Tuesday April 23, 2024

Rev. Rul. 72-395

GiftLaw Note: The foundational ruling for drafting charitable remainder unitrusts and annuity trusts is Rev. Rul. 72-395. After the passage of the Tax Reform Act of 1969 that created charitable remainder trusts, there was a pressing need for language that would qualify under the various provisions of TRA 1969. This ruling sets forth mandatory and optional language for both the annuity trust and the unitrust.

Annuity Trust Mandatory Provisions

1. A specific annuity amount must be stated as a fraction or a percentage.
2. The annuity amount must be paid at least annually for a life, lives or a term of years.
3. The remainder recipient must be a qualified exempt charity.
4. There may not be additional contributions.
5. The trustee is bound by several of the private foundation limitations.

Annuity Trust Optional Provisions

1. Provisions for corrective payments language.
2. The permission to defer payments for a testamentary trust, with repayment of all sums, including interest as of date of death.
3. An option to allocate the annuity among a class.
4. The ability to make corpus distributions to qualified charities.
5. Permission to terminate payments with the last payment prior to the death of the last non-charitable annuity recipient.

Unitrust Mandatory Provisions

1. Payments from the charitable remainder unitrust must be made at least annually.
2. There is an annual valuation requirement.
3. Distribution of remainder must be made to a qualified exempt charity.
4. There must be corrective payment language for incorrect valuations.
5. Payments will be prorated for short taxable years.
6. Additional contributions are permissible.
7. Certain private foundation provisions will apply to the trustee.

Unitrust Optional Provisions

1. A charitable remainder unitrust may use a net income with makeup or net income only payout method.
2. A testamentary unitrust may permit a deferral of payments until trust is funded and repayment of correct amounts with interest.
3. Unitrust amounts may be allocated among a living class for life or lives with an independent trustee.
4. Unitrust amounts may be allocated for a term of 20 years among a class not yet ascertained.
5. There may be distributions of income or corpus to qualified charities.
6. Permission to terminate payments with the last payment prior to the death of the last non-charitable annuity recipient.

Rev. Rul. 72-395, 1972-2 C.B. 340 Sec. 664

Service Headnote

Illustrations describe the mandatory and optional provisions for inclusion in the governing instrument of a charitable remainder annuity trust and a charitable remainder unitrust.

Full Text

Rev. Rul. 72-395

Table of Contents

Page

Sec. 1. Purpose 341

Sec. 2. Background 341

Sec. 3. Instructions to Taxpayers 341

Sec. 4. Charitable Remainder Annuity Trust; Mandatory Provisions 342

.01 Creation of annuity amount for a period of years or life 342
.02 Creation of remainder interest in charity 342
.03 Selection of alternate charitable beneficiary if remaindermen do not qualify under section 170(c) of the Code at time of distribution 343
.04 Computation of annuity amount in short and final taxable years 343
.05 Prohibition of additional contributions 343
.06 Prohibitions governing private foundations 343

Sec. 5. Charitable Remainder Annuity Trust; Optional Provisions 344

.01 Dollar amount annuity may be stated as a fraction or a percentage 344
.02 Deferral of annuity amount during a period of administration or settlement 344
.03 Annuity amount may be allocated to class of noncharitable beneficiaries in discretion of trustee 345
.04 Reduction of annuity amount if part of corpus is paid to charity on death of first recipient 345
.05 Distributions to charity in kind 345
.06 Termination of annuity amount on payment date next preceding death of recipient 346
.07 Retention of testamentary power to revoke noncharitable interest 346
.08 Investment restrictions on trustee 346
.09 Distribution from trust used to administer an estate to a charitable remainder trust 346

Sec. 6. Charitable Remainder Unitrust; Mandatory Provisions 347

.01 Creation of unitrust amount for a period of years or life 347
.02 Creation of remainder interest in charity 347
.03 Selection of alternate charitable beneficiary if remaindermen do not qualify under section 170(c) of the Code at the time of distribution 347
.04 Adjustment for incorrect valuations 348
.05 Computation of unitrust amount in short and final taxable years 348
.06 Additional contributions 348
.07 Prohibitions governing private foundations 349

Sec. 7. Charitable Remainder Unitrust; Optional Provisions 349

.01 Unitrust amount expressed as the lesser of income or a fixed percentage 349
.02 Deferral of unitrust amount during a period of administration or settlement 350
.03 Unitrust amount may be allocated to a class of noncharitable beneficiaries in discretion of trustee 350
.04 Reduction of unitrust amount if part of corpus is paid to charity on death of first recipient 351
.05 Distributions to charity in kind 351
.06 Termination of unitrust amount on payment date next preceding death of recipient 351
.07 Retention of testamentary power to revoke noncharitable interest 352
.08 Investment restrictions on trustee 352
.09 Distribution from trust used to administer an estate to a charitable remainder trust 352

Sec. 8. Requests for Rulings 352

Section 1. Purpose

The purpose of this Revenue Ruling is to set forth illustrative sample provisions for inclusion in the governing instrument of a charitable remainder trust that may be used to satisfy the requirements of section 664 of the Internal Revenue Code of 1954 and the Income Tax Regulations applicable thereto.

Sec. 2. Background

.01 The Tax Reform Act of 1969 Public Law 91-172, C.B. 1969-3, 10, imposed new requirements which must be satisfied by a charitable remainder trust in order for an income, gift, or estate tax deduction to be allowed for the transfer of a remainder interest to charity. The new requirements are contained in section 664 of the Code and in the regulations promulgated thereunder, T.D. 7207, page 106.

.02 In general, a charitable remainder trust is a trust which provides for a specified distribution at least annually for life or a term of years, to one or more beneficiaries, at least one of which is not a charity, with an irrevocable remainder interest to be held for the benefit of, or paid over to, charity. In order to qualify under section 664 of the Code, the trust must satisfy the requirements of either a charitable remainder annuity trust or a charitable remainder unitrust.

Sec. 3. Instructions to Taxpayers

.01 This Revenue Ruling contains sample illustrative provisions that may be included in the governing instrument of a charitable remainder annuity trust and a charitable remainder unitrust. These sample provisions include the mandatory provisions and certain permissible optional provisions referred to in the regulations. Provisions corresponding to these sample provisions will be accepted by the Internal Revenue Service in the absence of any showing that they are not enforceable under applicable local law.

.02 The language and format of the sample provisions included in this Revenue Ruling are merely examples of provisions which comply with the requirements and options in the regulations. There is no fixed language or format which must be used, and any other language or format that satisfies the requirements of the regulations will be acceptable. Incorporation of a regulatory requirement in the governing instrument of the trust by a short, specific, and descriptive reference to the requirement and its citation in the regulations will also be acceptable if such a reference incorporating the regulatory requirement into the governing instrument is effective under local law. However, a general provision stating that the grantor or testator intends to create a charitable remainder trust and incorporating by general reference all necessary requirements of the Internal Revenue Code and regulations will not, by itself, be sufficient.

