The IRS recently released eight new sample charitable remainder unitrust forms replacing those issued in 1990. In this article, St. Louis attorney Lawrence P. Katzenstein, writing for Leimberg Information Services, offers his "first impressions" commentary on the sample CRUT forms with an eye for changes practitioners will want to make in the forms for use with clients.
by Lawrence P. Katzenstein
Edited by Steve Leimberg
EXECUTIVE SUMMARY:
In Revenue Procedures 2005-52 through 2005-59, the Internal Revenue Service has issued sample charitable remainder unitrust forms replacing the sample forms issued in 1990. As with the annuity trust forms issued in 2003, the new forms are a significant improvement over the prior forms and the explanatory material and annotations provided by the Internal Revenue Service are very useful.
FACTS:
The specific forms issued are as follows:
1. Inter vivos charitable remainder unitrust (CRUT) for one measuring life - Rev. Proc. 2005-52.
2. Inter vivos CRAT for a term of years - Rev. Proc. 2005-53.
3. Inter vivos CRUT with consecutive interests for two measuring lives - Rev. Proc. 2005-54.
4. Inter vivos CRUT for concurrent and consecutive interests for two measuring lives - Rev. Proc. 2005-55.
5. Testamentary CRUT for one measuring life - Rev. Proc. 2005-56.
6. Testamentary CRUT for a term of years - Rev. proc. 2005-57.
7. Testamentary CRUT with consecutive interests for two measuring lives - Rev. Proc. 2005-58.
8. Testamentary CRUT with concurrent and consecutive interests for two measuring lives - Rev. Proc. 2005-59.
WHAT'S NEW AND DIFFERENT?
The forms are more complicated than the annuity trust forms, of course, because there are more flavors of unitrusts: regular unitrusts, income-only with makeup, income-only without makeup, and flip unitrusts (referred to by the Service as "combination of methods unitrusts").
The forms track closely the annuity trust forms issued in 2003 and many of the comments one could make about the forms were also true of the annuity trust forms.
But a number of the items are specific to unitrusts:
The annotations note that if an additional contribution is made to an existing charitable remainder unitrust and the contribution does not satisfy the 10% test of section 664(d(2)(D) the contribution is treated as a transfer to a separate trust under section 664(d)(4).
The annotations also include information and language regarding unitrusts with more than one valuation date. It will be rare when more than one valuation date will be desirable, because of the considerable complexities such a provision entails.
The annotations also include alternate language for testamentary additions to unitrusts and alternate methods of computing the deferred payments.
The annotations to the income-only variants take into account changes in state law definitions of income and provide that proceeds of sales of assets may be allocated to income under the terms of the governing instrument if not prohibited by applicable local law. Further, a discretionary power to make the allocation may be granted to the trustee to the extent that the applicable estate statute permits the trustee to make adjustments between income and principal to treat beneficiaries impartially. One assumes that prior IRS pronouncements prohibiting allocation of pre-gift gain to income still govern.
The annotations to the flip unitrust-which can make a one time change from an income only (with or without makeup) to a regular unitrust-note that the change may not be discretionary with or in the control of the trustees or any other persons. However, the usual trigger will be the sale of unproductive property which is, of course, within the control of the trustees.
I suppose what the Service is really saying is that only events of dependent significance count. There is something new in the flip unitrust forms: separate and detailed language regarding pro-ration of the unitrust amount in years both before and after the effective date of the triggering event.
BEWARE: NO MENTION OF NEW WAIVER REQUIREMENTS IN TWO LIFE TRUSTS!
Interestingly, and perhaps even bizarrely, the two life trusts, which will almost always be for husband and wife, say nothing about the waiver requirements of Revenue Procedure 2005-24 (The tax trap covered by Larry Katzenstein, Charles Schultz, and Conrad Teitell in Charitable Planning Newsletters 73, 74, and 76 at http://www.leimbergservices.com ) .
The forms include no sample waiver language for a spousal interest and the annotations do not even mention the existence of the necessity imposed by Revenue Procedure 2005-24.
Has the Service had a change of heart, or are they merely punting on the exact requirements? Or maybe spousal waivers is some else's department.
HANDLE WITH CARE!
The trust language itself is straightforward and to the point, and each form includes alternate provisions. As with the prior forms, the new forms must be used with care, although the thorough annotations provided by the Service will prevent many more inadvertent errors than the previous versions.
IRS PROVIDED ALTERNATIVES:
Examples of the kinds of alternatives provided by the Service, as well as explanatory cautions in the explanatory material, are the following:
1. The annotations point out that if the trust is funded with unmarketable assets, the annual or more frequent fair market value determination must be made by an independent trustee or must be determined by a qualified appraisal from a qualified appraiser as defined in the regulations.
