CRT Reformed to Permit Private Foundations as Remaindermen

CRT Reformed to Permit Private Foundations as Remaindermen

News story posted in Letter Rulings on 29 June 1998| comments
audience: National Publication | last updated: 18 May 2011
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Summary

The IRS has ruled privately that the reformation of an inter vivos charitable remainder unitrust to allow the charitable remainder beneficiaries to include private foundations will not disqualify the trust under Code Section 664. The taxpayers presented evidence that the provision in the governing instrument limiting the remainder beneficiaries to public charities was the result of a drafting error.

Ltr. Rul. 9826021

PGDC Summary:

In private letter ruling 9826021, the IRS has ruled that the reformation of an inter vivos charitable remainder unitrust to allow the charitable remainder beneficiaries to include private foundations will not disqualify the trust under Code Section 664. The taxpayers presented evidence that the provision in the governing instrument limiting the remainder beneficiaries to public charities was the result of a drafting error.

Facts:

A husband and wife created a charitable remainder unitrust and funded it with publicly traded securities. X was named as initial trustee. The husband and wife have the power to remove X and name successor trustees. The unitrust amount is to be paid to the husband and wife, or the survivor of them. At the death of the survivor of them, the remaining trust assets are to be distributed in equal shares to three charities designated in the instrument or to such charities as the husband and wife, or the survivor, may designate. The governing instrument specifies that if any one of the recipients named in the governing instrument or subsequently designated by the couple is not qualified under Code Sections 170(b)(1)(A), 170(c), 2055(a) and 2522(a), then the property that would go to such organization would go instead to the other organizations then entitled to receive shares or otherwise to one or more charities qualified under Code Sections 170(b)(1)(A), 170(c), 2055(a) and 2522(a) as the trustee may select.

The couple represent that reformation is necessary to correct a drafting error making it impossible to designate a private foundation as a remainder beneficiary. They submitted to the IRS an affidavit from the representative who advised them on the creation of the trust which indicates that the couple told him it was their intent to create a private foundation and name it as the remainder beneficiary of the trust. The representative referenced his own failure to note the limitation in the governing instrument which excluded private foundations as permissible beneficiaries.

The charitable deduction claimed by the husband and wife was less than twenty percent of their adjusted gross income and so would not exceed the applicable percentage limitations after the reformation. In addition, the publicly traded stock used to fund the trust qualified under the exception in Code Section 170(e)(5) and so the couple's charitable deduction would not have to be reduced pursuant to Section 170(e)(1)(B)(ii).

The husband and wife represent that state law allows reformation of an irrevocable trust to carry out the parties' true intent and that non-vested charitable remainder beneficiaries and the state's attorney general would have the right to object to the reformation.

Holding:

The proposed reformation will not violate Code Section 664 or the regulations thereunder and will not adversely affect the couple's charitable income tax deduction under Code Section 170.

Points to Ponder:

This ruling gives us hope that the IRS might be liberalizing its views on reformations. As we noted with respect to PLR 9818027 by the PGDC on May 4, 1998, perhaps the IRS will consider reformation of other types of charitable remainder trust provisions as long as the donor's intent is clear at the creation of the trust. Will a representative's affidavit always constitute proof of the donor's intent?

Full Text:

Date: March 26, 1998

In Reference to: CC:DOM:P&SI:1 - PLR-110971-97

LEGEND:

Trust = * * *
H = * * *
W = * * *
D1 = * * *
X = * * *
State = * * *

Dear * * *

[1] This responds to your March 2, 1998, letter, and prior correspondence, submitted on behalf of H and W, requesting rulings under sections 170 and 664 of the Internal Revenue Code concerning the effect of a proposed reformation of Trust on the qualification of Trust as a charitable remainder unitrust under section 664 and the applicable deduction to H and W under section 170.

SUBMITTED FACTS

[2] On D1, H and W created Trust. Trust is represented to be a charitable remainder unitrust. H and W funded Trust with publicly traded securities. The governing instrument names X as the initial trustee. However, H and W have the power to remove X as trustee and designate a successor trustee. Trust is required to pay annually to H and W, or the survivor, a unitrust amount equal to a fixed percentage of the net fair market value of Trust's assets. Trust's governing instrument provides that additional contributions may be made to Trust. As executed, Trust provides that upon the death of the survivor of H and W, the remainder of Trust's property is to be distributed in equal shares to three organizations designated in the Deed of Trust or to one or more other charitable organizations as H or W or the survivor may designate in a signed instrument delivered to the trustee. However, if at the time of distribution any charitable organization that would otherwise be entitled to receive a share of Trust's property does not qualify as an organization described in sections 170(b)(1)(A), 170(c), 2055(a), and 2522(a), then the property that would otherwise have been distributed to that organization will instead be distributed to the other charitable organizations as are then entitled to receive shares or otherwise to one or more charitable organizations as the trustee will select which qualify as organizations described in section 170(b)(1)(A), 170(c), 2055(a), and 2522(a).