.03 The trust instrument must create a valid trust under applicable local law in order to qualify as a charitable remainder trust. Thus, in addition to complying with the regulations, the trust instrument should incorporate any additional provisions relating to charitable trusts that are required under applicable local law.

.04 The trust instrument may contain provisions in addition to those provisions which are intended to satisfy the requirements of the regulations, but care should be taken to determine that such provisions are not in conflict with the regulations.

Sec. 4. Charitable Remainder Annuity Trust; Mandatory Provisions

.01 Under section 1.664-2(a)(1) of the regulations, one of the requirements of a charitable remainder annuity trust is that the governing instrument of the trust provide that the trust shall pay a sum certain not less often than annually to one or more persons described in section 1.664-2(a)(3) for the period specified in section 1.664-2(a)(5). Section 1.664-2(a)(2)(i) requires that the annuity amount must be at least 5 percent of the initial net fair market value of the assets placed in trust. Section 1.664-2(a)(3) provides that the sum certain 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) of the Code. Section 1.664-2(a)(5) provides that the sum certain may be payable for either the life or lives of a named individual or individuals or for a term of years not to exceed 20 years. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the mandatory provision described in this subsection:

The trustee shall pay to A during his life an annuity amount of $Y in each taxable year of the trust. The annuity amount shall be paid in equal quarterly installments from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the annuity amount shall be added to principal.

The following comments pertain to the sample provision described above:

(1) 5 Percent test. The annuity amount must be at least 5 percent of the initial net fair market value of the assets placed in trust.

(2) Annuity amount stated as a fraction or percentage. If the annuity amount is stated as a fraction or percentage rather than as a dollar amount, a provision must be included in the governing instrument regarding incorrect valuations. See section 5.01.

(3) Source of payment. The annuity amount may be paid from trust income or principal, but it must be paid from either of the two in all events. It should be noted that in many jurisdictions, the payment of the annuity amount is restricted to the income of the trust unless otherwise indicated. In such jurisdictions, it is necessary that such restrictions be removed by the governing instrument of the trust. The above provision removes such restrictions. Any income of the trust in excess of the annuity amount may, but need not, be added to principal. Care should be taken, however, to assure that, under applicable local law, such excess income is retained by the trust. The above provision so provides.

(4) Payment of annuity amount in installments. The annuity amount may be paid to the recipient annually or in equal or unequal installments throughout the year. The first and each succeeding installment should fall due at the end of the period to which it applies. The amount of the charitable deduction will be affected by the frequency of payment, by whether the installments are equal or unequal, and by whether each installment must await the end of the period for which it is paid.

(5) Terms of years. As an alternative to the payment of the annuity amount for the recipient's life, the annuity amount may be paid to the recipient for a term of years (not to exceed 20 years). See section 1.664-2(a)(5)(i).

(6) Concurrent or successive recipients. The annuity amount may be paid to concurrent or successive recipients so long as the 5 percent test is met. See section 1.664-2(a)(5).

(7) Payment of a portion of the annuity amount to charity. Any part, but not all, of the annuity amount may be paid to charity instead of to a noncharitable recipient. See section 1.664-2(a)(3)(i).

.02 Under section 1.664-2(a)(6)(i), the entire corpus of the trust must be irrevocably transferred to or for the use of one or more organizations described in section 170(c) of the Code or retained for such use upon the termination of all noncharitable interests. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the mandatory provision described in this subsection:

Upon the death of A, the trustee shall distribute all of the then principal and income of the trust, other than any amount due A, to M charity.

The following comments pertain to the sample provision described above:

(1) Permissible remaindermen. M charity must be an organization described in section 170(c) of the Code at the time of the transfer to the charitable remainder annuity trust. See section 1.664-2(a)(6)(i). If a deduction is sought under section 2055 or 2522 of the Code, M charity must also be an organization described in section 2055(a) or 2522(a) or (b), respectively, of the Code.

(2) Permissible dispositions of remainder interest. Upon the termination of the noncharitable interests, the charitable remainder may be distributed outright to one or more charities, may be held in further trust for one or more charities, may be held in further trust for charitable purposes, or any combination of the foregoing. See section 1.664-2(a)(6)(i).

.03 Under section 1.664-2(a)(6)(iv), the governing instrument of the trust shall provide that, in the event that an organization to or for the use of which the trust corpus is to be transferred or retained is not an organization described in section 170(c) of the Code at the time when any amount is to be irrevocably transferred to or for the use of such organization, such amount shall be transferred to or for the use of, or retained for the use of, one or more alternative organizations which are described in section 170(c) at such time. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the mandatory provision described in this subsection:

If M charity is not an organization described in section 170(c) of the Internal Revenue Code of 1954 at the time when any principal or income of the trust is to be distributed to it, the trustee shall distribute such principal or income to one or more organizations then described in section 170(c) as the trustee shall select in his sole discretion.

The following comments pertain to the sample provision described above:

(1) Manner of selection of alternative charitable remainderman. One or more alternate charities may be selected in any manner provided in the trust instrument. See section 1.664-2(a)(6)(iv).

(2) Cross references. See comments (1) and (2) in section 4.02.

.04 Under section 1.664-2(a)(1)(iv)(a), the governing instrument shall provide that, in the case of a taxable year which is for a period of less than 12 months, the annuity amount required to be paid shall be the sum certain multiplied by a fraction the numerator of which is the number of days in the taxable years of the trust and the denominator of which is 365 (366 if February 29 is a day included in the numerator). Section 1.664-2(a)(1)(iv)(b) provides that, in the case of the taxable year in which occurs the termination of the noncharitable interests, the annuity amount required to be paid shall be the sum certain multiplied by a fraction the numerator of which is the number of days between the beginning of such taxable year and the termination of such noncharitable interests and the denominator of which is 365 (366 if February 29 is a day included in the numerator). The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the mandatory provision described in this subsection:

In determining the annuity amount, the trustee shall prorate the same, on a daily basis, for a short taxable year and for the taxable year of A's death.

.05 Under section 1.664-2(b), the governing instrument shall provide that no additional contributions may be made to the trust after the initial contribution. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the mandatory provision described in this subsection:

No additional contributions shall be made to the trust after the initial contribution.

The following comment pertains to the sample provision described above:

Property passing by reason of death. All property passing to the trust by reason of the death of the grantor shall be considered one contribution. See section 1.664-2(b).

