Thursday April 25, 2024

3.10.1 Unitrust Duration and Recipients

Unitrust Duration and Recipients

Duration:   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.

Early Termination of a CRUT:   It may be possible for a donor to terminate a CRT and cash out his or her interest.

Permissible Recipients:   Normally, the donor is the recipient for a one-life unitrust, or donor and spouse for a two-life unitrust.

Special Rules for Fixed Percentage Trusts Created Before December 10, 1998:   The payout from a unitrust may be made within a reasonable time after the close of the calendar year, if the unitrust amount is 15% or less of initial net fair market value.

Qualified Contingency:   The duration of a charitable remainder trust may be shortened by a qualified contingency.

Unitrust "Special Needs Trust":   Charitable remainder unitrusts may be drafted for a life, lives or a term of years.

Duration

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.

It is also permissible to combine periods. The unitrust amounts may be paid for one or two lives, with a guaranteed number of years up to 20 years. In effect, this trust pays for the longer of the selected term of years or the two lives. If the life income beneficiaries pass away prior to the term of years, the balance of the term may be transferred to children, nephews, nieces or other family members. However, with a two life unitrust that includes a guaranteed term of years, a married couple does forego the marital deduction under Sec. 2056(b)(8) if one spouse passes away prior to the expiration of the specified term of years.

A trust also may be created for the lesser of a life or a term of years. For example, a trust may be created for a term of 20 years, but it will terminate if the income recipient passes away prior to that time and the remainder will be distributed to charity. This duration will result in a larger charitable deduction than a straight term of 20 years, since it is possible that the income recipient will pass away prior to the expiration of the term.

Finally, it is permissible to create a unitrust for one or two lives plus a term of years. However, this agreement is only permissible if all current and successor unitrust recipients are living at the inception of the trust, and the trust will terminate upon the earlier of the demise of all income recipients or the expiration of the term of years. In effect, the trust is created for one or two lives plus the lesser of the lives of the successor income recipients or the stated term of years. Reg. 1.664-3(a)(5)(ii).

Early Termination of a CRUT
It may be possible for a donor to terminate a CRT and cash out his or her interest. There have been several Private Letter Rulings that have allowed such a transaction. The termination may be by gift, sale, conversion to a gift annuity or a combination plan. Both federal and state laws apply to a CRT termination.

With a series of partial terminations, a CRT may function in a manner similar to a donor advised fund. At the end of each year, a donor may designate a vested exempt nonprofit with a fixed percentage of both the income and remainder of the CRT. The trustee may then distribute cash equal to the gifted portion to the designated nonprofit. Some CRT donors consider this plan a "Personal Foundation" and give the CRT growth away at the end of each year. There is a partial charitable tax deduction for this annual gift.

This CRT termination and gift plan is attractive for donors who have sufficient income from other retirement sources. Further, the gift of a unitrust income interest is beneficial because it can reduce the donor's taxable income and create a charitable income tax deduction for the donor in the year of the gift.

1. Gift of Income Interest - A donor may give his or her entire income interest to the remainder charities. The donor will receive a charitable deduction for a gift of a zero basis capital asset. Sec. 1001(e)(1). This deduction is usable to 30% of adjusted gross income because it is an appreciated asset. See Section 1001(e)(1). If the donor has retained the right to change charities, he or she will also need to vest selected charities with the remainder and irrevocably relinquish the power to change charities. See PLR 200802024. The selected charities will own vested interests in both the income and remainder of the CRT and, under the doctrine of merger, may terminate the trust and distribute the assets. Under state law, there may need to be approval of the termination by a probate court.

The gift of the unitrust income interest must be an undivided interest in either the entire income interest or an undivided percentage of the income interest. If a donor does not want to relinquish the entire unitrust income stream, he or she can make a gift of a percentage of the income interest. As long as the portion of the interest is undivided, the donor will receive a charitable income tax deduction.

However, a donor should refrain from making a gift of the unitrust interest close in time after creating the unitrust, as the IRS may scrutinize the transaction more closely. Generally, a gift of the unitrust income should not be made within one year of the creation of the trust. Otherwise, the transaction may appear as though it was done to avoid application of the partial interest rules. The partial interest rules are meant to limit abuse of the charitable income tax deductions on certain gifts, prohibiting income tax deductions for gifts of less than the entire interest in the asset.

