CRT Unitrust by Bob Parrish CPA

Charitable Remainder Trust - Unitrust

By Bob Parrish CPA (c) Copyright

What can be accomplished by using the Charitable Remainder Unitrust:

Reduce Current Income Tax
Reduce Estate Tax
Provide for a pseudo retirement plan
Asset Protection
Sheltering income from current taxation
Protect assets from long term care overages
Provide for long term care within your expectations
Protect assets in a divorce
Bypass probate
Establish CRT for each heir to protect the assets from spendthrift beneficiaries or heirs with potential litigation problems

List of Sections:

Internal Revenue Service Procedure 89-20

Internal Revenue Procedure 90-30

Sample Trusts From The Internal Revenue Service

Sec. 4 -- Sample Inter Vivos Charitable Remainder Unitrust: Two lives, Consecutive Interests;

SEC. 5 -- Sample Inter Vivos Charitable Remainder Unitrust: Two Lives, Concurrent and Consecutive Interests;

SEC. 6 -- Sample Testamentary Charitable Remainder Unitrust: One Life;

SEC. 7 -- Sample Testamentary Charitable Remainder Unitrust: Two Lives, Consecutive Interests; and

SEC. 8 -- Sample Testamentary Charitable Remainder Unitrust: Two Lives, Concurrent and Consecutive Interests.

Type some text.

Add a list item.

Type some text.

Rev. Proc. 89-20, 1989-1 C.B. 841

Amplified by Rev. Proc. 90-30. GO TO 90-30

SECTION 1. PURPOSE

This revenue Procedure makes available a sample form of declaration of trust that meets the requirements for a charitable remainder unitrust as described in section 664(d)(2) of the Internal Revenue Code.

SEC. 2. BACKGROUND

The Internal Revenue Service receives and responds to requests for rulings dealing with the qualification of trusts as charitable remainder trusts and the availability of deductions for contributions made to such trusts. In many of these requests, the trust instruments and charitable objectives are very similar. Consequently, in order to provide a service to taxpayers and to save the time and expense involved in requesting and processing a ruling on a proposed charitable remainder unitrust, taxpayers who make transfers to a trust that substantially follows the sample trust instrument contained herein can be assured that the Service will recognize the trust as meeting all of the requirements of a charitable remainder unitrust, provided the trust operates in a manner consistent with the terms of the trust instrument and provided it is a valid trust under applicable local law.

SEC. 3. SCOPE AND OBJECTIVE

The sample declaration of trust made available by section 4 of this revenue Procedure meets all of the applicable requirements under section 664(d)(2) of the Code for an inter vivos charitable remainder unitrust providing for unitrust payments during one life, followed by distribution of the trust asset to the charitable remainder beneficiary, if the trust document also creates a valid trust under local law. If the trust in instrument makes reference to this revenue Procedure and adopts a document substantially similar to the sample, the Service will recognize the trust as satisfying all of the applicable requirements of section 664(d)(2) of the Code and the corresponding regulations. Moreover, for transfers to a qualifying charitable remainder unitrust, the remainder interest will be deductible under sections 170(f)(2)(A) and 2522(c)(2)(A) for income and gift tax purposes, respectively. Therefore, it will not be necessary for a taxpayer to request a ruling as to the qualification of a substantially similar trust, and the Service generally will not issue such a ruling. See Rev. Proc. 89-19, page 59, this Bulletin. The Service, however, will continue to issue rulings to taxpayers who create trusts that are not substantially similar to the sample trusts.

SEC. 4. SAMPLE CHARITABLE REMAINDER UNITRUST

On this _____ day of _____, 19___, I, ______, (hereinafter referred to as "the Donor") desiring to establish a charitable remainder unitrust, within the meaning of Rev. Proc. 89-20 and section 664(d)(2) of the Internal Revenue Code (hereinafter referred to as "the Code") hereby create the _____ Charitable Remainder Unitrust and designate _____ as the initial Trustee.

1. FUNDING OF TRUST. The Donor transfers to the Trustee the property described in Schedule A, and the Trustee accepts such property and agrees to hold, manage and distribute such property of the Trust under the terms set forth in this Trust instrument.

2. PAYMENT OF UNITRUST AMOUNT. The Trustee shall pay to [a living individual] (hereinafter referred to as "the Recipient") in each taxable year of the Trust during the Recipient's life a unitrust amount equal to [AT LEAST FIVE] percent of the net fair market value of the assets of the Trust valued as of the first day of each taxable year of the Trust (the "valuation date"). The unitrust amount shall be paid in equal quarterly amounts 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. If the net fair market value of the Trust assets is incorrectly determined, then within a reasonable period after the value is finally determined for Federal tax purposes, the Trustee shall pay to the Recipient (in the case of undervaluation) or receive from the Recipient (in the case of an overvaluation) an amount equal to the difference between the unitrust amount properly payable and the unitrust amount actually paid.

3. PRORATION OF UNITRUST AMOUNT. 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 the Recipient's death.

4. DISTRIBUTION TO CHARITY. Upon the death of the Recipient, the Trustee shall distribute all of the then principal and income of the Trust (other than any amount due Recipient or Recipient's estate, under paragraphs 2 and 3, above) to _____ (hereinafter referred to as the Charitable Organization). If the Charitable Organization is not an organization described in sections 170(c), 2055(a), and 2522(a) of the Code at the time when any principal or income of the Trust is to be distributed to it, then the Trustee shall distribute such principal or income to such one or more organizations described in sections 170(c), 2055(a), and 2522(a) as the Trustee shall select in its sole discretion.

5. ADDITIONAL CONTRIBUTIONS. If any additional contributions are made to the Trust after the initial contribution, the unitrust amount for the year in which the additional contribution is made shall be [THE SAME PERCENTAGE AS IN PARAGRAPH 1] percent of the sum of (a) the net fair market value of the Trust assets as of the first day of the taxable year (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) that the number of days in the period that begins with the date of contribution and ends with the earlier of the last day of the taxable year or the Recipient's death bears to the number of days in the period that begins on the first day of such taxable year and ends with the earlier of the last day in such taxable year or the Recipient'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.

6. PROHIBITED TRANSACTIONS. The income of the Trust for each taxable year shall be distributed at such time and in such manner as not to subject the Trust to tax under section 4942 of the Code. Except for the payment of the unitrust amount to the Recipient, the Trustee shall not engage in any act of self-dealing, as defined in section 4941(d), and shall not make any taxable expenditures, as defined in section 4945(d). The Trustee shall not make any investments that jeopardize the charitable purpose of the Trust, within the meaning of section 4944, or retain any excess business holdings, within the meaning of section 4943.

7. SUCCESSOR TRUSTEE. The Donor reserves the right to dismiss the Trustee and to appoint a successor Trustee.

8. TAXABLE YEAR. The taxable year of the Trust shall be the calendar year.

9. GOVERNING LAW. The operation of the Trust shall be governed by the laws of the State of _____. However, the Trustee is prohibited from exercising any power of discretion granted under said laws that would be inconsistent with the qualification of the Trust under section 664(d)(2) of the Code and the corresponding regulations.

10. LIMITED POWER OF AMENDMENT. The Trust is irrevocable. However, the Trustee shall have the power, acting alone, to amend the Trust in any manner required for the sole purpose of ensuring that the Trust qualifies and continues to qualify as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Code.

11. INVESTMENT OF TRUST ASSETS. Nothing in this Trust instrument shall be construed to restrict the Trustee from investing the Trust assets in a manner that could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of Trust assets.