.06 Section 4947(a)(2) of the Code makes section 508(e) of the Code applicable to a charitable remainder annuity trust to the extent that other provisions of chapter 42 of the Code are also made applicable to such a trust. Section 4947(a)(2) of the Code makes sections 4941, 4943, 4944, and 4945 of the Code applicable to such trusts except for the payment of the annuity amount to the income beneficiary. Section 4947(b)(3)(B) of the Code excludes such trusts from the application of sections 4943 and 4944 of the Code in cases where a deduction was allowed for amounts going to every remainder beneficiary but not to any income beneficiary. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the mandatory provision described in this subsection:

Except for the payment of the annuity amount to A, the trustee is prohibited from engaging in any act of self-dealing as defined in section 4941(d) of the Internal Revenue Code of 1954, from retaining any excess business holdings as defined in section 4943(c) of the Code which would subject the trust to tax under section 4943 of the Code, from making any investments which would subject the trust to tax under section 4944 of the Code, and from making any taxable expenditures as defined in section 4945(d) of the Code. The trustee shall make distributions at such time and in such manner as not to subject the trust to tax under section 4942 of the Code.

The following comments pertain to the sample provision described above:

(1) Rule if part of the annuity amount is paid to charity. The governing instrument of the trust must prohibit the trustee from engaging in activities described in sections 4943 and 4944 of the Code during any period in which any part of the annuity amount is paid to charity. The above provision satisfies this requirement.

(2) Application of provisions after the trust ceases to be a charitable remainder annuity trust. To retain its exempt status after the trust ceases to be a charitable remainder annuity trust, the trust's governing instrument must also prohibit the trustee from engaging in any activities described in sections 4943 and 4944 of the Code and must require the trustee to distribute property at such times and in such manner as not to subject the trust to tax under section 4942 of the Code during any period after the date the trust is no longer treated as a trust described in section 4947(a)(2) of the Code and the regulations thereunder. The above provision satisfies this requirement. See section 1.664-2(a)(6)(ii).

(3) Application of state law. See section 13.8(b) of the Temporary Income Tax Regulations under the Tax Reform Act of 1969 providing for the satisfaction of the requirements of section 508(e) of the Code by applicable provisions of state law. If these requirements are satisfied by applicable provisions of state law, there is no need specifically to refer to them in the trust agreement.

Sec. 5. Charitable Remainder Annuity Trust; Optional Provisions

.01 Under section 1.664-2(a)(1)(iii) of the regulations, the sum certain may be expressed as a fraction or a percentage of the initial net fair market value of the property irrevocably passing in trust as finally determined for Federal tax purposes if the governing instrument also provides that, in the event that such value is incorrectly determined by the fiduciary, the trust shall pay to the recipient (in the case of an undervaluation) or be repaid by the recipient (in the case of an overvaluation) an amount equal to the difference between the amount which the trust should have paid the recipient if the correct value were used and the amount which the trust actually paid the recipient. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the optional provision described in this subsection:

The trustee shall pay to A in each taxable year of the trust during his life an annuity amount equal to Y percent of the initial net fair market value of the assets constituting the trust. In determining such value, assets shall be valued at their values as finally determined for Federal tax purposes. If the initial net fair market value of the assets constituting the trust is incorrectly determined by the fiduciary, then within a reasonable period after such final determination, the trustee shall pay to A in the case of an undervaluation or shall receive from A in the case of an overvaluation an amount equal to the difference between the annuity amount properly payable and the annuity amount actually paid. The annuity amount shall be paid in equal quarterly installments from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the annuity amount shall be added to principal.

The following comments pertain to the sample provision described above:

(1) 5 Percent test. The annuity amount percentage must be at least 5 percent. See section 1.664-2(a)(2)(i).

(2) Annuity amount expressed as the greater of two amounts. The annuity amount may also be expressed as the greater of a stated dollar amount or a fixed percentage (not less than 5 percent) of the initial value of the assets placed in trust.

(3) Provisions replaced. The optional provision set forth above may be used in lieu of the provision set forth in section 4.01.

(4) Cross references. See comments (3) through (7) in section 4.01

.02 Section 1.664-1(a)(5)(i) provides, in effect, that a deduction is not allowable under section 2055 or 2106 of the Code unless the obligation to pay the annuity amount with respect to the property passing in trust at the date of death begins as of the date of death of the decedent. Nonetheless, the requirement to pay such amount may be deferred until the end of the taxable year of the trust in which occurs the complete funding of the trust if such deferral is permitted by applicable local law or authorized by the provisions of the governing instrument. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the optional provision described in this subsection:

All the rest, residue and remainder of my property and estate, real and personal, of whatever nature and wherever situated, I give, devise, and bequeath to my trustee in trust, to invest and reinvest the same during the life of A and in each taxable year of the trust to pay to A an annuity amount equal to Y percent of the initial net fair market value of the assets constituting the trust. In determining such value, assets shall be valued at their values as finally determined for Federal tax purposes. If the initial net fair market value of the assets constituting the trust is incorrectly determined by the fiduciary, then within a reasonable period after such final determination, the trustee shall pay to A (in the case of an undervaluation) or shall receive from A (in the case of an overvaluation) an amount equal to the difference between the annuity amount properly payable and the annuity amount actually paid. The annuity amount shall be paid in equal quarterly installments from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the annuity amount shall be added to principal.

The obligation to pay the annuity amount shall commence with the date of my death but payment of the annuity amount may be deferred from the date of my death to the end of the taxable year in which occurs the complete funding of the trust. Payment of the annuity amount so deferred, plus interest computed at 6 percent a year, compounded annually, shall be made within a reasonable time after the occurrence of said event. The following comments pertain to the sample provision described above:

(1) Deferral of annuity amount for period of administration. The second paragraph of the above provision may be included in cases where funds pass to a charitable remainder annuity trust by reason of death, but the actual amount passing in trust may not be known until the trust has been completely funded.

(2) Provisions replaced. The optional provision set forth above may be used in lieu of the provision set forth in section 4.01 and the optional provision set forth in section 5.01.

(3) Cross references. See comments (3) through (7) in section 4.01 and comments (1) and (2) in section 5.01.

.03 Under section 1.664-2(a)(3)(ii), a trust is not a charitable remainder trust 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) of the Code, if such power would cause any person to be treated as the owner of the trust, or any portion thereof, if subpart E (sections 671 through 678 of the Code) were applicable to the trust. Consequently, it is possible to grant to the trustee the power to allocate the annuity amount among members of a class if such power comes within the exception to section 674(a) of the Code provided in section 674(c). The following is a sample provision for inclusion in the governing instrument of such a power:

The trustee shall pay an annuity amount of $Y in each taxable year of the trust to such member or members of a class of persons consisting of A, B, and C in such amounts and proportions as the trustee in its absolute discretion shall from time to time determine until the last to die of A, B, and C. The trustee may pay the annuity amount to any one member of said class or may apportion it among the various members in such manner as the trustee shall from time to time deem advisable. The annuity amount shall be paid first from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the annuity amount shall be added to principal.