Example 3.10.1A - Gift of Unitrust Income Interest

Joe and Mary had created a two life charitable remainder trust. Their estate had grown substantially and the donors did not require income from the trust. The trust document permitted them to select the charitable remainder recipient. They irrevocably selected Favorite Charity as the remainder recipient and also transferred their current and contingent income interests to Favorite Charity. They received a charitable deduction for the value of the income interest. As a capital gain-type gift, the deduction was limited to 30% of adjusted gross income, with a carry forward for five years. See PLR 9550026.


Example 3.10.6B Specimen Unitrust Income Interest Gift Language

Trustee
Organization
Address
City, State Zip Code
Re: Charitable Remainder Unitrust ______________

Dear Trustee:

We are currently the income recipients of a two life charitable remainder unitrust that was created on July 4, 2005 with trust grantors Joe and Mary Jones, 123 Main Street, Anytown, Illinois 00000 and initial trustee Charitable Organization, 456 Main Street, Anytown, Illinois 00000. The unitrust federal ID number is __________________.

As life income recipients, we have retained the power under section ________________ of that trust document to add, remove or modify by name or percentage the qualified exempt charitable remainder recipients. We declare our intention through this signed and dated writing to modify the charitable remainder recipients by irrevocably designating all of our income and remainder interests, whether vested or contingent, to a qualified exempt charity and relinquishing all powers to change charitable remainder interests.

In order to make a charitable gift of this charitable remainder unitrust, I hereby irrevocably designate qualified exempt charity ____________________________, of City, State, as the recipient of 100% of both the income and remainder interests in unitrust number _________________.

The trustee is authorized to recognize that under the doctrine of merger of income and remainder interests, the named exempt charity now owns all interests in this remainder unitrust. Therefore, the trustee may distribute the trust principal to the named exempt charity. Under the law of the state of ____________, this merger of interests may require consent of all trust beneficiaries or order of a probate court.

I understand that this transfer to a charitable organization may qualify under IRC Sec. 170 provisions for a charitable income tax deduction for the present value of the gifted income interest. Sincerely yours,

____________________________ Date: ____________
Unitrust Income Recipient

2. Sale of Income Interest - A donor may sell his or her entire income interest to the remainder charities. The donor will not receive a charitable deduction, but may receive cash equal to his or her income interest. If the donor has retained the right to change charities, he or she will also need to vest selected charities with the remainder. The selected charities will own vested interests in both the income and remainder of the CRT and, under the doctrine of merger, may terminate the trust and distribute the assets. Under state law, there may need to be approval of the termination by a probate court. With the sale option, the donor will report the full sale price as a capital gain. See PLR 200152018. Under Sec. 1001(e)(1), the basis in the income interest is zero.

3. Convert Income Interest to Gift Annuity - A donor may transfer his or her entire income interest to the remainder charity for a gift annuity. The donor will receive a partial charitable deduction and the right to the annuity for one life. If the donor has retained the right to change charities, he or she will also need to vest selected charities with the remainder. The selected charities will own vested interests in both the income and remainder of the CRT and, under the doctrine of merger, may terminate the trust and distribute the assets. The gift annuity value equal to the income interest will be transferred to the annuity reserve fund. The remainder value in the CRT is transferred to the issuing charity. Under state law, there may need to be approval of the termination by a probate court.

4. Combination Plan - A donor may combine a gift, sale or gift annuity for portions of the income interest. With the outright gift or gift annuity. The donor will receive a charitable deduction. If the donor has retained the right to change charities, he or she will also need to vest selected charities with the remainder. Under state law, there may need to be approval of the termination by a probate court.

5. Valuation of Income Interest - With a sale of the income interest, the donor is not making a charitable gift and the applicable federal rate (AFR) used for the calculation must be the rate that corresponds with the date the donor decides to terminate the trust. With a gift of the income interest or conversion to a gift annuity, one of the prior two-month's rates may be used. For a net income plus makeup trust, the income interest is based upon the lesser of the AFR or the unitrust percentage. For a standard unitrust, the income interest is calculated using the unitrust payout percentage. All life income interest calculations require a determination that the income beneficiaries have normal life expectancies. If there are health issues, in order to use the Sec. 7520 mortality tables there should be a written opinion by a medical doctor that a reasonable expectancy exists (at least over the 18 month Reg. 25.7520-3(b)(3) presumption). See PLR 200552015.

