Thursday April 25, 2024

Rev. Rul. 77-285
GiftLaw Note: In a charitable remainder trust, it is permissible for the grantor to retain the power to replace the trustee. However, a unitrust is disqualified if a retained power, such as the right to select income recipients, causes the unitrust to become a grantor trust.

In this ruling two unitrusts were created, with the grantor retaining the power to remove the existing trustee and appoint a new trustee, potentially including even the grantor as trustee.

In the first trust, this power was deemed permissible. However, in the second trust, the trustee had the power to allocate the trust income between the grantor and another income recipient. Since the power to allocate under Sec. 674(a) causes the unitrust to become a grantor trust and therefore disqualifies the trust under Reg. 1.664-1(a)(4), the second trust is disqualified. If the trustee has a discretionary power to allocate trust income among the trust income recipients, then the grantor may not serve as trustee or, potentially, successor trustee.

Rev. Rul. 77-285, 1977-2 C.B. 213

Section 664 -- Charitable Remainder Trusts
Section 674 -- Control of Beneficial Enjoyment

Service Headnote
Charitable remainder trusts; qualification; grantor's power to remove trustee. A trust, otherwise qualifying under section 664 of the Code, the governing instrument of which provides that the trustee will pay the specified distribution to the grantor for life will not be prevented from qualifying as a charitable remainder trust by a provision reserving to the grantor the right to remove the trustee for any reason and substitute any other person, including the grantor. However, a similar trust providing for payment of the specified distribution to two life beneficiaries, one of whom is the grantor, and for allocation of the specified distribution to or between the beneficiaries, does not qualify.

Full Text
Rev. Rul. 77-285

Advice has been requested whether, under the circumstances described below, two trusts qualify as charitable remainder trusts under the provisions of section 664 of the Internal Revenue Code of 1954 and the regulations applicable thereto.

Situation (1). The governing instrument of an irrevocable trust provides that the trustee shall pay the specified distribution to the grantor for life and upon the grantor's death the trust will terminate and the trust assets will be distributed to an organization described in section 170(c) of the Code.
The trust instrument also provides that the grantor reserves the right to remove the trustee for any reason and substitute any other person (including the grantor) as trustee. In all other respects, the trust instrument complies with the provisions of section 664 of the Code and the applicable regulations and includes the mandatory trust provisions prescribed in Rev. Rul. 72-395, 1972-2 C.B. 340.

Situation (2). The governing instrument of an irrevocable trust provides that the trustee shall pay the specified distribution to two life beneficiaries, one of whom is the grantor. The trustee may, in its sole discretion, allocate the specified distribution to or between the life beneficiaries. Upon the death of the survivor of the two life beneficiaries, the trust will terminate and the trust assets will be distributed to an organization described in section 170(c) of the Code.

The governing instrument further provides that the grantor reserves the right to remove the trustee for any reason and substitute any other person (including the grantor) as trustee. In all other respects, the trust instrument complies with the provisions of section 664 of the Code and the applicable regulations and includes the mandatory trust provisions prescribed in Rev. Rul. 72-395.

The specific question in both situations is whether a trust that authorizes the grantor to remove the trustee of an otherwise qualifying charitable remainder trust for any reason and substitute any person (including the grantor) as trustee qualifies as a charitable remainder trust.

Section 1.664-1(a)(4) of the Income Tax Regulations provides that in order for a trust to be a charitable remainder trust it must meet the definition of, and function exclusively as, a charitable remainder trust from the date or time of the creation of the trust. This section further provides that, solely for purposes of section 664 of the Code and the regulations thereunder, the trust will be 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, chapter 1, subtitle A. For purposes of the preceding sentence, neither the grantor nor the grantor's spouse shall be treated as the owner of the trust under subpart E merely because the grantor or the grantor's spouse is named as a recipient.

Sections 1.664-2(a)(3)(ii) and 1.664-3(a)(3)(ii) of the regulations provide that 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 sections 673-679 were applicable to such trust.

Section 674(a) of the Code provides the general rule that the grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without approval or consent of any adverse party. Section 674(c) provides that section 674(a) shall not apply to a power solely exercisable by a trustee or trustees, none of whom is the grantor, to allocate the specified distribution to the income beneficiaries.

Section 1.674(d)-2(a) of the regulations provides that a power in the grantor to remove, substitute, or add trustees may prevent the trust from qualifying under sections 674(c) or (d) of the Code. For example, if a grantor has an unrestricted power to remove an independent trustee and substitute any person including the grantor as trustee, the trust will not qualify under section 674(c) or (d).

In Situation (1), none of the provisions of sections 673-679 of the Code will prevent the trust from coming into existence under section 1.664-1(a)(4) of the regulations. Further, the trust complies with all of the provisions of section 664 and the applicable regulations.

Accordingly, the described trust qualifies as a charitable remainder trust under section 664 of the Code and the applicable regulations.

In Situation (2), the trust fails to satisfy the requirements of sections 1.664-2(a)(3)(ii) and 1.664-3(a)(3)(ii) of the regulations because the grantor has the right to substitute the grantor as trustee and therefore will be treated as the owner of a portion of the trust under section 674(a) of the Code.

Accordingly, the trust does not qualify as a charitable remainder trust under section 664 of the Code and the applicable regulations. The conclusion would be the same if the grantor could not serve as trustee but could name a related or subordinate party who is subservient to the wishes of the grantor as trustee.

Compare Rev. Rul. 77-73, 1977-1 C.B. 175, in which an independent trustee has the power to allocate the income among the beneficiaries.



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