3.10.8 Unitrust Reformations

Private Letter Rulings

PLR 199923013 Reformation of Unitrust to Correct Drafting Errors:   Charitable remainder unitrusts are irrevocable agreements. However, the Service has allowed reformations for "drafter's errors" in order to reflect Grantor's original intent. This ruling allowed reformation to preclude Grantor from reacquiring trust assets, to not permit estate taxes to be paid from the trust and to require payments to accrue from date of trust funding.

TAM 199941004 Deduction Lost - Estate Too Late in Request for Section 2055 CRT Reformation:   In TAM 199941004, the decedent had created a living trust with a testamentary transfer to a charitable remainder unitrust. This unitrust was to make payments to surviving spouse for life and then to 13 beneficiaries for the lesser of a term of ten years or their lives. Unfortunately, the trust was amended eight times and one of the amendments deleted the charitable remainder unitrust. When the decedent passed away, the document instead created a trust that paid the income from the trust to four beneficiaries, with the remainder to charity. In this case, the trust did not pay a fixed amount or percent and the reformation was not initiated prior to the 90-day period. Thus, it was no longer possible to obtain a reformation and charitable estate deduction.

PLR 200002029 Reformation Plus FLIP Of Unitrust Permitted:   A husband and wife executed and funded a unitrust with non-publicly traded stock. The unitrust was a net income trust that included the Sec. 170(b)(1)(A) limitation requiring distribution to only a public charity.

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).

FSA 200022005 Bankruptcy, Fraud, Self-Dealing and The "Super-Chutzpah" UT Grantor:   A unitrust grantor had been involved in a major tax shelter in years one through twelve. In year fourteen, the taxpayer funded a charitable remainder unitrust with the majority of his assets. After funding the unitrust, the taxpayer was essentially insolvent. Apparently, the taxpayer realized that the IRS would contest the tax shelter and was attempting to shelter his assets from the long arm of the law.

PLR 200031034 QTIP - NIMCRUT Reformation Approved:   Decedent passed away and created a QTIP trust for surviving spouse. After the death of surviving spouse, the QTIP Trust will be distributed to a net income plus makeup unitrust for the life of a niece. The trustees of the marital trust desire to reform the unitrust so that the unitrust is a net income trust for the partial year following the death of the spouse and then flips to a straight or standard payment unitrust on the following January 1.

PLR 200035014 Split Up Leads to Split CRUT:   Husband A and Wife B created a unitrust in 1993. A and B were co-trustees of the net income plus makeup unitrust. The trust paid the lesser of trust income or 15% to them jointly and then to the survivor for life.

PLR 200122045 Reformation Fails to Qualify Trust as CRUT:   Taxpayers created an inter vivos trust, which they intended to be a Charitable Remainder Unitrust (CRUT). The trust was to last for the lives of Taxpayers and then for a period of twenty years. Subsequent to the establishment of the trust, Taxpayers discovered their trust failed to meet the payout provisions of IRC Sec. 664.

PLR 200127023 Unitrust Split-Up Produces Taxable Income:   A donor created a unitrust for a term of 20 years. The unitrust was funded with appreciated property. Normally, donors transfer appreciated property to a unitrust to receive the benefit of a charitable income tax deduction and to diversify the assets without payment of capital gains tax.

PLR 200143028 Divorcing Taxpayers Allowed to Split Their Two-Life CRUT:   Several years ago, Husband and Wife created a two-life charitable remainder unitrust. The CRUT pays income to them jointly and, upon the death of either of them, then to the survivor for life.

PLR 200201026 Estate's Reformation Qualifies Trust as Charitable Remainder Unitrust:   Under the terms of Taxpayer's will, the residue of Taxpayer's estate will pass into a trust for Son. Upon Son's death, the trust will distribute the trust assets into two separate charitable trusts. Both charitable trusts are to be used exclusively for charitable purposes as described in Section 2055(a).

PLR 200208039 Unhappy CRUT Income Beneficiary Allowed to "Cash Out" and Terminate Trust:   Donor created a net plus makeup charitable remainder unitrust (NIMCRUT) to benefit donor and several other income beneficiaries. The NIMCRUT will pay out each year the lesser of the trust net income or 8% of the net fair market value of the trust assets. Donor has now died, and there is only one remaining income beneficiary.