6. State Law - Modification of an irrevocable trust is controlled by state law. A step that may need to be taken in terminating a charitable remainder trust early is to petition the probate court of the state under which the trust is formed. In California and other states, an alternative may be to terminate with consents from all income and remainder beneficiaries. One other recommended step in terminating a charitable remainder trust early is to notify the state attorney general of the early termination. The state attorney general in most jurisdictions oversees all charitable trusts.


Permissible Recipients

Normally, the donor is the income recipient for a one-life unitrust, or a donor and spouse for a two-life trust. However, it is permissible to create a trust for another person or persons. Common CRT alternatives include those for a donor and child, nephew, niece or other relative.

If a unitrust is for a term of years, then it is permissible to name a class of individuals as the beneficiary of the trust. Reg. 1.664-3(a)(3)(i). For example, a donor could create a charitable remainder trust with the income distributed among grandchildren. It is also permissible to grant the trustee the power to "sprinkle" among the grandchildren, so long as there is an independent trustee under Sec. 674(c). Rev. Rul. 77-285.

A charity is also a permissible recipient. The charity may receive a substantial proportion of the income, so long as the non-charitable income recipient receives at least a "de minimus" amount. There is no additional income tax deduction for the value of the CRT income payouts to charity.

Another option is for a trust to be the beneficiary of a payment from a term of years charitable remainder trust. However, if the unitrust is a one-life trust, then payments to a second trust are deemed permissible only if the single beneficiary is incompetent. PLR 9718030.

Special Rules for Fixed Percentage Trusts Created Before December 10, 1998

The payout from a unitrust may be made within a reasonable time after the close of the calendar year, if the unitrust amount is 15% or less of initial net fair market value. Reg. 1.664-3(a)(1)(i)(h). However, if the payout exceeds 15%, with a standard or type I unitrust the payout must either be made prior to year end or the trustee must elect to treat the payment as though it had been made by December 31.

Qualified Contingency

The duration of a charitable remainder trust may be shortened by a qualified contingency. Sec. 664(f). It is permissible to shorten the duration of the trust based on an objective event, such as marriage, divorce or a similarly defined event. If the specified event takes place, then the trust may be terminated and the remainder transferred at that time to charity. Since the event is generally contingent, there is no increase in the income tax deduction, regardless of the nature of the event.

"Special Needs Trust"

Charitable remainder trusts may be drafted for a life, lives or a term of years. However, if a beneficiary is subject to a disability, then it may be desirable for the trust to have discretionary payment options. Thus, some grantors have preferred to create a charitable remainder trust that makes distributions to a second trust. The second trust is usually described as a "special needs trust" and permits discretionary distributions for the support and care of an individual with a financial, physical or mental disability.

In Rev. Rul. 2002-20; 2002-17 IRB 794 (29 Apr 2002), the Service set forth guidelines for charitable remainder trusts that make payments to special needs trusts. First, if the charitable remainder trust is for a term of twenty years or less, then it may make distribution to a special needs trust. However, if the charitable remainder trust is payable for a lifetime, then it should meet several requirements. First, the trust must be for one lifetime and the beneficiary must be under a disability that renders him or her unable to manage personal financial affairs, as defined in Sec. 6511(b)(2)(A). Second, special needs trust should follow one of three formats:

I. Flow Through Trust. "The trust may be a "Flow Through Trust," in which the unitrust payouts are made to the special needs trust and then are distributed to the beneficiary. Additional distributions may be made under a trustee discretionary power. The remainder will be distributed to the income recipient's estate.

II. Discretionary Trust. Alternatively, the special need trust may have a discretionary payment provision, which permits the trustee to make payments that would not supplant governmental benefits otherwise available. With a discretionary special needs trust, the remainder of the trust is payable to the estate of the special needs person.

III. Discretionary with Power of Appointment Trust. Finally, a discretionary trust may be created with the income recipient holding a testamentary general power of appointment. If the special needs person does not exercise the general power when he or she passes away, then the remainder may be distributed to family or to charity.
Since unitrust payments may be made for the benefit of, rather than to an income recipient, the unitrust may make payments to a special needs trust because the payments are, in effect, received by the special needs person. The above options are also available for an annuity trust.

