Sunday, April 28, 2024
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GiftLaw Note: In this ruling, a trust (apparently irrevocable) for the benefit of an adult beneficiary (B) held shares of stock in a family business. Under the trust's governing instrument, B had a power to appoint corpus to any one or more of his descendants or to charitable beneficiaries, in trust or otherwise. B now proposes to exercise his power of appointment by authorizing the trustees to transfer these corporate shares to a newly created charitable remainder unitrust. The charitable trust will make regular payments to the trust for twenty years, after which the remaining trust assets will be paid to qualified charities. The IRS held that 1) the family trust is a permissible donor for the charitable remainder trust and 2) the irrevocable family trust is also a permissible recipient for the unitrust distributions.

This letter responds to a letter dated October 14, 1997, requesting certain rulings on the formation of a charitable remainder trust under section 664(d)(2) of the Internal Revenue Code.

FACTS


The Trust is a trust that was created by indenture dated December 8, 1984, and was modified by a Deed of Exercise dated November 5, 1993 (together, the Indenture). Settlor created the Trust to hold, manage, invest, and reinvest the Trust's property for Beneficiary. Beneficiary is an adult and has no living descendants. The Trust's property includes a shares of Class A common stock of Company (the Shares).

Under Article I(2) of the Indenture, Beneficiary holds the lifetime power to appoint any part or all of the Trust's principal to any one or more of his living descendants and any charitable organizations in trust or otherwise, except that no appointment may be made to Beneficiary, his estate, or creditors or to discharge any obligation of support of Beneficiary's. Beneficiary proposes to exercise the power of appointment with respect to the Shares by executing an Exercise of Inter Vivos Special Power of Appointment (the Appointment). Upon the execution of the Appointment, the trustees intend to transfer the shares to the CRUT.

The CRUT will be for a term of 20 years and the unitrust amount will be a fixed percentage determined on the date of execution of the Appointment. The fixed percentage will be (1) not less than five percent, (2) not greater than 50 percent, and (3) not greater than the percentage that will produce a value (determined under section 7520) of the remainder interest equal to 10 percent of the net fair market value of the assets contributed to the CRUT as of the date of contribution. At the termination of the CRUT, the trustees of the CRUT will pay the balance of the CRUT's property to one or more organizations described in sections 170(c), 2055(a), and 2522(a). The CRUT will operate in conformance with the laws of State X.

LAW AND RULINGS


Section 664(d)(2) contains the requirements a trust must satisfy to be a charitable remainder unitrust. One requirement, contained in section 664(d)(2)(A), is that a charitable remainder unitrust be a trust from which a fixed percentage (which is not less than 5 percent nor more than 50 percent) of the net fair market value of its assets, valued annually, is to be paid, not less often than annually, 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)(3)(i) of the Income Tax Regulations provides that the unitrust amount must be payable to or for the use of a named person or persons, at least one of which is not an organization described in section 170(c). Section 1.664-3(a)(5)(i) provides that the period for which the unitrust amount is payable begins with the first year of the charitable remainder trust and continues either for the life or lives of a named individual or individuals or for a term of years not to exceed 20 years. Only an individual or an organization described in section 170(c) may receive an amount for the life of an individual.

Section 7701(a)(1) defines the term "person" to include an individual, trust, estate, association, company, corporation, and partnership.

QUALIFICATION OF TRUST AS PERMISSIBLE GRANTOR FOR THE CRUT


There is nothing in section 664 or the applicable regulations that prohibits a trust from being a permissible donor to an otherwise qualified charitable remainder unitrust. Therefore, the Trust is a permissible donor for the CRUT.

TRUST AS A PERMISSIBLE RECIPIENT OF UNITRUST AMOUNT


In the present situation, the unitrust amount from the CRUT is payable to Trust for a term of 20 years. Because the term of the CRUT does not exceed 20 years, the recipient of the unitrust amount may be any person or persons, including a trust, if at least one such person is not a charitable organization. Therefore, Trust is a permissible recipient of the unitrust amount from the CRUT.

QUALIFICATION OF THE TRUST AS A CHARITABLE REMAINDER UNITRUST


The governing instrument of the CRUT 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, and reflects the statutory changes made by section 1089 of the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 960-61 (1997). Therefore, the CRUT will qualify as charitable remainder unitrust for federal income tax purposes for any year in which it continues to satisfy the definition of, and functions exclusively as, a charitable remainder unitrust, provided the CRUT is a valid trust under applicable local law.

This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) provides that it may not be cited as precedent. Except as provided above, we express no opinion on the provisions of the Trust or the CRUT. Specifically, we express no opinion on the federal tax consequences of the formation or operation of the CRUT under any section of the Code other than section 664. The ruling is based on the facts and applicable law in effect on the date of this letter.

A copy of this letter should be attached to the federal tax return for the tax year that the CRUT is formed.

Sincerely yours,
____
Donna M. Young
Senior Technician Reviewer, Branch 3
Office of the Assistant Chief Counsel
(Passthroughs and Special Industries)

Related Topics On Trust as Beneficiary of a Unitrust

3.10.1  Unitrust Duration and Recipients:    A charitable remainder unitrust (CRT) pays a fixed percentage for a life, lives, a term of up to 20 years, or a combination of a life or lives and a term up to 20 years. Reg. 1.664-3(a)(5)(i). In most circumstances, the income is paid to the donor for one life or to donor and spouse for two lives. Alternatively, the unitrust amounts may be paid for a term of no more than 20 years, or for a combination.


3.11.1  Education Unitrust:    An application for a unitrust is to provide for college education of a child, nephew, niece or grandchild. The education trust typically will pay a fairly high unitrust amount for a term of four or five years.



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