PLR 200215042 Flip of Old NIMCRUT into New Straight CRUT Approved:   Donors A and B created a NIMCRUT during their lifetime in accordance with Section 664. The NIMCRUT was to provide quarterly unitrust payments to A and B for their lifetimes and then for the lives of C, D, and E. At the death of the last income beneficiary, the trust would terminate and distribute the trust corpus to charity.

PLR 200218008 Donors Allowed to Reform CRUT into NIMCRUT Due to Scrivener's Error:   Husband and Wife hired Financial Planner to advise them on their retirement plan. Based upon Financial Planner's advice, Husband and Wife investigated the use of a charitable remainder trust in their retirement plan.

PLR 200219012 Rescission of a Charitable Remainder Unitrust Allowed:   During a fundraising campaign, Charity marketed planned gifts to prospective donors. In particular, Charity encouraged Donors to create a charitable remainder unitrust. As a result, Donors created a CRUT and named Charity as one of the charitable remainder beneficiaries.

PLR 200219038 Termination of Trusts with Remainder to Charity Not Self-Dealing:   X is a private foundation, which was funded by Donor. Afterwards, two of Donor's sisters created testamentary trusts with income to E and F (the children of Donor) and remainder to X. Both testamentary trusts provided for income and principal distributions to E and F pursuant to the sole discretion of the trustees.

PLR 200227015 Reformed Charitable Trust Will Qualify for Estate Tax Deduction:   Taxpayer created a trust during his lifetime which at his death would irrevocably create a charitable trust in favor of his brother, his sister-in-law and his favorite charities. The charitable trust is to pay the trust net income to Brother for life and then pay an annuity amount to Sister-in-Law for life.

PLR 200244011 Reformation of NIMCRUT into Standard CRUT Allowed:   Husband and Wife wanted to create a two-life charitable remainder unitrust. Husband and Wife's primary goal was to generate a consistent stream of income for themselves. As a result, Husband and Wife decided to create a standard (or Type 1) CRUT and serve as co-trustees of their CRUT. Husband and Wife were not interested in a net income plus makeup unitrust (NIMCRUT), because it was unlikely such a trust could produce the level of income they desired.

PLR 200251010 Scrivener's Error Allows Reformation of CRAT into CRUT:   After extensive charitable planning discussions with professional tax and estate planning advisors, Jack decided to create a charitable remainder trust. During the discussions, Jack was given sample illustrations comparing various trust types. After reviewing his goals, Jack elected to create a CRUT.

PLR 200304025 Donors "Cash Out" Just a Portion of Their NIMCRUT Income Stream:   Husband (H) and Wife (W) created a two-life NIMCRUT with a 5% payout. Upon termination of the trust, the remaining trust assets are distributed to H and W's private foundation. H and W now wish to sell a portion of their unitrust income interest (as opposed to their entire unitrust income interest) to the private foundation. As a result, H and W partitioned their NIMCRUT into two separate and new NIMCRUTS, Trust 1 and 2. Each new trust contains the same provisions as the original trust and each trust receives half of the NIMCRUT assets.

PLR 200310024 Donor May Sell A Percentage of A CRUT to Charity:   Several years ago, David Donor created a one-life NIMCRUT with a 5% payout. While the remainder beneficiary was a public charity, Donor reserved the power to change the remainder beneficiary to any other public charity.

PLR 200314021 Capital Gains Realized Upon Termination of CRUT:   Donor created a 12% payout charitable remainder unitrust (CRUT). Donor served as trustee of the CRUT; however, Big City Bank served as its Independent Special Trustee (IST). The IST was appointed to value unmarketable assets and make investment decisions regarding the unmarketable assets. At the end of Donor's lifetime, the trust distributed the corpus to Donor's Private Foundation (PF).