In addition, it is possible for gift annuity payments to fund a special needs trust. While the gift annuity provides for fixed payments over the life of the person with special needs, distributions from the gift annuity to the trust must be limited and based on special needs. To avoid disqualifying the individual from receiving government aide, it is best to permit distributions to the trust at the discretion of a special trustee knowledgeable of the federal requirements.

3.8% Net Investment Income Tax

 In the Healthcare and Education Reconciliation Act of 2010, a 3.8% tax on net investment income (NII) was passed. The tax applies generally for married couples with income over $250,000 and for other persons with income over $200,000. Purely charitable trusts and pooled income funds are excluded from the tax. However, distributions from Sec. 664 charitable remainder annuity trusts and unitrusts (individually a "CRT") may be subject to tax.

On November 26, 2013 the IRS published comprehensive final (T.D. 9644) and proposed (REG 130843-13) regulations on net investment income (NII). The final and proposed regulations reflect the complexity of the entire tax code. As CPAs face the daunting task of filing tax returns for 2013, they will be forced to deal with extensive technical rules on NII.

The regulations addressed multiple key issues. Many individuals and entities rent property from themselves. Real estate professionals are engaged in an active trade or business. Investors in various securities have both net losses and gains. A disposition of a partnership interest can raise substantial issues.

The final regulations set forth many technical rules to cover these situations. The proposed regulations also offer an optional simplified method to calculate distributions from passive entities. There are five specific sections that apply to charitable interests.

  1. Charitable Gift Annuities - Commentators had proposed that payments from annuities funded prior to 2013 should be partially exempt from NII. The IRS determined that NII would apply in full to the ordinary and capital gain elements of gift annuity payouts.
  2. Pooled Income Funds - The pooled income fund is subject to tax on short-term capital gains. There is a set aside for the long-term capital gain and the ordinary income is distributed and therefore deductible. However, pooled income funds are subject to taxation on short-term capital gains that are not distributed. That short-term gain will not be excluded from NII.
  3. Charitable Remainder Trusts - CRTs are subject to the specific rules on accumulated net investment income (ANII). The charitable trust itself is not subject to payment of the NII. Proposed Reg. 1.1411-3(c)(2)(iii) defined ANII as "the total amount of net investment income received by a CRT for all taxable years beginning after December 31, 2012, less the total amount of net investment income distributed for all prior taxable years beginning after December 31, 2012." This created an aggregate accounting rule that would exist in addition to the Sec. 664 four-tier accounting system. The final regulations responded to opinions by commentators that it would be preferable to track ANII within each tier. The final regulations provide specific examples for tracking the exempt and taxable portions of ANII within the four tiers under Sec. 664. However, the proposed regulations also indicate that the simplified method may be elected by the trustee rather than the four tier tracking system. The IRS reserves the right to remove this option for the simplified method in the future.
  4. Charitable Purpose Trusts - If a trust is completely "devoted to one or more of the purposes described in Sec. 170(c)(2)(B)," then it is excluded from NII.
  5. Charitable Purpose Estates - Some estates have distributed all non-charitable assets and are solely devoted to charitable purposes. If an estate is one in which "all of the unexpired interests are devoted to one or more of the purposes described in Sec. 170(c)(2)(B)," then it also is excluded from NII.
The very extensive and technical regulations concerning NII reflect the complexity of the Internal Revenue code. Unitrust CPAs will determine what items qualify as passive and are taxable and what items are excluded. With respect to charitable remainder trusts, each level of the four-tier system may also include both qualified and exempt accounting amounts for net investment income.

Case Studies on Unitrust Duration and Recipients

Death and Taxes - The Madison Era of Giving, Part 2 of 7:   Still on an emotional high from his multi-million dollar gift toward the construction of a state-of-the-art library (see last week's Case Study), George Madison, Jr. has a new focus in his life - making a difference in children's lives. After making the gift to the school, George had a life-changing realization. George spent his entire life building up his business and accumulating his fortune and rarely gave of his time or money to others. Like many people, George's career and family were his number one priorities. Now nearing the latter part of his life, George feels a strong urgency to do things differently. Knowing the importance education played in his success, George strongly desires to set up gifts that would provide educational opportunities for underprivileged children. In addition, he would like to take full advantage of the tax benefits of making such a gift. While he is becoming more generous as of late, George has no interest in increasing his cash "donations" to Uncle Sam.

