Confirmation of the IRS's Attitude Toward 'Spigot' Trusts

Confirmation of the IRS's Attitude Toward 'Spigot' Trusts

News story posted in Continuing Professional Education on 14 August 1998| comments
audience: Partnership for Philanthropic Planning, National Publication | last updated: 18 May 2011
Print
||
Rate:

Summary

NCPG's Government Relations Committee has announced further confirmation of the IRS's attitude toward "spigot" trusts, where a NIMCRUT turns on and off the flow of fiduciary income. The Internal Revenue Service just issued Exempt Organizations Continuing Professional Education Text for fiscal 1999 ("CPE"). Chapter P of the IRS's CPE covers recent developments in the area of private foundations, charitable remainder trusts, and chapter 42 issues.

The Internal Revenue Service just issued Exempt Organizations Continuing Professional Education Text for fiscal 1999 ("CPE"). Chapter P of the IRS's CPE covers recent developments in the area of private foundations, charitable remainder trusts, and chapter 42 issues.

In this Chapter, the Service addresses the issue of placing variable annuities and partnerships inside of a NIMCRUT and discusses the implications of Technical Advice Memorandum 9825001. As expected, the IRS reiterates its position as stated in the TAM, namely that the purpose of the variable annuity and the action of turning on and off fiduciary income is not an act of self-dealing. More specifically, the IRS concluded:

"Thus the negative inference of the ruling is that in some rare situations, the Service may, perhaps, be willing to find self- dealing. However, to find self-dealing of this sort, three tests must be satisfied.

The first two tests relate to the "manipulation" requirement based in Reg. 53.4941(d)-2(f)(1). (1) For the requisite "manipulation" to occur, the disqualified person and income beneficiary must control the decision of the trustee as to investment decision. Thus, such person must be serving as trustee or the facts of the case must establish that such person is acting in concert with the trustee as to these investment decisions. This is not an easy burden of proof to carry, as is demonstrated by the facts of the TAM. (2) The second element of manipulation is that the manipulation of the assets and investments is to serve the personal advantage and benefit of the income beneficiary beyond merely the receipt of the income provided by the trust instrument. There must be specific evidence of manipulation to benefit the income beneficiary in this manner. Again, not an easy burden of proof to carry.

Finally, (3) the third test is determining whether the deferral is a permitted use, meaning the lack of a presence of an unreasonable effect on the charitable remainder interest. As a practical matter, one might speculate that it will be quite a rare situation where an income deferral NIMCRUT would disadvantage a charity to the extent that it could be said that there is an unreasonable effect on the charitable remainder interest. The unreasonable affect on the charitable remainder interest would include an evaluation of the income realized by the charitable interest as well as the appreciation in value of the charitable assets over the term of the NIMCRUT. Since the Service does not second guess the investment decisions of the trustee in this regard, the "unreasonable effect" means something more than just bad investment judgment.

In the TAM, the Service has, in theory, left open the door to apply the self-dealing prohibition for the income deferral NIMCRUT in a truly egregious situation. As a practical matter, the vast majority of income deferral NIMCRUTs adhering to ordinary fiduciary standards under state law will not run afoul of this problem. The more realistic view is that the theory aired in 1997 EO CPE Text as modified, when applied to an actual case, will rarely be applied. As such, much of the discussion in the 1997 Text suggesting an aggressive approach on IRC 4941 issues with NIMCRUTS is modified pursuant to TAM 9825001 and this article."

Later in Chapter P, the Service discusses the proposed regulations on this particular issue, and indicates that final regulations should be forthcoming by the end of the year, but probably will not address the "spigot" feature. According to the Service, "[p]erhaps there may be some resolution of the IRS and Treasury study on this issue in the following year."

The entire text of the 1999 CPE manual may be downloaded in a Portable Document Format file (.PDF) by clicking on the link provided below. Please be aware that the manual is in excess of 300 pages in length and 900k in size.

Add comment

Login or register to post comments

Comments

Group details

Follow

RSS

This group offers an RSS feed.
 
7520 Rates: November 2.4% October 2.2% September 2.4%

Already a member?

Learn, Share, Gain Insight, Connect, Advance

Join Today For Free!

Join the PGDC community and…

  • Learn through thousands of pages of content, newsletters and forums
  • Share by commenting on and rating content, answering questions in the forums, and writing
  • Gain insight into other disciplines in the field
  • Connect – Interact – Grow
  • Opt-in to Include your profile in our searchable national directory. By default, your identity is protected

…Market yourself to a growing industry