IN WITNESS WHEREOF _____ and _____ [TRUSTEE] by its duly authorized officer have signed this agreement the day and year first above written.

__________________________________

[DONOR]

__________________________________

[TRUSTEE]

By _______________________________

[Acknowledgements, Witnesses, etc.]

SEC. 5 APPLICATION

The Service will recognize a trust as meeting all of the requirements of a qualified charitable remainder annuity trust under section 664(d)(2) of the Code if the trust instrument makes reference to this document and is substantially similar to the sample provided in section 4, provided the trust operates in a manner consistent with the terms of the trust instrument and provided it is a value trust under applicable local law. A trust that contains substantive provisions in addition to those provided by section 4 (other than provisions necessary to establish a valid trust under applicable local law) or that omits any of these provisions will not necessarily be disqualified, but neither will it be assured of qualification under the provisions of this revenue Procedure.

SEC. 6 EFFECTIVE DATE

This revenue Procedure is effective for ruling requests received in the National Office after February 27, 1989, the date of publication of this revenue Procedure in the Internal Revenue Bulletin.

DRAFTING INFORMATION

The principal author of this revenue Procedure is John McQuillan of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue Procedure, contact John McQuillan on (202) 535-9540 (not a toll-free call).

Rev. Proc. 90-30, 1990-1 C.B. 534

SECTION 1. PURPOSE

This revenue Procedure makes available five sample forms of trust that meet the requirements for a charitable remainder unitrust as described in section 664(d)(2) of the Internal Revenue Code.

SEC. 2. BACKGROUND

The Internal Revenue Service receives and responds to requests for rulings dealing with the qualification of trusts as charitable remainder trusts and the availability of deductions for contributions made to such trusts. In many of these requests, the trust instruments and charitable objectives are very similar. Consequently, in order to provide a service to taxpayers and to save the time and expense involved in requesting and processing a ruling on a proposed charitable remainder unitrust, this revenue Procedure allows taxpayers who make transfers to a trust that substantially follows one of the sample forms of trust contained herein to be assured that the Service will recognize the trust as meeting all of the requirements of a charitable remainder unitrust, provided that the trust operates in a manner consistent with the terms of the instrument creating the trust and provided it is a valid trust under applicable local law.

SEC. 3. SCOPE AND OBJECTIVE

Section 4 of Rev. Proc. 89-20, 1989-1 C.B. 841, provides a sample form of trust for an inter vivos charitable remainder unitrust providing for unitrust payments during one life that meets all of the applicable requirements of section 664(d)(2) of the Code. This revenue Procedure amplifies Rev. Proc. 89-20 by providing the following additional sample forms of trust.

Sec. 4 -- Sample Inter Vivos Charitable Remainder Unitrust: Two lives, Consecutive Interests;

SEC. 5 -- Sample Inter Vivos Charitable Remainder Unitrust: Two Lives, Concurrent and Consecutive Interests;

SEC. 6 -- Sample Testamentary Charitable Remainder Unitrust: One Life;

SEC. 7 -- Sample Testamentary Charitable Remainder Unitrust: Two Lives, Consecutive Interests; and

SEC. 8 -- Sample Testamentary Charitable Remainder Unitrust: Two Lives, Concurrent and Consecutive Interests.

In all cases, the termination of the life interests must be followed by distribution of the trust assets to the charitable remainder beneficiary, and the trust must be a valid trust under applicable local law. If the trust provisions are substantially similar to those in one of the samples provided in sections 4 through 8 of this revenue Procedure or in section 4 of Rev. Proc. 89-20, the Service will recognize the trust as satisfying all of the applicable requirements of section 664(d)(2) of the Code and the corresponding regulations. A document will be considered to be substantially similar to one of the samples even though, for example, the wording is varied to comport with local law and practice as necessary to create trusts, define legal relationships, pass property by bequest, provide for the appointment of alternative and successor trustees, or designate alternative charitable remaindermen. Moreover, for transfers to a qualifying charitable remainder unitrust, the remainder interest will be deductible under sections170(f)(2)(A) , 2055(e)(2)(A), and 2522(c)(2)(A) for income, estate, and gift tax purposes, respectively, if the charitable remainder beneficiary otherwise meets all of the requirements of those provisions. Therefore, it will not be necessary for a taxpayer to request a ruling on the qualification of a substantially similar trust. A trust that contains substantive provisions in addition to those provided by sections 4 through 8 of this revenue Procedure or by section 4 of Rev. Proc. 89-20 (other than provisions necessary to establish a valid trust under applicable local law) or that omits any of these provisions will not necessarily be disqualified but neither will it be assured of qualification under the provisions of this revenue Procedure.

CHARITABLE REMAINDER UNITRUST: TWO LIVES, CONSECUTIVE INTERESTS

SEC. 4. SAMPLE INTER VIVOS CHARITABLE REMAINDER UNITRUST: TWO LIVES, CONSECUTIVE INTERESTS

On this ______________ day of ______________________ , 19 ___ , I, ________________________ (hereinafter referred to as "the Donor"), desiring to establish a charitable remainder unitrust, within the meaning of section 4 of Rev. Proc. 90-30 and section 664(d)(2) of the Internal Revenue Code (hereinafter referred to as "the Code") hereby create the _______________ Charitable Remainder Unitrust and designate ________________ as the initial Trustee. [ALTERNATE OR SUCCESSOR TRUSTEES MAY ALSO BE DESIGNATED IF DESIRED.]

1. FUNDING OF TRUST. The Donor transfers to the Trustee the property described in Schedule A, and the Trustee accepts such property and agrees to hold, manage, and distribute such property of the Trust under the terms set forth in this Trust instrument.

2. PAYMENT OF UNITRUST AMOUNT. In each taxable year of the Trust, the Trustee shall pay to [A LIVING INDIVIDUAL] during his or her lifetime, and after his or her death to [A LIVING INDIVIDUAL] (hereinafter referred to as "the Recipients"), for such time as he or she survives, a unitrust amount equal to [AT LEAST 5] percent of the net fair market value of the assets of the Trust valued as of the first day of each taxable year of the Trust (the "valuation date"). The unitrust amount shall be paid in equal quarterly amounts 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. If for any year the net fair market value of the Trust assets is incorrectly determined, then within a reasonable period after the value is finally determined for federal tax purposes, the Trustee shall pay to the Recipients (in the case of an undervaluation) or receive from the Recipients (in the case of an overvaluation) an amount equal to the difference between the unitrust amount properly payable and the unitrust amount actually paid.

3. PAYMENT OF FEDERAL ESTATE TAXES AND STATE DEATH TAXES. The lifetime unitrust interest of the second Recipient will take effect upon the death of the first Recipient only if the second Recipient furnishes the funds for payment of any federal estate taxes or state death taxes for which the Trustee may be liable upon the death of the first Recipient. [THIS PROVISION IS MANDATORY ONLY IF ALL OR A PORTION OF THE TRUST MAY BE SUBJECT TO SUCH TAXES ON THE DEATH OF THE FIRST RECIPIENT.]

4. PRORATION OF THE UNITRUST AMOUNT. 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 ending with the survivor Recipient's death.

5. DISTRIBUTION TO CHARITY. Upon the death of the survivor Recipient, the Trustee shall distribute all of the then principal and income of the Trust (other than any amount due either of the Recipients or their estates under the provisions above) to ______ (hereinafter referred to as "the Charitable Organization"). If the Charitable Organization is not an organization described in sections170(c) , 2055(a), and 2522(a) of the Code at the time when any principal or income of the Trust is to be distributed to it, then the Trustee shall distribute such principal or income to such one or more organizations described in sections 170(c), 2055(a), and 2522(a) as the Trustee shall select in its sole discretion.