The following comments pertain to the sample provision described above:

(1) Gifts to a class. A, B, and C must be individuals living at the creation of the trust. The annuity amount may also be allocated among members of a class such as "children" or "issue" for their lives, provided that the class is closed and all members of the class are living and ascertainable at the creation of the trust. The annuity amount may also be allocated among the members of such a class for a term of years (not to exceed 20 years), in which event the members of the class need not be living or ascertainable at the creation of the trust. See section 1.664-2(a)(3)(i).

(2) Type of power. The power to allocate the annuity amount among members of a class must not cause any person to be treated as the owner of any part or all of the trust under the rules of sections 671 through 678 of the Code. See section 1.664-2(a)(3)(ii).

(3) Power to delay payment not permitted. The power to allocate the annuity amount may not include a power to delay payment of the annuity amount, i.e., the entire annuity amount must be paid out for each taxable year of the trust. See section 1.664-2(a)(1)(i).

(4) Provisions replaced. The optional provision set forth above may be used in lieu of the provision set forth in section 4.01.

(5) Cross reference. See comments (1) through (7) in section 4.01.

.04 Under section 1.664-2(a)(1)(i), the stated dollar amount must be the same either as to each recipient or as to the total amount payable for each year of the term of years or the lives of the recipients. However, under sections 1.664-2(a)(1)(i) and 1.664-2(a)(2)(ii), the stated dollar amount may be reduced at the death of a recipient or expiration of a term of years if: (1) the reduced amount is the same either as to each recipient or as to the total amount payable each year for the balance of the period during which annuity amounts are to be paid, (2) there is a distribution to an organization described in section 170(c) of the Code at the death of the recipient or expiration of the term of years, and (3) the total amounts payable each year after such distribution are not less than a stated dollar amount which bears the same ratio to 5 percent of the initial net fair market value of the trust assets as the net fair market value of the trust assets immediately after such distribution bears to the net fair market value of the trust assets immediately before such distribution. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the optional provision described in this subsection:

During the joint lives of A and B, the trustee shall, in each taxable year of the trust, pay to A an annuity amount of $X and pay to B an annuity amount of $Y. The annuity amounts shall be paid in equal quarterly installments from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the annuity amounts shall be added to principal. Upon the death of the first to die of A and B, the trustee shall distribute $Z (or P percent of the trust assets) to M charity, and thereafter the trustee shall pay, in equal quarterly installments, to the survivor of A and B, for his life, an annuity amount, in each taxable year of the trust, which bears the same ratio to 5 percent of the initial net fair market value of the trust assets as the net fair market value of the trust assets, valued as of the date of distribution, less $Z (or P percent of the trust assets bears), to such fair market value as of the date of distribution.

The following comments pertain to the sample provision described above:

(1) 5 Percent test. The sum of $X and $Y must not be less than 5 percent of the initial net fair market value of the assets placed in trust. See section 1.664-2(a)(2)(i).

(2) Annuity amount larger than minimum amount provided above. The above provision provides a formula to calculate the minimum annuity amount which must be paid to the survivor of A and B. The annuity amount paid to the survivor of A and B may be greater than that provided, but in no event may it exceed the annual aggregate annuity amount paid to A and B during their joint lives.

(3) Provision replaced. The optional provision set forth above may be used in lieu of the provision set forth in section 4.01.

(4) Cross reference. See comments (2) through (7) in section 4.01. See section 5.05 for rules requiring that the adjusted basis of assets distributed to charity in kind be fairly representative of the adjusted basis of all assets available for distribution on the date of distribution.

.05 Under section 1.664-2(a)(4), the governing instrument may provide that any amount, other than the annuity amount, shall be paid (or may be paid in the discretion of the trustee) to an organization described in section 170(c) of the Code provided that, in the case of distributions in kind, the adjusted basis of the property distributed is fairly representative of the adjusted basis of the property available for payment on the date of payment. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the optional provision described in this subsection:

During the life of A, the trustee may pay to M charity any income of the trust in excess of the annuity amount payable to A for the taxable year of the trust in which the income is earned. The adjusted basis for Federal income tax purposes of any trust property which the trustee distributes in kind to charity during the life of A must be fairly representative of the adjusted basis for such purposes of all trust property available for distribution on the date of distribution.

The following comment pertains to the sample provision described above:

Permitted distributions to charity. The governing instrument may permit or require distributions of trust assets to charity prior to the termination of all noncharitable interests. In such cases, the above provision with respect to adjusted basis is mandatory unless the governing instrument prohibits the trustee from satisfying such distributions in kind.

.06 Under section 1.664-2(a)(5)(i), the payment of the annuity amount may terminate with the regular payment next preceding the termination of all noncharitable interests. The following is a sample provision for inclusion in the governing instrument of the optional provision described in this subsection:

The trustee shall pay to A during his life an annuity amount of $Y in each taxable year of the trust. However, the obligation of the trustee to pay such annuity amount shall terminate with the payment next preceding the death of A. The annuity amount shall be paid in equal quarterly installments from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the annuity amount shall be added to principal.

The following comments pertain to the sample provision described above:

(1) Provisions replaced. The optional provision set forth above may be used in lieu of the provision set forth in section 4.01.

(2) Cross references. See comments (1) through (7) in section 4.01.

.07 Under section 1.664-2(a)(4), the grantor of the trust may retain the power, exercisable only by will, to revoke or terminate the interest of any recipient other than an organization described in section 170(c) of the Code. The following is a sample provision for inclusion in the governing instrument of the optional provision described in this subsection:

The trustee shall pay to the settlor during his life an annuity amount of $Y and upon the death of the settlor, if B survives him, the trustee shall pay to B during her life an annuity amount of $Y. The settlor hereby expressly reserves the power, exercisable only by his will, to revoke and terminate the interest of B under this trust. Upon the first to occur of (i) the death of the survivor of the settlor and B or (ii) the death of the settlor if he effectively exercises his testamentary power to revoke and terminate the interest of B, the trustee shall distribute all of the then principal and income of the trust, other than any amount due A or B, to M charity. The annuity amount shall be paid in equal quarterly installments from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the annuity amount shall be added to principal.

The following comments pertain to the sample provision described above:

(1) Provisions replaced. The optional provision set forth above may be used in lieu of the provisions set forth in sections 4.01 and 4.02.

(2) Cross references. See comments (1) through (7) in sections 4.01 and comments (1) and (2) in section 4.02.