Death and Taxes - The Madison Era of Giving, Part 3 of 7:   George Madison, Jr., has definitely become a gift-making machine. Just in the past three months he has gifted $5 million to public charities. George's "ease" into retirement is turning out to be much more exciting than he had ever imagined. Due to the publicity of his two large charitable contributions, George has risen to the top of many gift planners' "people to call upon" list. One such list belongs to Eleanor Jacob, director of development at Education is Power schools. Eleanor consequently called George and asked if she could visit with him. After several visits and trips to the schools, George and Eleanor developed a good relationship. George liked the school's mission and felt he could contribute greatly to its further development. Therefore, George happily pledged a gift of $1 million to help Education is Power upgrade its classrooms and purchase new books for its students.

Unraveling the Life Plus Term CRT:   Quintana, Arizona is the official yarn capital of the world. The city of Quintana in fact produces over 70% of all the yarn sold worldwide. There are six major yarn companies in Quintana with Spun, Inc. being the largest. Spun, Inc. is a family-run business headed by founders David and Mary Kabril. David, 69, and Mary, 68, have lived their entire lives in Quintana and plan to retire there as well. They truly loved the Quintana community and have raised all of their four children there. Not surprisingly, they strongly support the community with their time and charitable contributions.

The Prearranged "Stock Holder" Sale:   Ken Barker, 65, was a senior level manager for a highly successful mid-sized company. After 35 years of employment with the same company, Ken retired three months ago.

Getting Back to the "Art of the Matter," Part 5:   Paulo Frambini, 45, is a talented artist and a self-proclaimed leader of the art purist movement. He lives, breathes and eats art history and culture. Paulo refuses to be characterized as any one particular type of artist. Accordingly, Paulo's artistic creations are very diverse and varied.

The Gift of Philanthropy to Two Sons:   Lorraine Moore, a widow age 75, has an estate valued at $1 million. Her estate consists of her home valued at $100,000, liquid investments of $400,000 (primarily bonds and stock) and an apartment building valued at $500,000.

Economics vs. Charitable Intent... A High Payout Trust is the Solution:   Sam Crawford, age 65, started a parts supply business over thirty years ago and with hard work and entrepreneurial expertise has built the company to a value of $5,000,000. Sam never married, has one brother and sister and would like to retire this year. The business is structured as a C corporation and five key employees have expressed an interest in purchasing 100% of the stock of the company. Both Sam and the employees feel that the $5 million value is a very fair price and would like to begin serious deliberations to purchase the company within the next 12 to 18 months. However, at this point, there has been no formal offer by the employees - only discussions "around the lunch table."

Should a CRT be Funded with an Installment Note?:   Gayle Goodman sold 10 acres of real estate she had owned for a number of years on an installment sale. The total sales price for the property was $500,000. She received $50,000 down and carried the balance of the purchase price on a 10% note amortized over a period of 25 years with a balloon payment due at the end of five years. Gayle had originally purchased the property for $100,000 and, therefore, will ultimately be required to report a gain of $400,000 on the sale of the property. Four-and-a-half years ago, when she sold the property, she reported a gain of $40,000 as a result of receiving a 10% down payment upon sale of the property. Since then she has reported another $10,000 of gain as a result of receiving principal payments on the note. Therefore, $350,000 of gain still remains to be reported on her tax return.

A FLIP for the Spouse:   Michael Williams just turned 72 and has begun the mandatory withdrawals from his individual retirement account. The assets of the IRA have been invested primarily in equities over the past ten years and Michael has been astounded by the growth of the account over that period. What was once a very moderate account has grown to over $3 million in value and, therefore, he will be required to withdraw over $100,000 per year based on his life expectancy. Michael has planned to leave the balance of the account to charity upon his death, but he has become concerned about providing for Michelle. They do have $3 million in other assets, but the majority of the $3 million is in income-producing real estate which he manages. The real estate throws off a very nice income stream (over $200,000 net per year), but this is primarily because of Michael's management expertise. Michael is very concerned that should he predecease his spouse, the real estate will not produce near this kind of income because he will not be available to provide the savvy management skills.