6. ADDITIONAL CONTRIBUTIONS. If any additional contributions are made to the Trust after the initial contribution, the unitrust amount for the year in which the additional contribution is made shall be [THE SAME PERCENTAGE AS IN PARAGRAPH 2] percent of the sum of (a) the net fair market value of the Trust assets as of the valuation date (excluding the assets so added and any income from, or appreciation on, such assets) and (b) that proportion of the fair market value of the assets so added that was excluded under (a) that the number of days in the period that begins with the date of contribution and ends with the earlier of the last day of the taxable year or the date of death of the survivor Recipient bears to the number of days in the period that begins on the first day of such taxable year and ends with the earlier of the last day in such taxable year or the date of death of the survivor Recipient. In the case where there is no valuation date after the time of contribution, the assets so added shall be valued as of the time of contribution.

7.PROHIBITED TRANSACTIONS. 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. Except for the payment of the unitrust amount to the Recipients, the Trustee shall not engage in any act of self-dealing, as defined in section 4941(d), and shall not make any taxable expenditures, as defined in section 4945(d). The Trustee shall not make any investments that jeopardize the charitable purpose of the Trust, within the meaning of section 4944 and the regulations thereunder, or retain any excess business holdings, within the meaning of section 4943(c).

8. TAXABLE YEAR. The taxable year of the Trust shall be the calendar year.

9. GOVERNING LAW. The operation of the Trust shall be governed by the laws of the State of _______ . The Trustee, however, is prohibited from exercising any power or discretion granted under said laws that would be inconsistent with the qualification of the Trust under section 664(d)(2) of the Code and the corresponding regulations.

10. LIMITED POWER OF AMENDMENT. The Trust is irrevocable. The Trustee, however, shall have the power, acting alone, to amend the Trust in any manner required for the sole purpose of ensuring that the Trust qualifies and continues to qualify as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Code.

CHARITABLE REMAINDER UNITRUST: TWO LIVES CONCURRENT AND CONSECUTIVE INTEREST

SEC. 5. SAMPLE INTER VIVOS CHARITABLE REMAINDER UNITRUST: TWO LIVES CONCURRENT AND CONSECUTIVE INTEREST

On this _______ day of _________ , 19 ___ , I, __________ (hereinafter referred to as "the Donor"), desiring to establish a charitable remainder unitrust, within the meaning of section 5 of Rev. Proc. 90-30 and section 664(d)(2) of the Internal Revenue Code (hereinafter referred to as "the Code") hereby create the ________ Charitable Remainder Unitrust and designate _______ as the initial Trustee. [ALTERNATE OR SUCCESSOR TRUSTEES MAY ALSO BE DESIGNATED IF DESIRED.]

2. PAYMENT OF UNITRUST AMOUNT. In each taxable year of the Trust, the trustee shall pay to [A LIVING INDIVIDUAL and [A LIVING INDIVIDUAL] (hereinafter referred to as "the Recipients"), in equal shares during their lifetimes, a unitrust amount equal to [AT LEAST 5] percent of the net fair market value of the assets of the Trust valued as of the first day of each taxable year of the Trust (the "valuation date"). Upon the death of the first of the Recipients to die, the survivor Recipient shall be entitled to receive the entire unitrust amount. The unitrust amount shall be paid in equal quarterly amounts 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. If for any year the net fair market value of the Trust assets is incorrectly determined, then within a reasonable period after the value is finally determined for federal tax purposes, the Trustee shall pay to the Recipients (in the case of an undervaluation) or receive from the Recipients (in the case of an overvaluation) an amount equal to the difference between the unitrust amount properly payable and the unitrust amount actually paid.

3. PAYMENT OF FEDERAL ESTATE TAXES AND STATE DEATH TAXES. The lifetime unitrust interest of the survivor Recipient will continue in effect upon the death of the first Recipient to die only if the survivor Recipient furnishes the funds for payment of any federal estate taxes or state death taxes for which the Trustee may be liable upon the death of the first Recipient to die. [THIS PROVISION IS MANDATORY ONLY IF ALL OR A PORTION OF THE TRUST MAY BE SUBJECT TO SUCH TAXES ON THE DEATH OF THE FIRST RECIPIENT TO DIE.]

5. DISTRIBUTION TO CHARITY. Upon the death of the survivor Recipient, the Trustee shall distribute all of the then principal and income of the Trust (other than any amount due either of the Recipients or their estates under the provisions above) to ________ (hereinafter referred to as "the Charitable Organization"). If the Charitable Organization is not an organization described in sections170(c) , 2055(a), and 2522(a) of the Code at the time when any principal or income of the Trust is to be distributed to it, then the Trustee shall distribute such principal or income to such one or more organizations described in sections 170(c), 2055(a), and 2522(a) as the Trustee shall select in its sole discretion.

6. ADDITIONAL CONTRIBUTIONS. If any additional contributions are made to the Trust after the initial contribution, the unitrust amount for the year in which the additional contribution is made shall be [THE SAME PERCENTAGE AS IN PARAGRAPH 2] percent of the sum of (a) the net fair market value of the Trust assets as of the valuation date (excluding the assets so added and any income from, or appreciation on, such assets) and (b) that proportion of the fair market value of the assets so added that was excluded under (a) that the number of days in the period that begins with the date of contribution and ends with the earlier of the last day of the taxable year or the date of death of the survivor Recipient bears to the number of days in the period that begins on the first day of such taxable year and end with the earlier of the last day in such taxable year on the date of death of the survivor Recipient. In the case where there is no valuation date after the time of contribution, the assets so added shall be valued as of the time of contribution.

7. PROHIBITED TRANSACTIONS. 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. Except for the payment of the unitrust amount to the Recipients, the Trustee shall not engage in any act of self-dealing, as defined in section 4941(d), and shall not make any taxable expenditures, as defined in section 4945(d). The Trustee shall not make any investments that jeopardize the charitable purpose of the Trust, within the meaning of section 4944 and the regulations thereunder, or retain any excess business holdings, within the meaning of section 4943(c).

8. TAXABLE YEAR. The taxable year of the Trust shall be the calendar year.

10. LIMITED POWER OF AMENDMENT. The Trust is irrevocable. The Trustee, however, shall have the power, acting alone, amend the Trust in any manner required for the sole purpose of ensuring that the Trust qualifies and continues to qualify as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Code.

INVESTMENT OF TRUST ASSETS. Nothing in this Trust instrument shall be construed to restrict the Trustee from investing the Trust assets in a manner that could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of Trust assets.

TESTAMENTARY CHARITABLE REMAINDER UNITRUST: ONE LIFE

SEC. 6. SAMPLE TESTAMENTARY CHARITABLE REMAINDER UNITRUST: ONE LIFE

All the rest, residue, and remainder of my property and estate, real and personal, of whatever nature and wherever situated, [ALTERNATIVELY, IF NOT A RESIDUARY BEQUEST, DESCRIBE OR IDENTIFY THE BEQUEST] I give, devise, and bequeath to my Trustee in trust. It being my intention to establish a charitable remainder unitrust within the meaning of section 6 of Rev. Proc. 90-30 and section664(d)(2) of the Internal Revenue Code (hereinafter referred to as "the Code"), such Trust shall be known as the ________ Charitable Remainder Unitrust and I hereby designate ______ as the initial Trustee. [ALTERNATE OR SUCCESSOR TRUSTEES MAY ALSO BE DESIGNATED IF DESIRES.]