PLR 200425027 Scrivener's Error Defense Saves Estate Tax Charitable Deduction:   Dominic Donor created Dominic's Trust to receive his retirement assets and the residue of his estate at his death. Dominic's Trust was designed to make distributions to Foundation, a Sec. 501(c)(3) organization, to fund Dominic's Memorial Fund at Foundation. Foundation will then distribute amounts from Dominic's Memorial Fund to other educational and charitable institutions. Dominic's attorney stated by affidavit that due to a drafting error, he failed to include the language necessary so that the assets transferred to Dominic's Trust would qualify for the federal estate tax charitable deduction. On this basis, state court granted a petition to reform Dominic's Trust to include the required language. The executor of Dominic's estate sought a ruling that an estate tax charitable deduction would be allowed for the value of assets transferred to the reformed trust.

PLR 200441019 Donor Allowed to Change CRUT Payout from 7% to 5%:   Douglas Donor created a charitable remainder unitrust (CRUT) on date X. The CRUT was drafted to last for the lifetime of Douglas and have a 7% payout. However, due to a miscommunication and misunderstanding between Douglas and his attorney, the CRUT was drafted incorrectly. In particular, Douglas desired a 5% payout CRUT instead of 7% payout CRUT.

PLR 200502037 Split-Up Leads to Split Unitrusts:   Husband and Wife created a unitrust during the time they were married. While they reside in a community property state, it appears that Husband used separate property to create a unitrust that made annual payments to him for life. After the death of Husband, the trust then would make payments to Wife for life, provided that Husband did not exercise his retained testamentary power of revocation.

PLR 200524014 Division of NIMCRUT and Partial Termination Allowed:   Donor established a NIMCRUT with a 10% payout to himself as the sole beneficiary. In the trust document, the donor was named as the trustee and the trust document was to be governed under state law 1, the donor's state of residence at the time of trust creation. Another of the trust provisions allowed the donor the right to change the charitable remainderman.

PLR 200532022 Reformation of NIMCRUT Not Self-Dealing:   Al and Barbara established a net income with makeup charitable remainder unitrust (NIMCRUT). Al and Barbara created the NIMCRUT with the intention that post-contribution capital gain would be allocated to income. The trustee managed the trust in accordance with the NIMCRUT rules and allocated all post-contribution capital gain to trust income.

PLR 200535007 Scrivener's Error Allows Capital Gain Payouts for NIMCRUT:   In PLR 200535007, a charitable remainder trust was created. It was a net income plus make up unitrust or NIMCRUT under Sec. 664(d)(3). This trust provided a payout for two lives to the donors and paid out the lesser of the trust income or the selected unitrust percent.

PLR 200539008 Unitrust Division Upon Divorce Does Not Disqualify the Trust:   Adam and Bonnie created a charitable remainder unitrust (CRUT) shortly after they were married. The unitrust paid both Adam and Bonnie a set percentage of the value of the trust assets quarterly for the lesser of 20 years or their joint lives. The trust was funded with jointly owned community property and was drafted so that if either Adam or Bonnie passed away prior to the expiration of the selected 20-year term, the surviving spouse would receive all of the income payments for the duration of the trust.

PLR 200539022 Modification of Trust Does Not Invalidate CRUT:   At Alan's death, his living trust divided the residuary of his estate between a private foundation and three other trusts for the benefit of his two children Bob and Carol. The three trusts for his children included a trust for Bob and his descendants, a charitable remainder unitrust (CRUT) for Bob and a CRUT for Carol.

PLR 200541038 Reformed Statutory Trust Qualifies for Marital:   Dominic died testate, survived by Samantha and two children. Samantha elected under state law to waive any distribution as set forth in Dominic's will and instead take a distribution under state law. Under state law, Samantha's statutory share was one-third of Dominic's personal property and one-third of the real property up to $25,000 plus a lifetime income stream held in a statutory trust.

PLR 200601024 Judicially Reformed Trust is Valid CRUT:   A and B intended to create a fixed percentage or standard Charitable Remainder Unitrust (CRUT) under Sec. 664(d)(2). The introductory paragraph to the trust drafted by A & B's attorney described a fixed percentage CRUT. However, due to a drafting error, the trust instrument provided for a Net Income Plus Makeup Charitable Remainder Unitrust (NIMCRUT) paying out the lesser of net income or the unitrust percentage.

PLR 200605001 Dividing a Testamentary Trust into Chaitable and Non-Charitable Trusts produces an Estate Tax Charitable Deduction:   Trust was created by Decedent upon his death. Trust was to pay income to Son's trust for Son's benefit until Son's death. At Son's death, the remainder was to be distributed as follows.