.08 Under section 1.664-1(a)(3), the provisions of the trust may not include any provisions which restrict the trustee from investing the trust assets in a manner which could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of trust assets. The following is a sample provision for inclusion in the trust instrument which insures that the requirement described in this subsection is met:

Nothing in this trust instrument shall be construed to restrict the trustee from investing the trust assets in a manner which could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of trust assets.

.09 Under section 1.664-1(a)(4), in order for a trust to be a charitable remainder annuity trust, the trust must function exclusively as a charitable remainder annuity trust from its creation. Consequently, a revocable inter vivos trust which is used to administer the estate of the decedent can never qualify as a charitable remainder annuity trust. However, the regulations permit the revocable inter vivos trust to distribute assets to another trust which does qualify as a charitable remainder annuity trust. The following is a sample provision for inclusion in the governing instrument of the revocable inter vivos trust which provides that the revocable inter vivos trust will be used to partially administer the estate of the decedent and then distribute assets to another trust which is a charitable remainder annuity trust:

The trustee shall pay to A all of the income from the trust assets for A's life, during which the trust shall be fully revocable by A. Upon A's death the trust shall become irrevocable and the trustee shall pay all debts, taxes and other expenses of the administration of A's estate. After the payment or satisfaction of all such debts, taxes and expenses, the trustee shall transfer all of the then principal and income of the trust to the trustee of the charitable remainder annuity trust hereinafter established to be held, administered and distributed in the manner and according to the terms and conditions hereinafter provided.

The following comments pertain to the sample provisions described above:

(1) Trust provisions during life. There are no restrictions on the dispositive provisions of the above trust during the period it is fully revocable.

(2) Provisions for both trusts in same instrument. The same governing instrument may provide for both the revocable inter vivos trust and the charitable remainder annuity trust, and both trusts may have the same trustee.

Sec. 6. Charitable Remainder Unitrust; Mandatory Provisions

.01 Under section 1.664-3(a)(1)(i)(a) of the regulations, one of the requirements of a charitable remainder unitrust is that the governing instrument of the trust provide that the trust shall pay, not less often than annually, a fixed percentage of the net fair market value of the trust assets, determined annually, to one or more persons described in section 1.664-3(a)(3) for the period specified in section 1.664-3(a)(5). Section 1.664-3(a)(2)(i) provides that the fixed percentage must be at least 5 percent. Section 1.664-3(a)(3) provides that the fixed percentage of such value 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) of the Code. Section 1.664-3(a)(5) provides that the fixed percentage of such value may be payable for either the life or lives of a named individual or individuals or for a term of years not to exceed 20 years. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the mandatory provision described in this subsection:

The trustee shall pay to A in each taxable year of the trust during his life a unitrust amount equal to Y percent of the net fair market value of the trust assets valued as of the first day of each taxable year of the trust. The unitrust amount shall be paid in equal quarterly installments from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amount shall be added to principal.

The following comments pertain to the sample provision described above:

(1) 5 Percent test. The unitrust percentage must be at least 5 percent. See section 1.664-3(a)(2)(i).

(2) Source of payment. The unitrust amount may be paid from trust income or principal, but it must be paid from either of the two in all events. It should be noted that, in some jurisdictions, the payment of the unitrust amount may be restricted to the income of the trust unless otherwise indicated. In such jurisdictions, it is necessary that such restrictions be removed by the governing instrument of the trust. The above provision removes such restrictions. Any income of the trust in excess of the unitrust amount may, but need not, be added to principal. Care should be taken, however, to assure that, under applicable local law, such excess income is retained by the trust. The above provision so provides.

(3) Payment of the unitrust amount in installments. The unitrust amount may be paid to the recipient annually or in equal or unequal installments throughout the year. The first and each succeeding installment should fall due at the end of the period to which it applies. The amount of the charitable deduction will be affected by the frequency of payment, by whether the installments are equal or unequal, and by whether each installment must await the end of the period for which it is paid.

(4) Term of years. As an alternative to the payment of the unitrust amount for the recipient's life, the unitrust amount may be paid to the recipient for a term of years (not to exceed 20 years). See section 1.664-3(a)(5)(i).

(5) Concurrent or successive recipients. The unitrust amount may be paid to concurrent or successive recipients so long as the 5 percent test is met. See section 1.664-3(a)(5)(i).

(6) Payment of a portion of the unitrust amount to charity. Any part, but not all, of the unitrust amount may be paid to charity instead of to a noncharitable recipient. See section 1.664-3(a)(3)(i).

(7) Valuation date. The governing instrument may provide that the trust assets be valued, for example, as of the first business day of each taxable year. See section 1.664-3(a)(1)(iv).

(8) Amount of charitable deduction. The amount of the charitable deduction will be affected by the period of time between the valuation date and the payment date or dates and by the frequency of payment. See section 1.664-4.

.02 Under section 1.664-3(a)(6)(i), the entire corpus of the trust must be irrevocably transferred, in whole or in part, to or for the use of one or more organizations described in section 170(c) of the Code or retained, in whole or in part, for such use upon the termination of the noncharitable interests. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the mandatory provision described in this subsection:

(1) Permissible remaindermen. M charity must be an organization described in section 170(c) of the Code at the time of the transfer to the charitable remainder unitrust. See section 1.664-3(a)(6)(i). If a deduction is sought under section 2055 or 2522 of the Code, M charity must also be an organization described in section 2055(a) or 2522(a) or (b), respectively, of the Code.

(2) Permissible dispositions of remainder interest. Upon the termination of the noncharitable interest, the charitable remainder may be distributed outright to one or more charities, may be held in further trust for one or more charities, may be held in further trust for charitable purposes, or any combination of the foregoing. See section 1.664-3(a)(6)(i).

.03 Under section 1.664-3(a)(6)(iv), the governing instrument of the trust shall provide that, in the event that an organization to or for the use of which the trust corpus is to be transferred or retained is not an organization described in section 170(c) of the Code at the time when any amount is to be irrevocably transferred to or for the use of such organization, such amount shall be transferred to or for the use of or retained for the use of one or more alternative organizations which are described in section 170(c) at such time. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the mandatory provision described in this subsection:

(1) Manner of selection of alternative charitable remainderman. One or more alternate charities may be selected in any manner provided in the trust instrument. See section 1.664-3(a)(6)(iv).

(2) Cross references. See comments (1) and (2) in section 6.02.