1. PAYMENT OF UNITRUST AMOUNT. In each taxable year of the Trust, the Trustee shall pay to [a living individual] (hereinafter referred to as "the Recipient") during the Recipient's life a unitrust amount equal to [AT LEAST 5] percent of the net fair market value of the assets of the Trust valued as of the first day of each taxable year of the Trust (the "valuation date"). The unitrust amount shall be paid in equal quarterly amounts 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. If for any year the net fair market value of the Trust assets is incorrectly determined, then within a reasonable period after the value is finally determined for federal tax purposes, the Trustee shall pay to the Recipient (in the case of an undervaluation) or receive from the Recipient (in the case of an overvaluation) an amount equal to the difference between the unitrust amount properly payable and the unitrust amount actually paid.

2. DEFERRAL PROVISION. 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 such date until the end of the taxable year of the Trust in which occurs the complete funding of the Trust. Within a reasonable time after the end of the taxable year in which the complete funding of the Trust occurs, the Trustee must pay to the Recipient (in the case of an underpayment) or receive from the Recipient (in the case of an overpayment) the difference between: (1) any unitrust amounts actually paid, plus interest, compounded annually, computed for any period at the rate of interest that the federal income tax regulations under section 664 of the Code prescribe for the Trust for such computation for such period; and (2) the unitrust amounts payable, plus interest, compounded annually, computed for any period at the rate of interest that the federal income tax regulations under section 664 prescribe for the Trust for such computation for such period.

3. PRORATION OF THE UNITRUST AMOUNT. 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 ending with the Recipient's death.

4. DISTRIBUTION TO CHARITY. Upon the death of the Recipient, the Trustee shall distribute all of the then principal and income the the Trust (other than any amount due the Recipient or the Recipient's estate under the provisions above) to _____ (hereinafter referred to as "the Charitable Organization"). If the Charitable Organization is not an organization described in sections 170(c) and 2055(a) of the Code at the time when any principal or income of the Trust is to be distributed to it, then the Trustee shall distribute such principal or income to such one or more organizations described in sections 170(c) and 2055(a) as the Trustee shall select in its sole discretion.

5. ADDITIONAL CONTRIBUTIONS. No additional contributions shall be made to the Trust after the initial contribution. The initial contribution, however, shall consist of all property passing to the Trust by reason of my death.

6. PROHIBITED TRANSACTIONS. 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. Except for the payment of the unitrust amount to the Recipient, the Trustee shall not engage in any act of self-dealing, as defined in section 4941(d) and shall not make any taxable expenditures, as defined in section 4945(d). The Trustee shall not make any investments that jeopardize the charitable purpose of the Trust, within the meaning of section 4944 and the regulations thereunder, or retain any excess business holdings, within the meaning of section 4943(c).

7. TAXABLE YEAR. The taxable year of the Trust shall be the calendar year.

8. GOVERNING LAW. The operation of the Trust shall be governed by the laws of the State of _____. The Trustee, however, is prohibited from exercising any power or discretion granted under said laws that would be inconsistent with the qualification of the Trust under section 664(d)(2) of the Code and the corresponding regulations.

9. LIMITED POWER OF AMENDMENT. The Trustee shall have the power, acting alone, to amend the Trust in any manner required for the sole purpose of ensuring that the Trust qualifies and continues to qualify as a charitable remainder unitrust within the meaning of section664(d)(2) of the Code.

10. INVESTMENT OF TRUST ASSETS. Nothing herein shall be construed to restrict the Trustee from ivnesting the Trust assets in a manner that could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of Trust assets.

CHARITABLE REMAINDER UNITRUST: TWO LIVES, CONSECUTIVE INTERESTS

SEC. 7. SAMPLE TESTAMENTARY CHARITABLE REMAINDER UNITRUST: TWO LIVES, CONSECUTIVE INTERESTS

All the rest, residue, and remainder of my property and estate, real and personal, of whatever nature and wherever situated, [ALTERNATIVELY, IF NOT A RESIDUARY BEQUEST, DESCRIBE OR IDENTIFY THE BEQUEST] I give, devise, and bequeath to my Trustee in trust. It being my intention to establish a charitable remainder unitrust within the meaning of section 7 of Rev. Proc. 90-30 and section664(d)(2) of the Internal Revenue Code (hereinafter referred to as "the Code"), such Trust shall be known as the _____ Charitable Remainder Unitrust and I hereby designate _____ as the initial Trustee. [ALTERNATE OR SUCCESSOR TRUSTEE MAY ALSO BE DESIGNATED IF DESIRED.]

1. PAYMENT OF UNITRUST AMOUNT. In each taxable year of the Trust, the Trustee shall pay to [a living individual] during his or her lifetime, and after his or her death to [a living individual] (hereinafter referred to as "the Recipients"), for such time as he or she survives, a unitrust amount equal to [AT LEAST 5] percent of the net fair market value of the assets of the Trust valued as of the first day of each taxable year of the Trust ("the valuation date"). The unitrust amount shall be paid in equal quarterly amounts 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. If for any year the net fair market value of the Trust assets is incorrectly determined, then within a reasonable period after the value is finally determined for federal tax purposes, the Trustee shall pay to the Recipients (in the case of an undervaluation) or receive from the Recipients (in the case of an overvaluation) an amount equal to the difference between the unitrust amount properly payable and the unitrust amount actually paid.

2. DEFERRAL PROVISION. 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 such date until the end of the taxable year of the Trust in which occurs the complete funding of the Trust. Within a reasonable time after the end of the taxable year in which the complete funding of the Trust occurs, the Trustee must pay to the Recipients (in the case of an underpayment) or receive from the Recipients (in the case of an overpayment) the difference between: (1) any unitrust amounts actually paid, plus interest, compounded annually, computed for any period at the rate of interest that the federal income tax regulations under section 664 of the Code prescribe for the Trust for such computation for such period, and (2) the unitrust amounts payable, plus interest, compounded annually, computed for any period at the rate of interest that the federal income tax regulations under section 664 prescribe for the Trust for such computation for such period.

4. DISTRIBUTION TO CHARITY. Upon the death of the survivor Recipient, the Trustee shall distribute all of the then principal and income of the Trust (other than any amount due either of the Recipients of their estates under the provisions above) to _____ (hereinafter referred to as "the Charitable Organization"). If the Charitable Organization is not an organization described in sections170(c) and 2055(a) of the Code at the time when any principal or income of the Trust is to be distributed to it, then the Trustee shall distribute such principal or income to such one or more organizations described in sections 170(c) and 2055(a) as the Trustee shall select in its sole discretion.

6. PROHIBITED TRANSACTIONS. 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. Except for the payment of the unitrust amount to the Recipient, the Trustee shall not engage in any act of self-dealing, as defined in section 4941(d), and shall not make any taxable expenditures, as defined in section 4945(d). The Trustee shall not make any investments that jeopardize the charitable purpose of the Trust, within the meaning of section 4944 and the regulations thereunder, or retain any excess business holdings, within the meaning of section 4943(c).

