year. This section further states that the fixed percentage payment described in section 664(d)(2)(A) must be based upon the valuation for the year.

Section 1.664-3(a)(3)(ii) maintains 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 subpart E, part 1, subchapter J, chapter 1, subtitle A of the Code were applicable to such trust.

Section 1.664-3(a)(4) provides that the trust may not be subject to a power to invade, alter, amend, or revoke for the beneficial use of a person other than an organization described in section 170(c). It further states that the governing instrument may provide that a portion of the trusts assets may be distributed currently to an organization described in section 170(c).

Section 1.674(a)-1(b) states, generally, that a grantor is treated as the owner of a portion of a trust if he or a nonadverse party or both has the power to dispose of the beneficial enjoyment of the corpus or income unless the power is described in sections 1.674(a)-1(b)(1) to 1.674(a)-1(b)(3). Thus, the power designated in section 1.674(a)-1(b)(1)(iii) to chose between charitable beneficiaries or to affect the manner of their enjoyment of a beneficial interest does not cause the grantor to be treated as owner of the trust.

Rev. Rul. 76-8, 1976-1 C.B. 179, holds that a grantor's reserved power to designate a substitute remainderman at his discretion is not a retention of power that disqualifies an otherwise qualifying charitable remainder trust from being a charitable remainder trust under section 664 and the applicable regulations.

Rev. Rul. 77-285, 1977-2 C.B. 213, holds that a grantor's reserved power to remove the trustee for any reason and substitute any other person (including the grantor) as trustee is not a retention of power that disqualifies an otherwise qualifying charitable remainder trust from being a charitable remainder trust under section 664 and the applicable regulations because the grantor, even as trustee, would not be treated as the owner of the entire trust under sections 673-679. The governing instrument of the irrevocable trust at issue in Rev. Rul. 77-285 provided that the trustee shall pay the specified distribution to the grantor for life. Upon the grantor's death, the trust terminates and its assets are distributed to an organization described in section 170(c).

Here, paragraphs SIXTH B of Trust A and Trust B give Grantor the power to change the ultimate charitable beneficiary of the trusts. Rev. Rul. 76-8 states that retention of this type of power does not disqualify an otherwise qualifying charitable remainder trust from being a charitable remainder trust under section 664 and the applicable regulations. Thus, the provision in paragraphs SIXTH B of Trust A and Trust B do not disqualify the trusts as charitable remainder unitrusts under section 664.

Grantor's power under paragraph SIXTH E of Trust B to instruct the trustee to distribute all or a portion of Trust B's assets to a qualified charity during the term of the trust is not a retained power under section 1.664-3(a)(4) that disqualifies Trust B as a charitable remainder unitrust under section 664. Moreover, section 1.664-3(a)(4) specifically contemplates the current distribution of trust assets to an organization described in section 170(c) pursuant to the governing agreement.

In the event Grantor instructs Trust B to distribute assets currently to an organization described in section 170(c), Trust B will distribute those assets on the last day of Trust B's taxable year. Trust B will then calculate its required payout for the next taxable year by multiplying its fixed percentage by Trust B's net fair market value on its valuation day. The unitrust percentage used to determine the unitrust amount will not change upon an early termination of a portion of the trust. Calculating Trust B's required payout by multiplying its fixed percentage by its net fair market value on the valuation day is in accordance with section 1.664-3(a)(1) and will not disqualify Trust B as a charitable remainder unitrust under section 664 of the Code.

Trustee is a corporate fiduciary and, according to PARAGRAPH SEVENTEENTH, any successor trustee must be a corporate fiduciary. Grantor's power under paragraphs TWELFTH of the trusts to negotiate the trustee's compensation is not a retained power under section 1.664-3(a)(4) that disqualifies the trusts as charitable remainder unitrusts under section 664.

Grantor's power under paragraphs SEVENTEENTH of the trusts to remove the trustee with or without cause and appoint a corporate fiduciary trustee is not a retained power under section 1.664-1(a)(4) that disqualifies the trusts as charitable remainder unitrusts under section 664.

Grantor's power under paragraphs EIGHTEENTH of the trusts to appoint investment managers and to remove such investment managers with or without cause is not a retained power under section 1.664-1(a)(4) that disqualifies the trusts as charitable remainder unitrusts under section 664.

CONCLUSIONS


  1. Grantor's retention in Paragraphs SIXTH B of the power to change the designation of the ultimate charitable beneficiary of the trusts by his last will or testament or other conforming writing is not a retained power that disqualifies the trusts as charitable remainder unitrusts under section 664.
  2. Grantor's retention of the power in Paragraph SIXTH E of Trust B to instruct the trustee to distribute all or a portion of Trust B's assets to a qualified charity during the term of the trust is not a retained power that disqualifies the trust as a charitable remainder unitrust under section 664.
  3. The provision in Trust B, paragraph SIXTH E, that in the event Trust B distributes a portion or all of Trust B's assets to qualifying charitable organizations during the term of the trust on the last day of Trust B's taxable year the unitrust amount for the next year is calculated by multiplying the fixed percentage by Trust B's value on the next valuation day does not disqualify Trust B as a charitable remainder unitrust under section 664.
  4. Grantor's retention of the power in paragraphs TWELFTH allowing the Grantor to negotiate the trustee's compensation is not a retained power that disqualifies the trusts as charitable remainder unitrusts under section 664.
  5. Grantor's retention of the power in paragraphs SEVENTEENTH allowing the Grantor to remove the trustee with or without cause and appoint a successor corporate fiduciary as trustee is not a retained power that disqualifies the trusts as charitable remainder unitrusts under section 664.
  6. Grantor's retention of the power in paragraphs EIGHTEENTH providing the Grantor with the right to appoint investment managers and to remove such investment managers with or without cause is not a retained power that disqualifies the trusts as charitable remainder unitrusts under section 664.
We express no opinion concerning the federal income tax consequences of these donations under any other provisions of the Internal Revenue Code.

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. Pursuant to a power of attorney on file with this office, the original of this ruling is being sent to Grantor's authorized representative and a copy is being sent to Grantor.

Sincerely yours,
____
Brian M. Blum
Acting Assistant to the Chief, Branch 1
Office of the Assistant Chief Counsel
(Passthroughs and Special Industries)

Related Topics On Grantor Powers Under Unitrust Document

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.


3.10.7  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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