TRUST QUALIFIES AS CHARITABLE REMAINDER UNITRUST

Reference:

Section 664 -- Charitable Remainder Trusts

UIL Number(s) 0664.03-02

Full Text:

Date: March 14, 1994

Refer Reply to: CC:DOM:P&SI:3 TR-31-1410-93

LEGEND:
Trust = * * *
A = * * *
B = * * *
C = * * *
D = * * *

E = * * *
F = * * *
G = * * *
Foundation = * * *

Dear * * *

This is in response to a letter dated June 1, 1993, and subsequent correspondence, requesting rulings regarding whether certain trust provisions will affect the qualification of the proposed Trust as a charitable remainder unitrust under section 664 of the Internal Revenue Code and the applicable regulations.

The Trust is intended to be a charitable remainder unitrust under section 664(d)(2) of the Code. The terms of the Trust agreement provide that the unitrust amount is payable for the joint lives of the grantors, A and B, and then to the survivor for life. Upon the termination of the Trust, the balance in the Trust will be paid to Foundation. However, if Foundation is not an organization described in section 170(c), 2055(a) and 2522(a) of the Code, then the balance will be paid to an organization qualified under those sections and selected by the trustee.

Section B, Article III of the Trust agreement provides that a Special Trustee, initially C, will be appointed to act in a fiduciary capacity. The Special Trustee will have the right to resign. Moreover, the grantors, A and B, will each have the right to remove the Special Trustee, but only twice, by written instrument delivered to the Special Trustee being removed and to the trustee. This instrument must contain written notification of removal and the written acceptance of the position of Special Trustee by the next Special Trustee named in the trust agreement. The trust agreement names four persons, D, E, F, and G, to serve as Special Trustee, in the order in which they are named, if the initial Special Trustee, C, is unable, unwilling, or ceases to act as Special Trustee. In addition, the Trust agreement provides that in no event shall the Special Trustee be a person or entity related to or subordinate to either A or B, within the meaning of section 672(d) of the Code.

Section A, Article II, Paragraph A-1 of the Trust agreement provides that the unitrust amount (equal to 10 percent of the fair market value of the Trust's assets valued annually) is payable either jointly to the grantors, A and B, or partially to the grantors and partially to the charitable beneficiary, in such proportions as the Special Trustee determines. This provision is subject to the limitation that at least five percent of the unitrust amount must be paid each year jointly to the grantors or to the survivor.

Section A, Article II, Paragraph B-2 of the Trust agreement provides that the grantors, A and B, acting together, or the survivor may terminate the Trust partially or completely at any time, by directing the trustee to make distribution of all or a portion of the trust corpus to the charitable beneficiary. The Trust agreement also provides that if the trustee makes a distribution in kind upon a partial termination, the adjusted basis for federal income tax purposes of the property distributed shall be fairly representative of the adjusted basis for such purposes of all trust property available for distribution on the date of distribution.

Specifically, the rulings requested are: (1) that the power given to the trustees under the Trust agreement to allocate the payments of the unitrust amount among the beneficiaries according to the determination of the independent Special Trustee will not prevent the Trust from qualifying as a charitable remainder unitrust; (2) the power retained by the grantors to remove the independent Special Trustee and to substitute another independent Special Trustee, as named in the trust instrument, will not prevent the Trust from qualifying as a charitable remainder unitrust; (3) the power of grantors to terminate a portion of the Trust at any time by directing the trustee to distribute any or all of the Trust property to the charitable beneficiary will not prevent the Trust from qualifying as a charitable remainder unitrust.

Pursuant to section 4.01(39) of Rev. Proc. 94-3, 1994-1 I.R.B. 79, the Internal Revenue Service ordinarily will not issue rulings as to whether a trust that provides for unitrust payments for one or two measuring lives qualifies as a charitable remainder unitrust under section 664 of the Code. Sections 4.01(16), (44), and (46) of that revenue procedure also state that the Service ordinarily will not issue rulings as to whether a transfer to a trust described in section 664 that provides unitrust payments for one or two measuring lives qualifies for charitable deductions under sections 170(f)(2)(A), 2055(e)(2)(A) and 2522(c)(2)(A).

In lieu of seeking the Service's advance approval of a charitable remainder unitrust, taxpayers are directed to follow the sample provisions for charitable remainder unitrusts outlined in Rev. Proc. 90-30, 1990-1 C.B. 534. By following the models contained in Rev. Proc. 90-31, taxpayers can be assured that the Service will recognize a trust as meeting all of the requirements of a qualified charitable remainder unitrust under section 664(d)(2) of the Code, provided that 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. In addition, for transfers to a qualifying charitable remainder unitrust, the present value of the remainder interest will be deductible under sections 170(f)(2)(A), 2055(e)(2)(A), and 2522(c)(2)(A) if the charitable beneficiary otherwise meets all of the requirements of those sections.

Because the Trust agreement contains provisions that differ from the appropriate sample provided in Rev. Proc. 90-30, we are able to rule whether those provisions will prevent the Trust from qualifying as a charitable remainder unitrust under section 664(d)(2) of the Code.

Section 664(d)(2) provides, in part, that a charitable remainder unitrust is a trust (A) from which a fixed percentage (which is not less than 5 percent) of the net fair market value of its assets, valued annually, is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c) and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individuals, (B) from which no amount other than the payments described in subparagraph (A) may be paid to or for the use of any person other than an organization described in section 170(c).