7. TAXABLE YEAR. The taxable year of the Trust shall be the calendar year.

CHARITABLE REMAINDER UNITRUST: TWO LIVES, CONCURRENT AND CONSECUTIVE INTERESTS

SEC. 8. SAMPLE TESTAMENTARY CHARITABLE REMAINDER UNITRUST: TWO LIVES, CONCURRENT AND CONSECUTIVE INTERESTS

All the rest, residue, and remainder of my property and estate, real or personal, of whatever nature and wherever situated, [ALTERNATIVELY, IF NOT A RESIDUARY BEQUEST, DESCRIBE OR IDENTIFY THE BEQUEST] I give, devise, and bequeath to my Trustee in trust. It being my intention to establish a charitable remainder unitrust within the meaning of section 8 of Rev. Proc. 90-30 and section664(d)(2) of the Internal Revenue Code (hereinafter referred to as "the Code"), such Trust shall be known as the _____ Charitable Remainder Unitrust and I hereby designate _____ as the initial Trustee. [ALTERNATE OR SUCCESSOR TRUSTEES MAY ALSO BE DESIGNATED IF DESIRED.]

1. PAYMENT OF UNITRUST AMOUNT. In each taxable year of the Trust, the Trustee shall pay to [a living individual] and [a living individual] (hereinafter referred to as "the Recipients"), in equal shares during their lifetimes, a unitrust amount equal to [AT LEAST 5] percent of the net fair market value of the assets of the Trust valued as of the first day of each taxable year of the Trust (the "valuation date"). Upon the death of the first of the Recipients to die, the survivor Recipient shall be entitled to receive the entire unitrust amount. The unitrust amount shall be paid in equal quarterly amounts 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. If for any year the net fair market value of the Trust assets is incorrectly determined, then within a reasonable period after the value is finally determined for federal tax purposes, the Trustee shall pay to the Recipients (in the case of an undervaluation) or receive from the Recipients (in the case of an overvaluation) an amount equal to the difference between the unitrust amount properly payable and the unitrust amount actually paid.

2. DEFERRAL PROVISION. 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 such date until the end of the taxable year of the Trust in which occurs the complete funding of the Trust. Within a reasonable time after the end of the taxable year in which the complete funding of the Trust occurs, the Trustee must pay to the Recipients (in the case of an underpayment) or receive from the Recipients (in the case of an overpayment) the difference between: (1) any unitrust amounts actually paid, plus interest, compounded annually, computed for any period at the rate of interest that the federal income tax regulations under section 664 of the Code prescribe for the Trust for such computation for such period; and (2) the unitrust amounts payable, plus interest, compounded annually, computed for any period at the rate of interest that the federal income tax regulations under section 664 prescribe for the Trust for such computation for such period.

6. PROHIBITED TRANSACTIONS. 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. Except for the payment of the unitrust amount to the Recipient, the Trustee shall not engage in any act of self-dealing, as defined in section 4941(d), and shall not make any taxable expenditures, as defined in section 4945(d). The Trustee shall not make any investments that jeopardize the charitable purpose of the Trust, within the meaning of section 4944 and the regulations thereunder, or retain any excess business holdings, within the meaning of section 4943(c).

7. TAXABLE YEAR. The taxable year of the Trust shall be the calendar year.

SEC. 9. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 89-20 is amplified.

SEC. 10. EFFECTIVE DATE

This revenue Procedure is effective on and after June 18, 1990, the date of publication of this revenue Procedure in the Internal Revenue Bulletin.

DRAFTING INFORMATION

Details

The charitable contributions deduction is expressly disallowed for certain contributions in trust, for certain contributions of partial interests not in trust, for all contributions of services, and for contributions made for certain lobbying activities.

1. Contributions in Trust

A taxpayer may accomplish charitable and noncharitable objectives by creating a split interest trust having both charitable and noncharitable beneficiaries. A charitable remainder trust is a trust in which noncharitable beneficiaries are given a life or term interest and the remainder is given to charity. Under the terms of a charitable income or lead trust, benefits are given to charity for a term of years and the remainder interest is given to noncharitable beneficiaries. A trust with both charitable and noncharitable beneficiaries may be subject to manipulation for the benefit of the noncharitable beneficiaries at the expense of the interest of charity. To prevent abuse of the charitable contributions deduction, the deductibility of gifts is strictly limited to split interest trusts. 134 Contributions of remainder and income interests in trust are not deductible for income tax purposes unless the requirements described below are satisfied. 135

/Footnote/ 134 The restrictions on the deductibility of charitable contributions in trust also apply for estate and gift tax purposes. See §2055(e)(2), §2522(c)(2).

/Footnote/ 135 For exceptions pertaining to gifts of interests in trusts exclusively for charitable purposes and gifts of a donor's entire interest in property transferred, see ¶2390.03.C.1.c and ¶2390.03.C.1.d, infra. If a trust does not meet the requirements for a charitable contribution deduction under §170(f)(2), a deduction may nevertheless be allowed if there is a reformation of the trust instrument as provided in §170(f)(7) and §2055(e)(3).

a. Remainder Interests in Trust

An income tax deduction is allowed for a charitable contribution of a remainder interest in trust only if the trust is a charitable remainder annuity trust, a charitable remainder unitrust or a pooled income fund. 136

/Footnote/ 136 §170(f)(2)(A); Regs. §1.170A-6(a)(1). The statutory criteria for these 3 trust vehicles are elaborated on extensively in the regulations. Regs. §1.664-2 (Annuity trusts); Regs. §1.664-3 (Unitrusts); Regs. §1.642(c)-5 (Pooled income funds). Additional requirements are imposed in IRS rulings. These trusts are subject to numerous complex and highly technical requirements and should be drafted with great care. For sample provisions that satisfy the requirements for annuity trusts and unitrusts, see Rev. Proc. 89-20, 1989-1 C.B. 841; Rev. Proc. 89-21, 1989-1 C.B. 842; Rev. Proc. 90-30, 1990-1 C.B. 534; Rev. Proc. 90-31, 1990-1 C.B. 539; and Rev. Proc. 90-32, 1990-1 C.B. 546. For sample provisions that satisfy the requirements of a pooled income fund, see Rev. Proc. 88-53, 1988-2 C.B. 712. See generally 435 T.M., Charitable Remainder Trusts and Pooled Income Funds.

The scope of this chapter is limited to the income tax treatment of a donor who gives a remainder interest to charity. Planning considerations pertaining to charitable remainder trusts are discussed at ¶2390.08.B, below. The estate and gift tax treatment of the contribution of charitable remainder interests is governed by §2055(e)(2)(A) and §2522(c)(2)(A). Beneficiaries of charitable remainder annuity trusts and unitrusts are taxed as provided in §664(b). The tax treatment of such trusts themselves is controlled by §664(c). Pooled income funds and their beneficiaries are taxed under the normal rules applicable to the income taxation of trusts under subchapter J. Regs. §1.642(c)-5(a)(2). For application of the private foundation rules to split interest trusts, see ¶6820.03, below.

(1). Charitable Remainder Annuity Trust

A charitable remainder annuity trust is a trust that requires the payment of a sum certain, which is referred to as the annuity amount. 137 The annuity amount is required to be paid at least annually and cannot be less than 5% or more than 50% of the initial net fair market value of the trusts assets. 138 The annuity amount must be paid to one or more recipients, at least one of which is not a permissible donee. 139 Any individual recipient must be living at the time of creation of the trust. The interest of the recipients may be for a term of not more than 20 years or for the life or lives of individual recipients. 140 The value of the remainder interest must be at least 10% of the initial fair market value of the property placed in trust. 140.1 Other than the annuity amount, no amount may be paid from the trust to any recipient who is not a permissible donee. 141 When the interest of the recipient of the annuity amount terminates, the balance of the trust property must be transferred to or for the use of, or continued in trust for the use of, a permissible donee. 142

/Footnote/ 137 §664(d)(1)(A). See Regs. §1.664-2. Additions to an annuity trust are not permitted and must be prohibited under the terms of the trust instrument. Regs. §1.664-2(b). The IRS has taken the position that a deduction is not allowable for a transfer to a charitable remainder annuity trust if the probability exceeds 5% that a noncharitable beneficiary will survive the exhaustion of the corpus. Rev. Rul. 77-374, 1977-2 C.B. 329; Rev. Rul. 70-452, 1970-2 C.B. 199. While these rulings involved the estate tax charitable contributions deduction, the 5% rule may apply to the income tax deduction as well.