PLR 200616008 Division of CRUT Permitted:   During her marriage to B, A established a charitable remainder unitrust (CRUT) as described in Sec. 664(d)(2). The trust provided for payments to be made to A during her lifetime, and after her death to B, for his lifetime.

PLR 200622005 Qualified CRT Reformation:   D died on Date 1. D's will created a testamentary charitable remainder unitrust with a payout of only 4% to B for life, remainder to Charity. Sec. 2055(e) provides an estate tax deduction for remainder interests in charitable remainder trusts.

PLR 200624003 Division of Trust into Successor Trusts Permitted Without Tax:   Father died on date 1 and Mother died on date 2. Father's will created Trust for the benefit of Son and Son's issue. The trustees of Trust were given the power to accumulate or spend Trust income for the reasonable care, support, maintenance, education, enjoyment, advancement, or comfort of Mother, Son and Son's spouse and issue.

PLR 200744019 Splitting Unitrust in Two Approved:   H and W created a charitable remainder unitrust (CRUT) under Code Sec. 664(d)(2). Trust provides trustee pay annual amounts to H for life and at his death to W. Trust operates as a FLIP and pays a fixed 9% of the fair market value of the assets valued annually.

PLR 200808018 Proposed Trust Division Won't Result in Loss of CRT Status:   T created a net income plus makeup charitable remainder unitrust (NIMCRUT) with T and T's family trust as income beneficiaries and a qualified charitable organization as remainder beneficiary. T proposes to make a contribution of an undivided portion of T's unitrust interest to the charitable remainder beneficiary.

PLR 200811003 Judicial Reformation of Trust is Not Self-Dealing:   A and B created a trust with the intent that it qualify as a fixed percentage irrevocable charitable remainder trust (CRUT) under Sec. 664(d)(2). The trust paid income to A and B with remainder to Charity. The trust first paragraph described a fixed percentage CRUT, but a scrivener's error stated the trust's payout as a net income makeup charitable remainder trust (NIMCRUT) instead of a fixed percentage (standard) CRUT.

PLR 200814003 Division Does Not Disqualify CRUT:   Husband and Wife created a charitable remainder unitrust (CRUT) with income to be paid to Husband for his life and upon his death to Wife for hers. Within three years of the CRUT's creation, Husband and Wife divorced. Under the terms of the divorce judgment the CRUT was divided into CRUT A and CRUT B.

PLR 200818003 Reformed Trust Fails to Qualify as CRT:   Decedent, after creating an inter vivos trust (Trust), passed away in 1954. The terms of Trust directed the earnings to be accumulated for a period of five years and then pay $X to Wife for her lifetime. Twelve months after the death of Wife, Trust paid $X of income to Child A and Child B for their lives and upon their deaths, to each of Child A and B's children (Grandchildren).

PLR 200824022 Division of CRT is Not Taxable:   H created Trust X as a charitable remainder unitrust (CRT) under Sec. 664(d)(2). Trust X directed the trustee to make unitrust payments to H for his lifetime and then to W, H's surviving spouse, for her lifetime. Upon the death of H and W, the trustee would distribute the remainder to a qualified charitable organization.

PLR 200825017 Judicially Reformed Trust Is Valid CRUT:   A and B created Trust, intending that it qualify as a fixed percentage charitable remainder unitrust (CRUT) under Sec. 664(d)(2). Although the Trustee administered Trust as a fixed percentage (standard) CRUT due to an error, Trust's document was actually drafted as a net income plus makeup charitable remainder trust (NIMCRUT).

PLR 200829015 NIMCRUT Survives Reformation:   On Date 1, A creates Trust with the intention that it qualify as a NIMCRUT under Sec. 664(d)(3). Trust instrument provides for quarterly payments equal to the lesser the unitrust payout percentage or the trust income for the taxable year and includes a makeup provision.

PLR 200831002 Judicially Reformed Trust Adds Children to Potential Beneficiaries:   A created Trust with the intention that it qualify as a charitable remainder unitrust (CRUT) under Sec. 664(d)(2). A named the charitable remainder beneficiary as Trustee. A intended for Trust to make payments for the lives of A and A's spouse.