.04 Under section 1.664-3(a)(1)(iii), the governing instrument of the trust shall provide that, in the case where the net fair market value of the trust assets is incorrectly determined by the fiduciary, the trust shall pay to the recipient (in the case of an undervaluation) or be repaid by the recipient (in the case of an overvaluation) an amount equal to the difference between the amount which the trust should have paid the recipient if the correct value were used and the amount which the trust actually paid the recipient. The following is a sample provision for inclusion in the governing instrument which satisfies the requirement of the mandatory provision described in this subsection:

If the net fair market value of the trust assets is incorrectly determined by the fiduciary for any taxable year, then within a reasonable period after the final determination of the correct value, the trustee shall pay to A in the case of an undervaluation or shall receive from A in the case of an overvaluation an amount equal to the difference between the unitrust amount properly payable and the unitrust amount actually paid.

.05 Under section 1.664-3(a)(1)(v)(a), the governing instrument shall provide that, in the case of a taxable year which is for a period of less than 12 months, the unitrust amount required to be paid shall be the fixed percentage of the net fair market value of the trust assets for such year multiplied by a fraction of the numerator of which is the number of days in the taxable year of the trust and the denominator of which is 365 (366 if February 29 is a day included in the numerator). Section 1.664-3(a)(1)(v)(b) provides that, in the case of the taxable year in which occurs the termination of the noncharitable interests, the unitrust amount required to be paid shall be the fixed percentage of the net fair market value of the trust assets for such year multiplied by a fraction the numerator of which is the number of days between the beginning of such taxable year and the termination of such noncharitable interests and the denominator of which is 365 (366 if February 29 is a day included in the numerator). The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the mandatory provision described in this subsection:

In determining the unitrust amount, the trustee shall prorate the same, on a daily basis, for a short taxable year and for the taxable year of A's death.

The following comment pertains to the sample provision described below:

(1) Valuation date. If a valuation date other than the first day of the taxable year is selected, section 1.664-3(a)(1)(v)(a)(3) and (b)(1)(iii) provides that the governing instrument of the trust must also provide that where no valuation date occurs in a taxable year of the trust which is a short taxable year or which is the taxable year in which the noncharitable interests terminate, the trust assets shall be valued as of the last day of such short taxable year or as of the day on which such noncharitable interests terminate.

.06 Under section 1.664-3(b), the governing instrument shall provide either that no additional contributions may be made to the trust after the initial contribution or that the unitrust amount for the taxable year of a contribution shall be computed by multiplying the fixed percentage by the sum of (1) the net fair market value of the trust assets (excluding the value of the additional contribution and any earned income from and any appreciation on such property after its contribution) and (2) that proportion of the value of the additional property (that was excluded under (1)) which the number of days in the period which begins with the date of contribution and ends with the earlier of the last day of such taxable year or the last day of the period described in section 1.664-3(a)(5) bears to the number of days in the period which begins with the first day of such taxable year and ends with the earlier of the last day of such taxable year or the last day of the period described in section 1.664-3(a)(5). If additional contributions are not prohibited, section 1.664-3(b) also provides that the governing instrument shall provide that, where no valuation date occurs after the time of the contribution and during the taxable year in which the contribution is made, the additional property shall be valued as of the time of contribution. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the mandatory provision described in this subsection:

If any additional contributions are made to the trust after the initial contribution in trust, the unitrust amount for the taxable year in which the assets are added to the trust shall be Y percent of the sum of (a) the net fair market value of trust assets (excluding the assets so added and any income from, or appreciation on, such assets) and (b) that proportion of the value of the assets so added that was excluded under (a) which the number of days in the period which begins with the date of contribution and ends with the earlier of the last day of the taxable year or A's death bears to the number of days in the period which begins on the first day of such taxable year and ends with the earlier of the last day in such taxable year or A's death. In the case where there is no valuation date after the time of contribution, the assets so added shall be valued at the time of contribution.

The following comments pertain to the sample provision described above:

(1) No additional contributions. In lieu of the above provision, the governing instrument may provide that no additional contribution shall be made to the trust.

(2) Property passing by reason of death. All property passing to the trust by reason of death of the grantor shall be considered one contribution. See section 1.664-3(b).

.07 Section 4947(a)(2) of the Code makes section 508(e) of the Code applicable to a charitable remainder unitrust to the extent that other provisions of chapter 42 of the Code are also made applicable to such a trust. Section 4947(a)(2) makes sections 4941, 4943, 4944, and 4945 of the Code applicable to such trusts except for the payment of the unitrust amount to the income beneficiary. Section 4947(b)(3)(B) of the Code excludes such trusts from the application of sections 4943 and 4944 of the Code in cases where a deduction was allowed for amounts going to every remainder beneficiary but not to any income beneficiary. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the mandatory provision described in this subsection:

Except for the payment of the unitrust amount to A, the trustee is prohibited from engaging in any act of self-dealing as defined in section 4941(d) of the Internal Revenue Code of 1954, from retaining any excess business holdings as defined in section 4943(c) of the Code which would subject the trust to tax under section 4943 of the Code, from making any investments which would subject the trust to tax under section 4944 of the Code, and from making any taxable expenditures as defined in section 4945(d) of the Code. The trustee shall make distributions at such time and in such manner as not to subject the trust to tax under section 4942 of the Code.

The following comments pertain to the sample provision described above:

(1) Rule if part of the unitrust amount is paid to charity. The governing instrument of the trust must prohibit the trustee from engaging in activities described in sections 4943 and 4944 of the Code during any period in which any part of the unitrust amount is paid to charity. The above provision satisfies this requirement.

(2) Application of provisions after the trust ceases to be a charitable remainder unitrust. To retain its exempt status after the trust ceases to be a charitable remainder unitrust, the trust's governing instrument must also prohibit the trustee from engaging in any activities described in sections 4943 and 4944 of the Code and must require the trustee to distribute property at such times and in such manner as not to subject the trust to tax under section 4942 of the Code during any period after the date the trust is no longer treated as a trust described in section 4947(a)(2) of the Code and the regulations thereunder. The above provision satisfies this requirement. See section 1.664-3(a)(6)(ii).

(3) Application of state law. See section 13.8(b) of the Temporary Income Tax Regulations under the Tax Reform Act of 1969 providing for the satisfaction of the requirements of section 508(e) of the Code by applicable provisions of state law. If these requirements are satisfied by applicable provisions of state law, there is no need specifically to refer to them in the trust agreement.

Sec. 7. Charitable Remainder Unitrust; Optional Provisions

.01 Under section 1.664-3(a)(1)(i)(b), the trust may pay, instead of the regular unitrust amount (the fixed percentage of the net fair market value of the trust assets, determined annually), either the first of the following amounts or the sum of the first and second of the following amounts:

(1) The amount of trust income (as defined in section 643(b) and the regulations thereunder) for the taxable year to the extent that such amount is not more than the amount required to be distributed as the regular unitrust amount for that taxable year.

(2) The amount of the trust income for a taxable year which is in excess of the regular unitrust amount for that taxable year to the extent that the aggregate of the amounts paid in prior years was less than the aggregate of the regular unitrust amounts for those prior years.