Section 1.664-1(a)(1)(i) of the Income Tax Regulations provides that, generally, a charitable remainder trust is a trust which provides for a specified distribution, at least annually, to one or more beneficiaries, at least one of which is not a charity, for life or for a term of years, with an irrevocable remainder interest to be held for the benefit of, or paid over to, charity.

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

Section 1.664-3(a)(3)(ii) of the regulations provides that a trust is not a charitable remainder unitrust if any person has the power to alter the amount to be paid to any named person other than an organization described in section 170(c) of the Code if such power would cause any person to be treated as the owner of the trust, or any portion thereof, if subpart E, part 1, subchapter J, chapter 1, subtitle A were applicable to such trust.

Section 674(a) of the Code provides the general rule that the grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without approval or consent of any adverse party. Section 674(c) provides that section 674(a) shall not apply to a power solely exercisable (without the approval or consent of any other person) by a trustee or trustees, none of whom is the grantor, and no more than half of whom are related or subordinate parties who are subservient to the wishes of the grantor, to apportion the income within a class of beneficiaries or to pay corpus to a class of beneficiaries. See also Rev. Rul. 77-73, 1977-1 C.B. 175.

Section 1.674(d)-2(a) of the regulations provides that a power in the grantor to remove, substitute, or add trustees may prevent the trust from qualifying under sections 674(c) or (d) of the Code. For example, if a grantor has an unrestricted power to remove an independent trustee and substitute any person including the grantor as trustee, the trust will not qualify under section 674(c) or (d). See Rev. Rul. 77-285, 1977-2 C.B. 213.

In the present case, based solely on the information submitted and representations made, we conclude that the grantors have not retained a power to remove the Special Trustee that would allow the grantors to substitute any person, including themselves, as Special Trustee, or that would subordinate the Special Trustee to the grantors. The Trust agreement provides that the Special Trustee can be replaced only by the persons named in the trust agreement and in the order they are named. In no event will the Special Trustee be a person or entity related to or subordinate to either grantor. For these reasons, we conclude that the Special Trustee is an independent trustee within the meaning of section 674(c) of the Code.

Therefore, we conclude that the provision in the Trust agreement providing the grantors with the power to replace the Special Trustee will not cause any person to be treated as the owner of the trust, or any portion thereof, if subpart E were applicable to the Trust. Accordingly, this provision will not prevent the Trust from qualifying as a charitable remainder unitrust under section 664 of the Code.

A provision that gives an independent trustee the power to allocate the unitrust amount among the charitable and noncharitable beneficiaries on an annual basis is not inconsistent with the provisions of the Code and regulations governing charitable remainder trusts, provided that the governing instrument requires that a portion of the unitrust amount must be allocated and paid to the noncharitable beneficiaries each year and provided the portion of the unitrust amount so paid is not de minimis under the facts and circumstances for each year.

Therefore, in the present case, we conclude that the provision in the Trust agreement giving the independent Special Trustee the power to allocate the unitrust amount among the charitable and noncharitable beneficiaries, subject to the limitation that at least five percent of the unitrust amount must be paid to the noncharitable beneficiaries, will not prevent the Trust from qualifying as a charitable remainder unitrust under section 664 of the Code, provided that the portion of the unitrust amount actually paid to the noncharitable beneficiaries each year is not de minimis under the facts and circumstances.

Section 1.664-3(a)(4) of the regulations provides that no amount other than the unitrust amount may be paid to or for the use of any person other than a charitable organization. In addition, the trust may not be subject to a power to invade, alter, amend, or revoke for the beneficial use of a person other than a charitable organization. However, the governing instrument may provide that any amount other than the unitrust amount shall be paid (or may be paid in the discretion of the trustee) to a charitable organization provided that, in the case of distributions in kind, the adjusted basis of the property distributed is fairly representative of the adjusted basis of the property available for payment on the date of payment. For example, the governing instrument may provide that a portion of the trust assets may be distributed currently, or upon the death of one or more recipients, to a charitable organization.

In the present case, the Trust agreement provides that the grantors have the power to terminate a portion of the Trust at any time by instructing the trustee to distribute any or all of the Trust property to the charitable beneficiary. This provision does not subject the Trust to a power to invade, alter, amend, or revoke for the beneficial use of a person other than a charitable organization. The Trust agreement also provides that if the trustee makes a distribution in kind upon a partial termination, the adjusted basis of the property distributed shall be fairly representative of the adjusted basis of all property available for distribution on the date of distribution. Therefore, we conclude that the provision allowing the grantors to terminate a portion of the Trust will not prevent the Trust from qualifying as a charitable remainder unitrust under section 664 of the Code.

No opinion is expressed as to any other provisions of the proposed trust agreement or any amendments to the Trust. Except as specifically discussed above, no opinion is expressed as to the federal tax consequences of the formation or operation of the Trust under section 664 or any other section of the Code.

A copy of this letter should be attached to the federal income tax return of A and B for the taxable year in which the Trust is established. A copy is enclosed for that purpose.

This letter ruling is directed only to the taxpayers who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.

Pursuant to the power of attorney on file with this office, a copy of this letter is being sent to the taxpayers' representatives.

Sincerely,

Frances D. Schafer
Senior Technician Reviewer
Branch 3 Office of the Assistant Chief Counsel
(Passthroughs and Special Industries)

Enclosures (2):
Copy of this letter
Copy for section 6110 purposes