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Tuesday, April 23, 2024
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GiftLaw Pro |
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GiftLaw Note:
A grantor trust had been established by a court order for an incompetent person. The fiduciary for the trust requested authorization to fund a charitable remainder unitrust with the grantor trust as beneficiary. The Service held the unitrust qualified since it distributed unitrust amounts to the grantor trust for the incompetent individual's lifetime.
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This is in response to a letter dated March 13, 1998, submitted by the authorized representatives of A's estate, on behalf of A's estate, in which rulings are requested relating to a charitable remainder unitrust.
B, vice-president of Bank, represents the following in B's capacity as guardian of A's estate:
A is an individual who has been adjudicated mentally incompetent by the courts in both State A and State B. Bank is currently acting in two fiduciary capacities with respect to A. First, as guardian of A's estate, and second, as trustee of a separate trust created for A's benefit (Trust I).
Trust I was created by decree of Court dated d1 and funded with assets from A's estate. It is represented that Trust I is treated as owned entirely by A under sections 671 through 677. Trust I was intended to protect A's assets and ensure that they were used for A's benefit. Article Fourth paragraph A of Trust I provides that Trust I's income shall be paid to C, as guardian of A's person, for the benefit of A according to a Court-approved budget. Additionally, C may request additional payments for the benefit of A upon Court's approval. Article Fourth paragraph B provides that upon A's death, Trust I's assets are payable to A's estate.
As part of A's Court-approved estate planning, Bank, as guardian of A's estate, plans to establish Trust II which is intended to qualify as a charitable remainder unitrust described in section 664(d)(2). Subject to Court's approval, funds from Trust I will be distributed to A's estate, followed by a contribution of the funds from A's estate to Trust II. Bank will be the trustee of Trust II. Trust II will provide annual unitrust payments to Trust I during A's life. Upon A's death, the remainder will pass to a specified charitable organization if it qualifies as an organization described in sections 170(c), 2055(a), and 2522(a) or, if it does not so qualify, to another specified charitable organization, or if the second organization does not so qualify, to an organization described in sections 170(c), 2055(a) and 2522(a) of the trustee's choice.
Bank, as guardian of A's estate, represents that Trust II's provisions incorporate or follow closely the sample one-life charitable remainder unitrust provisions in section 4 of Rev. Proc. 89-20, 1989-1 C.B. 841, and is not requesting a ruling on those provisions. However, Bank has noted that Trust II contains provisions which differ from the model language in Rev. Proc. 89-20 in that the unitrust distributions are not paid directly to a named beneficiary but to Trust I established for the beneficiary's benefit.
Section 664(d)(2) sets forth the requirements to be a charitable remainder unitrust. Section 664(d)(2)(A) provides that 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 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)(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.
As defined in section 7701(a)(1), "person" includes an individual, a trust, estate, partnership, association, company or corporation.
Section 1.664-3(a)(5)(i) provides, however, that only an individual or an organization described in section 170(c) may receive an amount for the life of an individual.
Revenue Ruling 76-270, 1976-2 C.B. 194, holds that an otherwise qualifying charitable remainder trust that makes distributions to a second trust whose only function is to receive and administer those distributions for the benefit of an incompetent person who is the named individual lifetime beneficiary of the charitable remainder trust, is considered to have made the distributions directly to the individual and qualifies as a charitable remainder trust.
Therefore, based on the information submitted and the representations set forth above, we conclude that Trust II will not fail to qualify as a charitable remainder unitrust, pursuant to section 664 as a result of the unitrust distributions to Trust I for the life of A.
Except as specifically set forth above, no opinion is expressed as to the federal tax consequences of the formation or operation of Trust I and Trust II under the provisions of any other section of the Code. In addition: (1) the section 170(e)(5) special exception for charitable gifts of publicly traded securities from the limitation of section 170(e)(1)(B)(ii) expires June 30, 1998, and, therefore, any contribution after that date for qualified appreciated stock will be limited to A's basis in the property, unless section 170(e)(5) is extended to cover such later date of contribution; and (2) A will only be eligible for the lower percentage limitation under section 170(b)(1)(B), because the charitable gift is to a private foundation that is not a private foundation described in section 170(b)(1)(E).
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, a copy of this letter is being sent to Bank, as guardian of A's estate.
Sincerely yours,
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J. Thomas Hines
Senior Technician Reviewer Branch 2
Office of the Assistant Chief Counsel
(Passthroughs and Special Industries)
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