2. The old IRS unitrust forms included language to the effect that the charitable remainder beneficiary must be an organization described in Code section 170(c). This was a trap for many, because section 170(c) includes private foundations, which have lower income tax percentage limitations.
In addition, the deduction for gifts of appreciated property other than marketable securities is limited to basis if the charity is a private foundation. The explanatory annotations include a warning and alternative language for the case (which is the usual one) where the donor wishes the charitable beneficiary to be a public charity.
3. The annotations point out that the unitrust amount may be payable to members of a named class in a term of years trust even if the members of the class are not living or ascertainable at the creation of the trust. The annotations also point out that sprinkling powers cannot be held by certain persons without causing the trust to be treated as a grantor trust for income tax purposes.
4. The forms point out that the unitrust amount may be paid in equal or unequal installments throughout the year. Unequal installments create complexities of valuation, and most practitioners will want to avoid unequal payments.
5. The annotations point out that generally the unitrust amount must be paid before the close of the taxable year in which it is due, and refer the reader to the regulations under section 664 which were adopted to prevent abuses related to the 2-year, high pay out charitable remainder trust.
6. The annotations point out that the trust may provide for an amount other than the unitrust amount to be paid in the discretion of the trustee to a charitable organization, and further point out that if distribution is made in kind, the adjusted basis of distributed property must be fairly representative of adjusted basis of property in the trust.
7. The annotations point out that the charitable remainder beneficiary may be selected by the trustee or some other person, or that the power to name the charitable beneficiary may be retained by the donor. In that case the gift will be incomplete for gift tax purposes, but the charitable income tax deduction will still be available. The forms also include alternate provisions in which the donor retains the right to substitute the charitable remainderman.
8. Another interesting provision referred to in the annotation is the qualified contingency provision of section 664(f) which permits a trust to end early upon the happening of any contingency, whether or not the actuarial value of the contingency can be determined. The qualified contingency is ignored for valuation purposes, but it will not disqualify the trust.
PLANNING MODIFICATIONS YOU'LL WANT TO MAKE TO THE FORMS:
There are several changes most practitioners will want to make in the forms.
1. First, the forms provide as the default that the final payment will be prorated. In many cases this necessitates a payment of the stub period payment to the beneficiary's estate for the period after the last payment and until the beneficiary's death. Most practitioners will want to provide that the final payment will be the regular payment preceding the beneficiary's death.
2. As noted above, most practitioners will want to limit the charitable remainder beneficiary to public charities described in section 170(b)(1)(A), as provided in the alternative language.
3. Most practitioners will want to include a spendthrift provision, at least where the beneficiary is not the donor. The advisability and effect of a spendthrift provision will depend on state law. 4. In the two-life trusts, the forms have much simpler language regarding payment of taxes on the first death than were used in some of the prior IRS pronouncements. The two-life trust form does not include as a default provision a retained testamentary power to revoke the interest of the successor beneficiary so as to prevent a gift for gift tax purposes.
Most practitioners will want to include that provision, even in the case of trusts for spouses. Where the donor has retained the right to change the charitable remainder beneficiary, including a power to revoke the survivorship interest of the spouse will avoid the necessity for filing a gift tax return. Note that this power must be testamentary rather than a lifetime power to avoid grantor trust treatment. (By contrast, the power to designate a different charitable remainder beneficiary may be an inter vivos or a testamentary power.)
NITS AND LICE:
In one respect, the generally useful forms are unnecessarily nitpicking. The explanatory material accompanying the term of years trust states that the term of a term of years trust must not exceed 20 years, and then includes the following sentence:
"Thus, for example, the unitrust period of a CRAT for a term of 20 years will end on the date preceding the 20th anniversary of the date the trust was created."
But surely a trust ending on the 20th anniversary date of the trust should qualify.
Requiring that the term end one day before the 20th anniversary seems unnecessarily nitpicking and undoubtedly many trusts have been written calling for the trust to terminate on the 20th anniversary date. Do all of these fail to qualify? Actually, now that we have a required 10% minimum actuarial value for both CRATs and CRUTs, the term limitation is really unnecessary. But it will be up to Congress to change that.
HOPE THIS HELPS YOU HELP OTHERS!
Larry Katzenstein
Edited by Steve Leimberg
CITE AS:
Steve Leimberg's Charitable Planning Newsletter # 80 (August 22, 2005) at http://www.leimbergservices.com. Copyright 2005 Leimberg Information Services, Inc. (LISI). Republished by permission. Reproduction in Any Form or Forwarding to Any Person Prohibited - Without Express Permission.