/Footnote/ 138 §664(d)(1)(A).

/Footnote/ 139 Id.

/Footnote/ 140 Id.

/Footnote/ 140.1 §664(d)(1)(D), added by the Taxpayer Relief Act of 1997 and effective for transfers in trust after July 28, 1997.

/Footnote/ 141 §664(d)(1)(B).

/Footnote/ 142 §664(d)(1)(C); Regs. §1.664-2(a)(6).

If the requirements of a charitable remainder annuity trust are met, the donor is allowed an income tax deduction for the gift of the remainder interest to charity. 143 The fair market value of the charitable remainder interest is equal to the net fair market value of the property placed in trust less the present value of the annuity interest. 144 The ordinary income reduction and the capital gain reduction are applicable in determining the amount of a contribution to a charitable remainder annuity trust. 145

/Footnote/ 143 Regs. §1.664-2(d).

/Footnote/ 144 Regs. §1.664-2(c).

/Footnote/ 145 Regs. §1.170A-6(b)(2); Regs. §1.664-2(d). For an example of the application of the §170(e)(1) reductions in the context of a charitable remainder annuity trust, see ¶2390.03.B.3, Example, above.

Example—Charitable Remainder Annuity Trust

D creates a charitable remainder annuity trust to which she contributes stock held for more than one year having a fair market value of $1 million and an adjusted basis of $600,000. Under the terms of the trust, an annuity of 5% of the initial net fair market value of the trust assets ($50,000) is payable annually to D's son, who is age 55 at the time the trust is created. At the son's death, all remaining trust property is to be paid to a public charity. Assume that the present value of the son's annuity interest is $400,230. 146 The amount of the charitable contribution is $599,770 ($1 million fair market value of trust assets - $400,230 present value of annuity).

/Footnote/ 146 For gifts made after April 30, 1989, the valuation is calculated using valuation tables promulgated by the IRS pursuant to §7520. P.L. 100-647, §5031(a). Regs. §20.2031-7(d) governs actuarial valuations after April 30, 1989 and contains tables for interest rates between 4.2% and 14%. Comprehensive valuation tables under §7520, containing additional valuation factors, are found in IRS Pub. 1457, Actuarial Values Alpha Volume and Pub. 1458, Actuarial Values Beta Volume. See also Tables R(1) published in Notice 89-60, 1989-1 C.B. 700 and guidance for applying the §7520 tables as set forth in Notice 89-24, 1989-1 C.B. 660, which may be relied on for valuing transfers after April 30, 1989 and before June 10, 1994. See also Regs. §1.664-2(c), §1.7520-1 - 3.

(2). Charitable Remainder Unitrust

A charitable remainder unitrust is a trust that requires the payment of a fixed percentage, which may not be less than 5% or more than 50%, of the net fair market value of the trust assets valued annually. 147 The unitrust amount is required to be paid at least annually to one or more recipients, at least one of which is not a charitable donee. 148 Any individual recipient must be living at the time of creation of the trust. The interest of the recipients may be for a term not to exceed 20 years or for the life or lives of individual recipients. 149 The value of the remainder interest must be at least 10% of the net fair market value of the property placed in trust. 149.1Other than the unitrust amount, no amount may be paid from the trust to any recipient who is not a permissible donee. 150 When the interest of the recipient of the unitrust amount terminates, the balance of the trust property must be transferred to or for the use of, or continued in trust for the use of, a permissible donee. 151

/Footnote/ 147 §664(d)(2)(A). See Regs. §1.664-3. Since the assets of a unitrust are revalued annually, additional contributions to a unitrust are permitted, provided the trust instrument contains certain provisions regarding valuation of additions and computation of the unitrust amount in a year in which an addition is made. Regs. §1.664-3(b). The inconvenience and expense of an annual revaluation of the trust assets is a factor to consider in determining whether to create a unitrust. The IRS has proposed that, under certain circumstances, the trust assets must be valued using an independent appraiser. Prop. Regs. §1.664-1(a)(7).

/Footnote/ 148 §664(d)(2)(A). See PLRs 9710008 - 010 (Unitrust's distributions to trust for benefit of grantor's child for life disqualify it as §664 charitable remainder unitrust, since payments for life can only be made to an individual). But see Rev. Rul. 76-270, 1976-2 C.B. 194 (Trust for incompetent beneficiary is a permissible unitrust beneficiary.) For a discussion of permissible donees see ¶2390.01.D, above.

/Footnote/ 149 §664(d)(2)(A). The term of the trust may not be as short as two years if the purpose of the trust is to avoid the capital gains tax which would otherwise be imposed on appreciated property transferred to the trust. Notice 94-78, 1994-2 C.B. 555.

/Footnote/ 149.1 §664(d)(2)(D), added by the Taxpayer Relief Act of 1997 and effective for transfers in trust after July 28, 1997.

/Footnote/ 150 §664(d)(2)(B).

/Footnote/ 151 §664(d)(2)(C); Regs. §1.664-3(a)(6).

As an alternative to annual payment of the unitrust amount, the creator of a charitable remainder unitrust may select either an "income only" or an "income only with make-up" method of payment. 152 The "income only" method of payment entitles the noncharitable beneficiary to receive the lesser of the unitrust amount or the income of the trust. Under the "income only with make-up" method, the noncharitable recipient receives the lesser of the unitrust amount or the trust income, but trust income in later years in excess of the unitrust amount is paid to the recipient to make up for deficiencies in earlier years where the income was less than the unitrust amount. 152.1

/Footnote/ 152 §664(d)(3); Regs. §1.664-3(a)(1)(i)(b).

/Footnote/ 152.1 The IRS has permitted a unitrust which treats certain capital gains as income. PLR 9609009. See Prop. Regs. §1.664-3(a)(1)(i)(b)(3).

Example—Charitable Remainder Unitrust (1)

In 1996, D creates a charitable remainder unitrust to which he contributes 100 acres of farmland having a value of $100,000. Under the terms of the trust, D is entitled to receive: (1) payment annually of the lesser of 5% of the value of the trust assets valued on June 30 or the net income of the trust, and (2) net income for any year in excess of the unitrust amount to the extent that payments for prior years are less than the unitrust amount. On June 30, 1996, the value of the trust assets is $100,000. In 1996, the income of the trust is $2,000. Since the trust income of $2,000 is less than the unitrust amount of $5,000 ($100,000 fair market value x 5% fixed percentage), D receives a payment of $2,000. In early 1997, the trustee sells the farmland and invests the proceeds in a variety of securities. On June 30, 1997, the value of the trust assets is $120,000. In 1997, the income of the trust is $9,600. Since the unitrust amount of $6,000 ($120,000 fair market value x 5% fixed percentage) is less than the trust income, D receives a payment of $6,000. D also receives $3,000 to make up for the deficiency in 1996.

Once the trust has been established, it may not be reformed to increase the payments to the unitrust beneficiary. 153 To do so would be detrimental to the interests of the charitable remainderman.

