Thursday, March 28, 2024
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GiftLaw Note: A unitrust must be established for a life, lives or term of years. If a unitrust is created for a life, it must be created for the life of the income recipient. In this ruling, a unitrust was created that would make payments to a second trust. The second trust included a discretionary power for the trustee to make payments of income and principal to a daughter. If the daughter passed away with assets in trust two, those assets would be distributed to her estate.

In this ruling the Service determined that a "double trust" was no longer permissible, with one exception. The exception is a second trust for an incompetent individual. Since state law will typically create a conservatorship or trust for incompetent individuals, this exception is a reasonable interpretation of unitrust regulations.

Editor's Note: If a two-trust plan is desired, it may be preferable to use a term of 20 years trust. With a term of years trust, there is great freedom in selecting a trust, a corporation, an individual or any other entity as the income recipient.

LTR 9718030 (2 May 1997)

Date: February 4, 1997

Refer Reply to: CC:DOM:P&SI:4/PLR 240440-96

Re: * * *
Dear * * *

On October 4, 1990, the Internal Revenue Service issued a letter ruling to the above captioned taxpayers under control no. TR- 31-1097-90 (PLR 9101010), regarding several issues presented in the proposed wills of the taxpayers.

Ruling No. 4 involved, in part, otherwise qualifying charitable remainder trusts established under Article VI of each will that make distributions for the life of taxpayers' daughter to a second trust that will distribute income, and corpus in the discretion of the trustee, to the daughter. On the daughter's death, the trust corpus of the second trust would be paid to the daughter's estate. We concluded that the charitable remainder trusts qualified as a charitable remainder unitrusts [sic] under section 664 of the Code. Therefore, the value of the remainder interest in each trust would qualify for an estate tax charitable deduction under section 2055.

We have determined that this conclusion is not in accord with the current views of the Service. Therefore, in accordance with section 12.04 of Rev. Proc. 97-1, 1997-1 I.R.B. 11, 39, that conclusion is hereby revoked.

Section 664(d)(2) of the Code sets forth the requirements for a charitable remainder unitrust. Section 664(d)(2)(A) provides that a fixed percentage (which is not less than 5 percent) of the net fair market value of the trust assets, valued annually, is to be paid, not less often than annually, to one or more persons (at least one of whom 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 only an individual or an organization described in section 170(c) may receive an amount for the life of an individual. We have determined that, under section 664(d)(2), an otherwise qualifying charitable remainder trust that makes distributions for the life of a named individual to a second trust whose only function is to receive and administer those distributions for the benefit of the named individual beneficiary will not qualify as a charitable remainder unitrust, unless the named individual is incompetent.

Accordingly, the trusts established under Article VI of each will would not satisfy the requirements of section 664, because the unitrusts' payments are to be made to a trust for the benefit of the daughter, and not directly to the daughter. Therefore, the value of the remainder interest would not be deductible under section 2055. Further, trusts established pursuant to Article VI would not be eligible for favorable tax treatment available under section 664. The letter ruling is hereby modified to reflect these conclusions.

Section 12.04 of Revenue Procedure 97-1, 1997-1 I.R.B. 11, 43 provides that a letter ruling found to be in error or not in accord with the current views of the Service may be revoked or modified. If a letter ruling is revoked or modified, the revocation or modification applies to all open years under the statute of limitations, unless the Service uses its discretionary authority under section 7805(b) to limit the retroactive effect of the revocation or modification.

Section 12.05 of the revenue procedure provides that except in rare or unusual circumstances, the revocation or modification of a letter ruling will not be applied retroactively to the taxpayer to whom the letter ruling was issued provided that, inter alia, the taxpayer relied in good faith on the letter ruling and revoking or modifying the letter ruling would be to the taxpayer's detriment. Section 12.11 prescribes the procedure for requesting relief under section 7805(b).

Section 6110(j)(3) of Code provides that this ruling may not be used or cited as precedent.

Sincerely,
Assistant Chief Counsel, (Passthroughs and Special Industries)
By: George L. Masnik
Chief, Branch 4




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