3.10.7 Unitrust Document Requirements

Very specific document requirements and applicable regulations for charitable remainder unitrusts are set forth in Sec. 664. The document must specify a unitrust percentage for a life, lives or a term of up to 20 years. A remainder interest must be created in a qualified exempt charity. Sec. 664(d)(2)(C). If the named charity is not qualified exempt at the time for distribution, an alternative charity must be named in the document or selected by the trustee. Reg. 1.664-3(a)(3). There must be provisions for calculation of unitrust amounts in a short initial year and the final tax year. Reg. 1.664-3(a)(2)(l)(v). A unitrust may permit additional contributions and must include private foundation prohibitions. If the unitrust is a testamentary trust, it must date back to the date of death, with a provision for corrective payments to include interest for that period of deferral. Reg. 1.664-1(a)(5). Finally, there may not be investment restrictions on the trustee. Reg. 1.664-1(a)(3)

There are also a number of optional provisions for unitrust documents. With an independent trustee under Sec. 674(c), the income may be allocated among a class of beneficiaries. Under Sec. 664(f), based on a death, marriage, divorce or similar event, part or all of the trust principal may be distributed to a charity. The obligation to pay the unitrust amount may terminate with the payment prior to the death of the last non-charitable income recipient.

After the Tax Reform Act of 1969, it was permissible to write qualified charitable remainder unitrusts and charitable remainder annuity trusts. However, there was a need for clarification of the appropriate language for drafting trusts. Rev. Rul. 72-395 was the response by the Service to set forth a comprehensive set of language for the mandatory and optional provisions for both charitable remainder annuity trusts and charitable remainder unitrusts. Most of the language in charitable trust documents is derived directly from this initial guidance.

Sec. 6 defines the mandatory provisions for charitable remainder unitrusts. The trust must be for a period of years or life, must leave a remainder to a qualified charity with provision for an alternate charity if there is no qualified exempt charity, must provide a provision for short taxable years and must include the private foundation prohibitions.

Sec. 7 defines optional provisions for a unitrust. These include the ability to write a net income trust, to defer trust payment during a period of administration with the payouts relating back to date of death, to allocate the payout to a class of beneficiaries, to reduce the payout if one of the beneficiaries passes away and that portion is transferred to charity, to make distributions in kind to charity, to terminate the unitrust payouts with the payment prior to the death of the last non-charitable recipient, to allow a testamentary power of revocation, to prohibit investment restrictions on the trustee and to allow distributions to testamentary charitable remainder trusts.

A clarification of Rev. Rul. 72-395 was required for testamentary unitrusts. The provision that stated that payments from a testamentary unitrust would accrue from date of death was in the optional section. Rev. Rul. 80-123 made clear that in order to qualify for an estate tax deduction, there would be a mandatory requirement for the corrective payments. Therefore, if a trust is funded after date of death, the trustee must make all payments with appropriate interest as though the trust had been funded on date of death.

A charitable remainder trust qualifies for an estate tax charitable deduction under Sec. 2055. However, if it were possible to qualify for a charitable deduction and then under state law to apportion estate tax to the trust principal, the trust would be reduced and the charitable deduction could be overstated.

Rev. Rul. 82-128 clarifies the requirement that a charitable trust may not be invaded for the purpose of payment of gift or estate taxes. For example, if a two-life inter-vivos trust is created for a mother and daughter, and the mother retains the testamentary power of revocation over the income interest of the daughter, then there is no current gift and the assets will be included in the estate of the mother. In this circumstance, the trust document must make clear that the trust may not be invaded to pay tax on the value on the income interest of the daughter. The estate must make provision in the will, trust or through other means for payment of any potential estate tax from other sources.

If there were a period of deferral between the date of death and the funding of a testamentary trust, then corrective payments were required. Rev. Rul. 82-165 clarified the corrective payments language. It added specific language that also required payment of 6% interest, the standard interest rate as of the date of the ruling. With a testamentary unitrust, not only would the trust be required to make the corrective payments, but there would need to be 6% interest calculated and added to the corrective payments.

When the Service initially created the requirement in Rev. Rul. 72-395 to make corrective payments and then stated that the payments would also include 6% interest in Rev. Rul. 82-165, it was not foreseen that there would be change in interest rates. However, as a result of the change in interest rates on December 1 of 1983, it became apparent that the prior language with a fixed rate was not adequate. Therefore, Rev. Rul. 88-81 specified that corrective interest payment would be made with "the rate of interest that the federal income tax regulations under Sec. 664 of the Internal Revenue Code prescribed for the trust with such computation for such period." In effect, the Service allowed the regulations to amend the interest rate requirement.

Corrective payments of interest may be calculated under Reg. 1.664-1(a)(5)(ii). This formula states that the payment shall be the corrective payment plus applicable interest. The language of Rev. Rul. 88-81 noted that the interest should be added in again to the formula. In effect, it is possible that the language could be interpreted to add the interest in twice. Thus, Rev. Rul. 92-57 provides new language that clarifies the issue and simply notes that the interest will become computed under the federal regulations at the correct rate and that the corrective payouts shall then use Reg. 1.664-1(a)(5)(ii). The payments thus are made with interest included just one time.