/Footnote/ 153 Regs. §1.664-3(a)(4); PLR 9516040 (Unitrust reformation to delete "income only" provision will result in disqualification). But see PLR 9804036 (Reformation of trust to substitute a fixed percentage unitrust payment for an income-only with make-up payment does not affect §664(d)(2) status of trust, where creator had intended to use the fixed percentage payment method, a scrivener's error caused the trust instrument to prescribe the wrong unitrust payment method, the trust was administered at all times as if it contained a fixed percentage payment, and the error was quickly discovered and corrected). The IRS subsequently proposed regulations to allow the creation of trusts that start out using the income-only method, and then switch to a straight unitrust payment. Prop. Regs. §1.664-3(a)(1)(i)(c). These are known as "flip" unitrusts.

If the requirements of a charitable remainder unitrust are met, the donor is allowed an income tax deduction for the gift of the remainder interest to charity. 154 The fair market value of a remainder interest in a unitrust is its present value determined with reference to factors supplied in valuation tables. 155 The ordinary income reduction and the capital gain reduction are applicable in determining the amount of a contribution to a charitable remainder unitrust. 156

/Footnote/ 154 Regs. §1.664-3(d).

/Footnote/ 155 For gifts made after April 30, 1989, the valuation tables are promulgated by the IRS pursuant to §7520. Regs. §1.664-4(e)(6), §1.7520-1 - 3. See also Notice 89-60, 1989-1 C.B. 700, and IRS Pub. 1458, Actuarial Values Beta Volume, for actuarial factors that are not contained in the regulations. For gifts made after November 30, 1983 and on or before April 30, 1989, the valuation tables are found in Regs. §1.664-4A.

/Footnote/ 156 Regs. §1.170A-6(b)(2); Regs. §1.664-2(d). For an example of the application of the 170(e)(1) reductions in the context of a charitable remainder annuity trust, see ¶2390.03.B.3, Example, above.

Example—Charitable Remainder Unitrust (2)

On Jan. 1, 1997, D creates a charitable remainder unitrust to which she contributes stock held for more than one year, having a fair market value of $1 million and an adjusted basis of $600,000. Under the terms of the trust, D is entitled to a unitrust amount of 10% of the fair market value of the trust assets as of June 30, payable semiannually for a term of 15 years. At the end of D's term interest, all remaining trust property is to be paid to a public charity. Assume that the present value of the remainder interest is $214,049. 157 Since neither the ordinary income reduction nor the capital gain reduction is applicable, the amount of the contribution is also $214,049.

/Footnote/ 157 For gifts made after April 30, 1989, the valuation is calculated using valuation tables promulgated by the IRS pursuant to §7520. See Regs. §1.664-4 and IRS Pub. 1458, Actuarial Values Beta Volume. For gifts made on or before April 30, 1989, the value of a remainder interest in a unitrust is determined using valuation tables in Regs. §1.664-4A.

(3). Pooled Income Fund

A pooled income fund is a trust operated by a charitable organization for the purpose of receiving gifts to the organization from donors who wish to retain a life estate for themselves or other beneficiaries. A pooled income fund has the following characteristics:

• Each donor transfers property to the fund, contributing an irrevocable remainder interest in the property to or for the use of a public charity 158 and retaining an income interest for the life or lives of one or more beneficiaries living at the time of the transfer; 159

• Property transferred by each donor is commingled with property transferred by other donors who have made similar transfers; 160

• The fund cannot invest in securities which have tax-exempt income; 161

• The fund includes only amounts which meet the requirements of a pooled income fund; 162

• The fund is maintained by the public charity to which the remainder interests are contributed and no donor or beneficiary is a trustee of the fund; 163 and

• The annual income interest of each beneficiary is determined by the rate of return earned by the trust for that year. 164

/Footnote/ 158 The public charity to which the transfer is made must be an organization described in §170(b)(1)(A) (other than in clauses (vii) and (viii)). §642(c)(5)(A).

/Footnote/ 159 §642(c)(5)(A).

/Footnote/ 160 §642(c)(5)(B).

/Footnote/ 161 §642(c)(5)(C).

/Footnote/ 162 §642(c)(5)(D).

/Footnote/ 163 §642(c)(5)(E). Despite some degree of discretion in the donor and/or charity maintaining the pooled income funds, §642(c)(5)(E) is satisfied if the fund is maintained by a community trust and in the instrument of transfer either: (1) the donor gives the community trust complete discretion to determine how the remainder interest will be used to further charitable purposes; or (2) the donor requests or requires that the community trust place the proceeds from the remainder interests in one of its component funds that is designated to benefit a specific charity and that satisfies Regs. §1.170A-9(e)(11)(ii). Rev. Rul. 96-38, 1996-2 C.B. 44. See PLR 9807030. In Rev. Rul. 92-107, 1992-2 C.B. 120, the IRS approved as satisfying the maintenance requirement a pooled income fund established and maintained by a national organization for the benefit of itself and local organizations affiliated with it where: (1) only local organizations that expressly consented to participate in the fund were included in the fund; (2) the national organization carried out its purposes through the local affiliates, with which it had an identity of aims and purposes; (3) the organizations were all described in §170(b)(1)(A)(i) -(iv); (4) a local affiliate could not sever its interest in the fund before the death of a named income beneficiary; and (5) if a local affiliate was no longer affiliated with the national organization, the remainder interest would be transferred to the national organization or another affiliate the national organization chose. See PLR 9703023.

/Footnote/ 164 §642(c)(5)(F). See Regs. §1.642(c)-5(c).

If the requirements of a pooled income fund are met, a donor is allowed an income tax deduction for the gift of the remainder interest to charity. 165 Generally, the fair market value of a remainder interest in a pooled income fund is equal to the value of the property contributed minus the present value of the retained life income interest. 166 If there is only one life income beneficiary, however, the value of the remainder interest is computed directly using factors supplied in valuation tables. 167 The present value of the income or remainder interest is determined with reference to the highest yearly rate of return of the fund for any of the three taxable years preceding the contribution. 168 If the fund has been in existence for less than three taxable years, the IRS publishes a deemed interest rate which must be used in valuing the income and remainder interests. 168.1 The ordinary income reduction and the capital gain reduction are applicable in determining the amount of a contribution to a pooled income fund. 169

/Footnote/ 165 Regs. §1.642(c)-5(a)(4).

/Footnote/ 166 Regs. §1.642(c)-6(a)(1).

/Footnote/ 167 Regs. §1.642(c)-6(a)(2); Regs. §1.642(c)-6(d). For the valuation of the remainder interest of a gift see fn. 146, above.

/Footnote/ 168 §642(c)(5); Regs. §1.642(c)-6(e)(2).

/Footnote/ 168.1 For pooled income funds in existence less than three taxable years, see Regs. §1.642(c)-6(e)(3) and Rev. Rul. 96-1, 1996-1 C.B. 119, which explains how to compute the deemed rate of return and lists the rates for transfers to new funds established between 1989 and 1996. The deemed rate for transfers made in 1997 is 7.2%. Rev. Rul. 97-1, 1997-2 I.R.B. 10. For transfers made in 1998 it is also 7.2%. Rev. Rul. 98-4, 1998-2 I.R.B. 17.

/Footnote/ 169 Regs. §1.170A-6(b)(2); Regs. §1.642(c)-5(a)(4). For an example of the application of the §170(e)(1) reductions in the context of a charitable remainder annuity trust, see ¶2390.03.B.3, Example, above.