TAM 200840008 Property Distributed to Trust Doesn't Qualify Estate for Charitable Deduction:   D's will directed the funding of a testamentary trust with the residue of D's estate. The trustees were to divide half of the trust's net income between A and B for their lives and to distribute the remainder at the trustees' discretion. The will provided that after A and B passed away, the trustees could distribute the remaining trust assets to a charity or charities of their choice.

PLR 200850046 Reformation of a CRT is not Self-Dealing:   Husband and Wife (H and W) intended to create a charitable remainder unitrust (CRUT) that would last the longer of a term of twenty years or the lives of both. Some time after the CRUT was created H and W discovered a scrivener's error.

PLR 201115003 Trust Reformation is Qualified:   The residue of Decedent's estate passed to Trust. The income from Trust is payable to individuals A and B for their lives. In addition, Charity 1 and Charity 2 receive $V annually. Upon the death of A and B, specific dollar amounts are paid out to charities 3 and 4, as well as to individuals C, D, E, F and G.
PLR 201242002 IRS Allows Trust Severance, Reverse QTIP Election:   Decedent died, survived by Spouse, Son and grandchildren. Article IV of Decedent's will provided that upon her death the residue of the estate should pass to Trust.

PLR 201320004 IRS Rules on Proposed Trust Modification:   Settlor created a tax-exempt irrevocable trust ("Trust") for the benefit of Settlor's three children ("the Beneficiaries"). Trust holds three equal and separate shares, one share per child.

PLR 201332011 IRS Rules on Court-Ordered Trust Agreement Changes:   Grantor created Trust as a net income plus make-up charitable remainder unitrust (NIMCRUT) to pay income to Grantor. Trustee has the power to amend Trust to ensure it continues to qualify as a CRUT.

PLR 201333006 IRS Rules that Trust Reformation is Qualified:   Upon Decedent's death, the residue of Decedent's estate was split into Share A and Share B. Share B funded Charitable Trust. Charitable Trust paid a certain percentage of trust corpus to Child 1 and Child 2.

PLR 201340012 IRS Approves Judicial Reformation of Trust:   A created Trust with the intent that it qualify as a charitable remainder unitrust (CRUT) under Sec. 664(d)(2). A's intention upon creating Trust was for Trust to terminate upon A's death.

PLR 201420010 IRS Rules on Consolidation of Trusts:   A and B created Trust A and Trust B as two life charitable remainder unitrusts under Sec. 664 of the Code. A and B are both trustees and income beneficiaries of Trust A and Trust B.

PLR 201426006 Reformation of Trust Won't Result in Self-Dealing:   A and B created Trust with the intention that it would qualify as a standard charitable remainder unitrust (CRUT) that paid a fixed percentage of its assets each year. Trust was to make annual distributions to settlors along with their two children, C and D, for each of their lifetimes.

PLR 9804036 Unitrust Document Drafting Error:   The donor in this Ruling intended to create a standard charitable remainder unitrust (Type I), but instead executed a net income with makeup unitrust (Type II) due to a drafting error. The drafting error was discovered before the first tax return was filed and a court order reformed the trust ab initio. Moreover, the trust was administered as a Type I unitrust. On these facts, the IRS held that it would not be an act of self-dealing to reform the trust as described. However, no opinion was expressed as to whether or not the trust would be treated as a qualified remainder trust.

PLR 9833008 NIMCRUT Modification of Income Provisions:   The taxpayer asserted that a provision allocating post-gift appreciation to income was omitted from a net income with make-up charitable remainder unitrust (Type II) because of a drafting error. The IRS ruled that a judicial modification of the trust to correct the error will not disqualify the trust as a charitable remainder unitrust so long as the court determines the omission was in fact a "scrivener's" error.

PLR 9845001 Unitrust Amendment Requirements:   A unitrust may be amended for federal tax compliance purposes under Sec. 2055(e). After the first Trustee resigned, the Successor Trustee desired to amend the trust to add (1) a "No Estate Tax" clause, (2) a "Testamentary Transfer" clause and (3) an "Additional Contributions" clause. The Service allowed the amendments, but noted that the excess payments of the first Trustee could be self-dealing under Sec. 4941 and the investment in a limited partnership could produce UBI under Sec. 512.