Gift of Philanthropy to Two Sons:   Lorraine Moore, a widow age 75, has an estate valued at $1 million. Her estate consists of her home valued at $100,000, liquid investments of $400,000 consisting primarily of bonds and some stock and an apartment building valued at $500,000. As a former high school history teacher, she lives comfortably with her pension and the income from her investments. The apartment building generates an income stream of about $20,000 per year after expenses.

A CRT as the Guarantor of a Charity's Loan:   Jennifer Lange, age 65, is a retired stockbroker who has remained active in the markets ever since her retirement five years ago. She never married and has one surviving brother who now is 75 years of age. Apart from her brother and his two children, she has no immediate heirs. Jennifer has been very successful in her investing, having purchased stock in a number of computer and chip companies in the late 1980s. Her strategy to buy and hold has yielded great dividends, as she has seen an original portfolio of $250,000 balloon to $1,000,000. Apart from this portfolio of computer stock, she has another $500,000 in much more conservative balanced mutual funds.

A Like-kind Exchange with Debt-encumbered Property:   Robert Boone purchased a rental house in 1990 for $100,000. As a result of depreciation on the property, his depreciated cost basis is $65,000 and the property, until recently, was free and clear. The real estate market has done very well in his locality and the property has appreciated in value to $250,000. However, to help fund a Grandchild's education, he secured a personal credit line with First National Bank using the property as security. The current balance on the line of credit is $10,000.

The Ultimate Donor Advised Fund:   Juan and Maria Hernandez, ages 65 and 60 respectively, are successful produce farmers and own 200 acres of prime land on the outskirts of their local community. The land is currently being farmed and produces primarily a variety of fruits and vegetables.

First National Bank of the CRT:   Eugene and Caroline Butler, both age 84, funded a charitable remainder unitrust back in the mid 1980's with $250,000 of highly appreciated real estate. Because of the illiquid nature of the property, a net income with makeup unitrust (NIMCRUT) was selected. They chose an 8% trust distribution percentage which was a reasonable payout rate based upon interest rates at that time. Therefore, the trust was written so that they would receive the lesser of net income or 8% of the fair market value of the trust as valued annually. No provision was drafted into the unitrust document to allow for distributions of capital gains as income since this creative concept was not yet being discussed in planned giving circles.

A Charitable Gift or AGI Limitations... Which is more Important?:   Marvin McLaughlin recently received a planned giving mailing from a college in Illinois which he has supported for a number of years. The mailing caught his eye because the primary thrust of the piece was a discussion on the benefits of charitable remainder trusts. Since he had some appreciated real estate, he decided to send in the response card with the question - "Do you ever get to San Diego?" Upon receiving the card, the charity contacted Marvin by phone and asked him if he wouldn't mind answering some questions since the only information in the charity's database on Marvin was his name, address and his giving record (which indicated contributions of $1000 per year for the past ten years). Marvin stated that he was 75 years old, married and was interested in "that charitable trust idea" discussed in the latest mailing. The funding asset would be a 32-unit apartment building located in central San Diego worth about $2.5 million. The charity was very excited about the prospects of a charitable trust and told Marvin that "Yes, they do get to San Diego." A trip was scheduled expeditiously by the Major Gifts Officer.

A Guardianship CRT:   Franklin Roth is Sr. Vice President of a Major National Bank ("Bank"). The bank is currently acting in two fiduciary capacities with respect to Johnny Persons, who has been adjudicated mentally incompetent by the courts. First, the Bank is guardian of Johnny's estate. Second, the bank serves as trustee of an irrevocable trust (IRT) created for Johnny's benefit. The IRT was created by a decree of the Court ten years ago and was funded with cash from a substantial insurance settlement. Johnny suffered serious head injuries when he and his wife were hit head-on by a drunk driver which left him in an incompetent state. This trust was intended to protect Johnny's assets and ensure that they are used for his benefit. Johnny's wife was tragically killed in the accident.