Example—Pooled Income Fund

On Jan. 1, 1995, D transfers $100,000 to a pooled income fund maintained by State University. D, who is age 50, retains a life income interest. The highest yearly rate of return of the fund for the years 1992 through 1994 is 8.6%. Assume that the value of the remainder interest is $16,121. 170 Since neither the ordinary income reduction nor the capital gain reduction applies, the amount of D's contribution is also $16,121.

/Footnote/ 170 The remainder is valued under Regs. §1.642(c)-6(e).

b. Income Interests in Trust

An income tax deduction is allowed for a charitable contribution of an income interest in trust only if: (1) the charity's interest is in the form of a guaranteed annuity interest or a unitrust interest, and (2) the donor is treated as the owner of the interest under the grantor trust rules. 171

/Footnote/ 171 §170(f)(2)(B). The scope of this section is limited to the income tax treatment of a donor who contributes an income interest to charity. Planning considerations relating to charitable lead trusts are discussed at ¶2390.08.C, below. The tax treatment of the contribution of a charitable income interest for estate and gift tax purposes is described in §2055(e)(2)(B) and §2522(c)(2)(B). See generally, 442 T.M., Charitable Income Trusts.

A guaranteed annuity is an irrevocable arrangement under which a determinable amount is paid at least annually for a specified term or for the life or lives of an individual or individuals living on the date of the transfer. 172 A unitrust interest is an irrevocable right to receive at least annually a fixed percentage of the net fair market value of the trust assets valued annually. 173

/Footnote/ 172 Regs. §1.170A-6(c)(2)(i)(A). An amount is considered determinable if the exact amount payable according to the trust terms can be ascertained as of the date of the transfer. Id.

/Footnote/ 173 Regs. §1.170A-6(c)(2)(ii)(A).

Under the grantor trust rules, a creator of a trust who retains certain interests or powers in the trust is treated as the owner of the trust for income tax purposes. 174 The trust entity of a grantor trust is ignored for income tax purposes and its income, deductions and credits are included by the grantor in computing his personal income tax liability. 175 An income tax deduction is not allowable for the contribution of an income interest unless the donor is treated as the owner of the interest for tax purposes. 176 If the donor ceases to be treated as the owner of the trust before the termination of the charitable interest, the donor is considered to have received an amount of income equal to the amount of the charitable contributions deduction allowed for the transfer of the interest minus the discounted value of all amounts previously paid to charity under the terms of the trust. 177

/Footnote/ 174 §673 - §677. See ¶6120 for a discussion of grantor trusts.

/Footnote/ 175 §671; Regs. §1.671-2, Regs. §1.671-3.

/Footnote/ 176 If a deduction is allowed under §170 for the value of an income interest transferred to charity, neither the grantor, the trust nor any other person is allowed a deduction under §170 or any other section for the annual amount contributed to charity. §170(f)(2)(C); Regs. §1.170A-6(d). If the grantor is not treated as the owner of the trust and is therefore not allowed a deduction under §170 for the transfer of the charitable income interest, the income paid to charity is nonetheless excluded from the grantor's income and the trust may be entitled to a charitable contributions deduction under §642(c)(1). The settlor of a charitable lead trust can therefore gain either a present income tax deduction or the exclusion of the trust's income from his gross income, but he cannot obtain both of these tax benefits.

/Footnote/ 177 §170(f)(2)(B); Regs. §1.170A-6(c)(4). For example, a grantor ceases to be treated as the owner of a trust at his death.

If the charity's interest is properly structured and the trust is a grantor trust, a deduction is allowed for the contribution of the charitable income interest. The deduction for the contribution of a guaranteed annuity interest or a unitrust interest is the fair market value of the interest on the date of the contribution. 178 Guaranteed annuity interests are valued by use of a factor supplied in valuation tables. 179 The value of a unitrust interest is equal to the value of the property contributed less the present value of all interests in the property other than the unitrust interest. 180

/Footnote/ 178 Regs. §1.170A-6(c)(3)(i), Regs. §1.170A-6(c)(3)(ii). If, however, it appears from all the facts and circumstances that the charity may not receive the beneficial enjoyment of the interest, a deduction is allowed only for the minimum amount that it is evident the charity will receive. Id. (iii).

/Footnote/ 179 Regs. §1.170A-6(c)(3)(i). For gifts made on or before April 30, 1989, the value of the annuity is determined under Table A or B of Regs. §20.2031-7(f). For gifts made after April 30, 1989, the valuation is calculated using valuation tables promulgated by the IRS pursuant to §7520. P.L. 100-647, §5031(a). See Tables R(1) and B in Notice 89-60, 1989-1 C.B. 700. Guidance for applying the §7520 tables is set forth in Notice 89-24, 1989-1 C.B. 660.

/Footnote/ 180 Regs. §1.170A-6(c)(3)(ii). For gifts made on or before April 30, 1989, factors used to determine the fair market value of the interests other than the unitrust interest are supplied in Tables D and F of Regs. §1.664-4(b)(5). For gifts made after April 30, 1989, the valuation is calculated using the valuation tables promulgated by the IRS pursuant to §7520. See Tables U(1), D and F in Notice 89-60, 1989-1 C.B. 700.

Example—Grantor Trust

D establishes a charitable lead trust to which she contributes $500,000. The trustee is directed to pay Private University an annuity of $30,000, payable annually at the end of each year for 15 years. Upon termination of the university's interest, the residue of the trust is to revert to D. Assume that the present value of the university's guaranteed annuity interest is $228,183. 181 D is treated as the owner of the trust under the grantor trust rules. 182 D is entitled to a deduction of $228,183 for the contribution of the charitable income interest.

/Footnote/ 181 See fn. 179, supra.

/Footnote/ 182 A grantor is treated as the owner of a trust if the value of a retained reversionary interest exceeds 5% of the value of the trust. §673(a). Since the value of D's reversion of $271,817 ($500,000 value of trust - $228,183 value of annuity interest) exceeds 5% of the value of the charitable lead trust (5% x $500,000 = $25,000), D is treated as the owner of the trust for income tax purposes.

c. Trusts Exclusively for Charitable Purposes

The rules discussed above regarding contributions of income interests and remainder interests in trust do not apply if the donor's entire interest in property is transferred in trust and is contributed to a charitable organization. 183 A deduction is allowed regardless of the structure of the income interests if all the beneficiaries are charities.

/Footnote/ 183 §170(f)(2)(D).

Example—Charitable Trust

D creates a trust to which he transfers $100,000. The trustee is directed to pay the net income of the trust to a permissible donee in quarterly installments for 20 years. Upon termination of the income interest, the residue of the trust is to be distributed to a university. D is allowed a charitable contributions deduction of $100,000 for the transfer to the trust. 184

/Footnote/ 184 See Regs. §1.170A-6(a)(1).

d. Entire Interest in Property Transferred

The rules regarding contributions of income interests and remainder interests in trust do not apply to a contribution of a partial interest in trust if the interest transferred is the donor's entire interest in the property. 185

/Footnote/ 185 Regs. §1.170A-6(a)(2). No deduction is allowed, however, if the property was divided in order to create the partial interest and thereby avoid the rules of §170(f)(2). Id.

Example—Entire Interest Transferred

M's will creates a testamentary trust under which net income is payable to F for life. At F's death, the remainder of the trust is to be distributed to C. During F's lifetime, C irrevocably assigns his remainder interest in M's trust to a symphony orchestra. Regardless of the fact that the remainder interest is not an interest in a charitable remainder annuity trust, a charitable remainder unitrust or a pooled income fund, C is allowed a deduction for the contribution of the remainder interest to charity because he transfers his entire interest in the property.

Related Page 1 | Related Page 2 | Related Page 3