Section 1.664-3(a)(1)(v)(a)(2) and (b)(1)(ii), in effect, provides that in a short taxable year and in the taxable year in which the noncharitable interests terminate, the amount determined under section 1.664-3(a)(1)(i)(b) shall be computed on the basis of the income for the taxable year and the prorated regular unitrust amount. The prorated regular unitrust amount is determined under section 1.664-3(a)(1)(v)(a)(1) and (b)(1)(i). The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the optional provision described in this subsection:

The trustee shall pay to A in each taxable year of the trust during his life an amount equal to the lesser of (a) the trust income for such taxable year (as defined in section 643(b) of the Internal Revenue Code of 1954 and the regulations thereunder) and (b) Y percent of the net fair market value of the trust assets valued as of the first day of such taxable year decreased as elsewhere provided in the case where the taxable year is a short taxable year or is the taxable year in which A dies and increased as elsewhere provided in the case where there are additional contributions in the taxable year. If the trust income for any taxable year exceeds the amount determined under (b), the payment to A shall also include such excess income to the extent that the aggregate of the amounts paid to A in prior years is less than Y percent of the aggregate net fair market value of the trust assets for such years. Payments to A shall be made in quarterly installments. Any income of the trust in excess of such payments shall be added to principal.

The following comments pertain to the sample provision described above:

(1) Makeup of deficiencies not required. If it is desired to use the above provision, the second sentence, increasing the unitrust amount by the income in excess of the fixed percentage to the extent of deficiencies between the income and the regular unitrust amount in prior years, is optional.

(2) Computation of charitable deduction. It should be noted that, notwithstanding the above provision, the computation of the charitable deduction will be determined on the basis that the regular unitrust amount will be distributed in each taxable year of the trust.

(3) Provisions replaced. The optional provision set forth above may be used in lieu of the provision set forth in section 6.01. In addition, the above provision assumes that the governing instrument does not prohibit additional contributions. See section 6.06.

(4) Cross references. See comments (1) through (8) in section 6.01.

.02 Section 1.664-1(a)(5)(i) provides, in effect, that a deduction is not allowable under section 2055 or 2106 of the Code unless the obligation to pay the unitrust amount with respect to the property passing in trust at the date of death begins as of the date of death of the decedent. Nonetheless, the requirement to pay such amount may be deferred until the end of the taxable year of the trust in which occurs the complete funding of the trust if such deferral is permitted by applicable local law or authorized by the provisions of the governing instrument. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the optional provision described in this subsection:

All the rest, residue and remainder of my property and estate, real and personal, of whatever nature and wherever situated, I give, devise, and bequeath to my trustee in trust, to invest and reinvest the same during the life of A and in each taxable year of the trust to pay, in equal quarterly installments, to A, a unitrust amount equal to Y percent of the net fair market value of the trust assets valued as of the first day of each taxable year of the trust. The unitrust amount shall be paid from income and, to the extent income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amount shall be added to principal.

The obligation to pay the unitrust amount shall commence with the date of my death, but payment of the unitrust amount may be deferred from the date of my death to the end of the taxable year of the trust in which occurs the complete funding of the trust. Within a reasonable time after the occurrence of said event, the trustee shall pay the amount determined under the method described in section 1.664-1(a)(5)(ii) of the Federal Income Tax Regulations less the sum of any amounts previously distributed and interest thereon computed at 6 percent a year, compounded annually, from the date of distribution to the occurrence of said event.

The following comments pertain to the sample provision described above:

(1) Deferral and computation of unitrust amount for period of administration. The second paragraph of the above provision may be included in cases where funds pass to a charitable remainder unitrust by reason of death, but the actual amount passing in trust may not be known until the trust has been completely funded. The cited section of the regulations contains a formula under which the unitrust amount may be retroactively computed during a reasonable period of administration or settlement.

(2) Incorporation by reference. If the reference to the regulations is not effective under the law governing the trust to incorporate the regulatory provision into the governing instrument, the formula contained in the regulations should be restated in the governing instrument.

(3) Provisions replaced. The optional provision set forth above may be used in lieu of the provision set forth in section 6.01.

(4) Cross references. See comments (1) through (8) in section 6.01.

.03 Under section 1.664-2(a)(3)(ii), a trust is not a charitable remainder trust 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) of the Code, if such power would cause any person to be treated as the owner of the trust, or any portion thereof, if subpart E (sections 671 through 678 of the Code) were applicable to the trust. Consequently, it is possible to grant to the trustee the power to allocate the unitrust amount among members of a class if such power comes within the exception to section 674(a) provided in section 674(c). The following is a sample provision for inclusion in the governing instrument of such a power:

The trustee shall pay, in each taxable year of the trust, a unitrust amount equal to Y percent of the net fair market value of the trust assets valued as of the first day of such taxable year to such member or members of a class of persons consisting of A, B, and C in such amounts and proportions as the trustee in its absolute discretion shall from time to time determine until the last to die of A, B, and C. The trustee may pay the unitrust amount to any one member of said class or may apportion it among the various members in such manner as the trustee shall from time to time deem advisable. The unitrust amount shall be paid first from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amount shall be added to principal.

The following comments pertain to the sample provision described above:

(1) Gifts to a class. A, B, and C must be individuals living at the creation of the trust. The unitrust amount may be allocated among members of a class such as "children" or "issue" for their lives, provided that the class is closed and all members of the class are living and ascertainable at the creation of the trust. The unitrust amount may also be allocated among the members of such a class for a term of years (not to exceed 20 years), in which event the members of the class need not be living or ascertainable at the creation of the trust. See section 1.664-3(a)(3)(i).

(2) Type of power. The power to allocate the unitrust amount among members of a class must not cause any person to be treated as the owner of any part or all of the trust under the rules of sections 671 through 678 of the Code. See section 1.664-3(a)(3)(ii).

(3) Power to delay payment not permitted. The power to allocate the unitrust amount may not include a power to delay payment of the unitrust amount. Thus, the entire unitrust amount must be paid out for each taxable year of the trust. See section 1.664-3(a)(1)(i).

(4) Provisions replaced. The optional provision set forth above may be used in lieu of the provision set forth in section 6.01.

(5) Cross references. See comments (1) through (8) in section 6.01.