Maximum Meatpacking LP Unitrust:   Mother and Father were in business for many years and operated a meat packing plant. The plant was on the outskirts of a major urban area and they operated the plant successfully for 30 years. However, after Father passed away, the business began to decline and Mother sold all of the assets to another company. The plant was leased to another business for a number of years, but that business has now also moved to a new facility.

The Flexible Foundation:   Jane and Bill Wilson are both 70 and are now retired. Years ago, they each inherited stock from their parents. The entire portfolio is now invested in two stocks. There has been no management of the portfolio for the past 30 years. Jane and Bill think that it would be good judgement to diversify. However they do not want to pay any capital gains tax. Both of them live fairly modestly and they will soon be required to start taking distributions from their IRAs. Thus, they do not want added income now, but may need more income in the future. Is there a way that Jane and Bill can diversify without paying tax? Can they control their income? If they need income, they would like to take income. If not, they would consider making gifts to charity. Can this arrangement be done at very modest cost?

Private Letter Rulings

PLR 199903001 Charitable Remainder Annuity Trust and Special-Needs Trust:   The parent of a disabled child desired to leave one-half interest in a home outright to charity, with a life estate in the other one-half interest to a special-needs trust for the life of the child and the remainder interest from this trust to charity. Other assets are to go to a charitable remainder annuity trust that pays to a special-needs trust.

PLR 200010035 Current Distributions of CRAT Income and Principal to Charity Permitted:   Ariana and Bruce Fila established a charitable remainder annuity trust (CRAT) to pay a 7% annuity interest to them for their lifetimes and then distribute the remainder to their private foundation (Foundation).

PLR 200108035 CRUT with Two-Layer Payout Approved:   Taxpayers propose to create a Charitable Remainder Unitrust with a 7% payout. However, the Taxpayers wish to have a rather unique payout schedule. They intend to pay 50% of the unitrust amount to Child for life, 35% of the unitrust amount to charity for five years and then to Child for life, and 15% of the unitrust amount to charity for the life of Child. Upon Child's death, the trust will distribute remaining income and principal to charity.

PLR 200203034 S Corp's Proposed Trust Fails to Qualify as a Charitable Remainder Unitrust:   Husband is the sole shareholder of S corporation. S corporation intends to transfer a block of appreciated stock into a charitable remainder unitrust. The charitable remainder unitrust would pay quarterly to S corporation for the term of 19 years, then would pay to Husband and Wife for the rest of their combined lives.

PLR 200252092 Donors May Terminate and "Cash Out" Term-of-Years High-Payout CRUT:   Donors created a term of years charitable remainder unitrust. The trust duration is for five years and the unitrust payout is 20%. At the end of the five years, the trust distributes the remaining corpus to Donors' Private Foundation. The trust document, however, provides Donors with the power to change the charitable remainderman. Nevertheless, as major donors and trustees of the PF, Donors are disqualified persons with respect to the PF.

PLR 200252096 CRUT's Creation of a For-Profit Corporation Insulates Trust from UBIT:   Charitable Remainder Unitrust (CRUT) intends to form a wholly owned for-profit corporation. CRUT will contribute the necessary capital to fund Corporation. However, CRUT will not incur any debt in the process. Once created and funded, Corporation will purchase an interest in LLC. LLC operates an active business that leases business equipment and commonly uses debt financing to partially fund its purchase of business equipment.

PLR 200321010 Transfer of Restricted Stock to CRUT Neither Taxable to Donor nor Prearranged Sale:   Edward Executive is a retired officer of Big Corp. However, Edward continues to serve on Big Corp's Board of Directors and continues to hold a substantial amount of Big Corp's stock. In fact, in connection with Big Corp's executive stock purchase plan, Edward entered into 14 stock purchase plans during his time at Big Corp.

PLR 200340001 CRUT for Friend Qualified for Estate Tax Charitable Deduction:   Decedent created a testamentary trust to benefit Friend and Charity. The trust provided for monthly income (or other convenient payment frequency) to Friend. In addition, the trust allowed distributions of principal to Friend under a health, support and maintenance standard. At Friend's death, the trust principal passed to Charity.

PLR 200548023 Cash Out of CRUT Not Self-Dealing:   n 1996, Barney established a 16% charitable remainder unitrust (CRUT) for the shorter of his life or a term of 20 years. Barney and all parties involved decided it was in everyone's best interest to terminate the trust and cash-out Barney and the charity. The trustee requested a ruling that the termination would not result in an act of self-dealing and would not subject the trust to the private foundation termination tax.