.04 Under section 1.664-3(a)(1)(i), the fixed percentage amount must be the same either as to each recipient or as to the total of the percentages payable for each year of the term of years or the lives of the recipients. However, under sections 1.664-3(a)(1)(ii) and 1.664-3(a)(2)(ii), the fixed percentage may be reduced at the death of a recipient or expiration of a term of years if: (1) the reduced percentage is the same either as to each recipient or as to the total percentage payable each year for the balance of the period during which unitrust amounts are to be paid, (2) there is a distribution to an organization described in section 170(c) of the Code at the death of the recipient or expiration of the term of years, and (3) the total of the percentages payable each year after such distribution are not less than 5 percent. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the optional provision described in this subsection:

During the joint lives of A and B, the trustee shall, in each taxable year of the trust, pay to A a unitrust amount equal to X percent of the net fair market value of the trust assets valued as of the first day of such taxable year and pay to B a unitrust amount equal to Y percent of the net fair market value of the trust assets valued as of the first day of such taxable year. The unitrust amounts shall be paid in equal quarterly installments from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amounts shall be added to principal. Upon the death of the first to die of A and B, the trustee shall distribute $Z (or P percent of the trust assets) to M charity, and thereafter the trustee shall pay to the survivor of A and B for his life a unitrust amount in each taxable year of the trust equal to 5 percent of the net fair market value of the trust assets valued as of the first day of such taxable year.

The following comments pertain to the sample provision described above:

(1) 5 Percent test. The sum of X and Y must not be less than 5 percent. See section 1.664-3(a)(2)(i).

(2) Unitrust amount larger than minimum amount provided above. The above provision describes the minimum unitrust amount which must be paid to the survivor of A and B. The unitrust amount paid to the survivor of A and B may be greater than that provided, but in no event may it exceed the total of the percentages paid to A and B during their joint lives.

(3) Provisions replaced. The optional provision set forth above may be used in lieu of the provisions set forth in sections 6.01 and 6.02.

(4) Cross references. See comments (2) through (8) in section 6.01 and comments (1) and (2) in section 6.02. See section 7.05 for rules requiring the adjusted basis of assets distributed to charity in kind to be fairly representative of the adjusted basis of all assets available for distribution on the date of distribution.

.05 Under section 1.664-3(a)(4), the governing instrument may provide that any amount, other than the unitrust amount, shall be paid (or may be paid in the discretion of the trustee) to an organization described in section 170(c) of the Code provided that, in the case of distributions in kind, the adjusted basis of the property distributed is fairly representative of the adjusted basis of the property available for payment on the date of payment. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the optional provision described in this subsection:

During the life of A, the trustee may pay to M charity any income of the trust in excess of the unitrust amount payable to A for the taxable year of the trust in which the income is earned. The adjusted basis for Federal income tax purposes of any trust property which the trustee distributes in kind to charity during the life of A must be fairly representative of the adjusted basis for such purposes of all trust property available for distribution on the date of distribution.

The following comment pertains to the sample provision described above:

.06 Under section 1.664-3(a)(5)(i), the payment of the unitrust amount may terminate with the regular payment next preceding the termination of all noncharitable interests. The following is a sample provision for inclusion in the governing instrument of the optional provision described in this subsection:

The trustee shall pay to A in each taxable year of the trust during his life a unitrust amount equal to Y percent of the net fair market value of the trust assets valued as of the first day of such taxable year. However, the obligation of the trustee to pay such unitrust amount shall terminate with the payment next preceding the death of A. The unitrust amount shall be paid in equal quarterly installments from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amount shall be added to principal.

The following comments pertain to the sample provision described above:

(1) Provisions replaced. The optional provision set forth above may be used in lieu of the provision set forth in section 6.01.

(2) Cross references. See comments (1) through (8) in section 6.01.

.07 Under section 1.664-3(a)(4), the grantor of the trust may retain the power, exercisable only by will, to revoke or terminate the interest of any recipient other than an organization described in section 170(c) of the Code. The following is a sample provision for inclusion in the governing instrument of such a power:

The trustee shall pay to the settlor during his life a unitrust amount equal to Y percent of the net fair market value of the trust assets valued as of the first day of each taxable year of the trust and upon the death of the settlor, if B survives him, the trustee shall pay to B during her life a unitrust amount equal to Y percent of the net fair market value of the trust assets valued as of the first day of each taxable year. The settlor hereby expressly reserves the power, exercisable only by his will, to revoke and terminate the interest of B under this trust. Upon the first to occur of (i) the death of the survivor of the settlor and B or (ii) the death of the settlor if he effectively exercises his testamentary power to revoke and terminate the interest of B, the trustee shall distribute all of the then principal and income of the trust, other than any amount due A or B, to M charity. The unitrust amount shall be paid in equal quarterly installments from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amount shall be added to principal.

The following comments pertain to the sample provision described above:

(1) Provision replaced. The optional provision set forth above may be used in lieu of the provisions set forth in sections 6.01 and 6.02.

(2) Cross references. See comments (1) through (8) in section 6.01 and comments (1) and (2) in section 6.02.

.08 Under section 1.664-3(a)(3), the provisions of the trust may not include any provisions which restrict the trustee from investing the trust assets in a manner which could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of trust assets. The following is a sample provision for inclusion in the trust instrument which insures that the requirement described in this subsection is met:

.09 Under section 1.664-1(a)(4), in order for a trust to be a charitable remainder unitrust, the trust must function exclusively as a charitable remainder unitrust from its creation. Consequently, a revocable inter vivos trust which is used to administer the estate of the decedent cannot qualify as a charitable remainder unitrust. However, the regulations permit the revocable inter vivos trust to distribute assets to another trust which does qualify as a charitable remainder unitrust. The following is a sample provision for inclusion in the governing instrument of the revocable inter vivos trust which provides that the revocable inter vivos trust will be used to partially administer the estate of the decedent and then distribute assets to another trust which is a charitable remainder unitrust:

The trustee shall pay to A all of the income from the trust assets for A's life, during which the trust shall be fully revocable by A. Upon A's death the trust shall become irrevocable and the trustee shall pay all debts, taxes and other expenses of the administration of A's estate. After the payment or satisfaction of all such debts, taxes and expenses, the trustee shall transfer all of the then principal and income of the trust to the trustee of the charitable remainder unitrust hereinafter established to be held, administered and distributed in the manner and according to the terms and conditions hereinafter provided.

The following comments pertain to the sample provision described above:

(1) Trust provisions during life. There are no restrictions on the dispositive provisions of the above trust during the period it is fully revocable.

(2) Provisions for both trusts in same instrument. The same governing instrument may provide for both the revocable inter vivos trust and the charitable remainder unitrust, and both trusts may have the same trustee.

Sec. 8. Requests for Rulings

Requests for rulings on the governing instruments of charitable remainder trusts should be submitted in compliance with the general procedures contained in Revenue Procedure 72-3, C.B. 1972-1, 698, pertaining to the issuance of rulings, and should be addressed to the Assistant Commissioner (Technical), Attention: T:PS:T (T:I:I), Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C., 20224