PLR 200616035 Termination of a Unitrust is not Self-Dealing or Subject to Termination Tax:   X established a charitable remainder unitrust (Trust) on Date 1. A served as the trustee to Trust and C served as an independent special trustee. X is also the sole income beneficiary of Trust which shall make payments to X for the remainder of X's life.

PLR 200631006 Renunciation of Unitrust Interest Will Entitle Donor to Gift and Estate Tax Deductions:   T funded a net income plus makeup charitable remainder unitrust (NIMCRUT) with shares of stock. T designated his three daughters to serve as co-trustees.

PLR 200720021 Redemption of Stock from CRT by Disqualified For-Profit is Not Self-Dealing:   A is a for profit corporation with common stock owned by B, C and X. B is a charitable remainder unitrust formed by X and Y under the meaning of Sec. 664(d)(2). C is an employee stock ownership plan. X is a trustee of B and the sole unitrust income beneficiary. A offers to redeem for cash, the common stock held by all shareholders.

PLR 200813023 50-50 Unitrust Approved:   Grantor proposed a standard payout unitrust (CRUT). The payout is to be paid 50% to Grantor and 50% to Grantor and/or any other charitable organization the trustee deems appropriate. Grantor retains the right to change the charitable remainderman.

PLR 200821204 Fund Contribution and Repurchase:   Taxpayer (T) owns common voting shares in holding company X, individually and through T's own grantor-trust. T's family members also own common voting shares in X. T is one of X's board of directors, and none of T's family members are directors of X.

PLR 9331043 UT Guaranteed Years:   A unitrust may be created for a life, lives or a term of 1 to 20 years. However, it is also possible to combine lives and term of years trusts. In PLR 9331043, the Service permitted a remainder unitrust for two lives to include a guaranteed 20 year provision. If mother and father pass away prior to 20 years, then the balance of the term of 20 years is distributed to children. However, if mother and father live past the term of 20 years, then the trust functions as a typical two-life unitrust.

PLR 9821029 Trust as Beneficiary of a Unitrust:   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.

PLR 9825001 Unitrust Invested in Variable Annuity Contracts:   The trustee of a unitrust used trust assets to purchase two commercial deferred annuity agreements. The Service held that the purchase by a charitable remainder unitrust of variable annuity contracts 1) would not adversely affect the unitrust's status under Sec. 664 and the current regulations thereunder, and 2) is not an act of self-dealing.

PLR 9839024 Unitrust Allowed Distributions to Guardianship Trust:   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.

Related Topics on Unitrust Duration and Recipients

3.1.1  Annuity Trust Duration and Recipients:    A charitable remainder annuity trust (CRAT) usually pays a fixed annuity for a life, lives or a term of up to 20 years, but other combinations are possible. Reg. 1.664-2(a)(1)(i). In most circumstances, the annuity is paid to the donor for one life, or to donor and spouse for two lives. Alternatively, the annuity may be paid for a term of 20 years.

3.10.2  Four-Tier Accounting:    Unitrust payouts are one of the most important areas for the advisor to communicate to the recipient. With a charitable remainder trust, the basic payout rule is that the unitrust percentage is multiplied times the trust value and that amount is then distributed. The distribution may be monthly, quarterly, semiannually or annually.

3.10.4  Types of Unitrust Payouts:    Payouts are among the most important areas for the advisor to communicate to the recipient. With a charitable remainder unitrust, the basic payout rule is that the unitrust percentage is multiplied times the trust value and that amount is then distributed. The distribution may be monthly, quarterly, semiannually or annually.

Palumbo:    In Estate of Antonio J. Palumbo et al. v. United States; No. 11-2371 (2 Apr 2012), the 3rd Circuit of the United States Court of Appeals determined that an estate with remainder to be transferred entirely to a charitable trust did not qualify for recovery of attorneys' fees.

Family Trust of Massachusetts Inc:    In Family Trust of Massachusetts, Inc. v. United States; No. 1:11-cv-00680 (24 Sep 2012), a District Court determined that a pooled-asset special needs trust did not qualify for exempt status.

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