[3] H and W state that the proposed reformation of the irrevocable trust is necessary due to a drafting error that makes it impossible for them to designate a private foundation, an organization described in section 170(c) but not in section 170(b)(1)(A), as a remainder beneficiary as they originally intended. An affidavit from the representative that advised them on the creation of the unitrust indicates that the representative was told by H and W when creating the unitrust that their intent was to allow private foundations as possible remaindermen. Specifically, in the affidavit the representative states that H and W advised him that they wished to establish and name a private foundation to be the charitable beneficiary of the trust. The representative states that he failed to note the restriction in the trust document that limited the possible remaindermen to organizations described in section 170(b)(1)(A) and advised H and W to execute the trust agreement and substitute their private foundation at a later date. The affidavit establishes that the taxpayers original intent was to be able to designate a private foundation as a remainder beneficiary. As reformed, the Deed of Trust would allow H and W or the survivor to designate a substitute charitable organization as remainder beneficiary provided that it qualifies at the time of distribution asan organization described in sections 170(c), 2055(a), and 2522(a).

[4] The total charitable deduction claimed by H and W, including the amount attributable to the value of the remainder interest in Trust, was less than 20 percent of H and W's adjusted gross income and, therefore, the deduction that H and W claimed with respect to Trust was within the percentage limitations set forth in sections 170(b)(1)(B) and 170(b)(1)(D). In addition, the deduction would not be subject to the provisions of section 170(e)(1)(B)(ii) because the exception provided in section 170(e)(5) for contributions of publicly traded stock was in effect when H and W funded Trust.

[5] H and W represent that State common law permits reformation of an irrevocable trust to carry out the true intentions of the parties. H and W represent that the purpose of the modification is to correct a drafting error and reflect their true intentions regarding the designation of charitable remaindermen. H and W also represent that the non-vested charitable remainder beneficiaries and State's attorney general have the right to object to the proposed reformation.

LAW AND ANALYSIS

[6] Section 1.664-1(a)(1)(iii)(a) of the Income Tax Regulations provides that the term "charitable remainder trust" means a trust with respect to which a deduction is allowable under sections 170, 2055, 2106, or 2522 and which meets the description of a charitable remainder annuity trust (as described in section 1.664-2) or a charitable remainder unitrust (as described in section 1.664-3).

[7] Section 1.664-1(a)(1)(i) provides that, generally, a charitable remainder trust is a trust that 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. The specified distribution to be paid at least annually must be a sum certain that is not less than 5 percent of the initial net fair market value of all property placed in trust (in the case of a charitable remainder annuity trust) or a fixed percentage that is not less than 5 percent of the net fair market value of the trust assets, valued annually (in the case of a charitable remainder unitrust).

[8] Section 1.664-3(a)(3)(ii) provides that a trust is not a charitable remainder unitrust if any person has the power to alter the amount paid to any named person other than an organization described in section 170(c) 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 of the Code were applicable to such trust.

[9] In regard to charitable remainder unitrusts, section 1.664-3(a)(4) provides, in part, that the trust may not be subject to a power to invade, alter, amend, or revoke for the beneficial use of a person other than an organization described in section 170(c). Notwithstanding the preceding sentence, the grantor may retain the power exercisable only by will to revoke or terminate the interest of any recipient other than an organization described in section 170(c).

[10] Section 170(f)(2) provides that no deduction is allowed under section 170 for the value of a remainder interest unless the trust is a charitable remainder annuity trust or a charitable remainder unitrust (described in section 664).

[11] Under Rev. Rul. 76-8, 1976-1 C.B. 179, a trust that otherwise qualifies as a charitable remainder unitrust may provide that the grantor or a recipient of the unitrust amount may have the power to designate the remainder beneficiary if the remainder beneficiary must be a charitable organization described in sections 170(c), 2055(a), and 2522(a). The ruling does not require that the remainder beneficiary must also be an organization described in section 170(b)(1)(A).

[12] Under Rev. Rul. 79-368, 1979-2 C.B. 109, the deduction allowed for the value of the remainder interest in property transferred to a charitable remainder unitrust is subject to the percentage limitations set forth in section 170(b)(1)(B) where the grantor or a recipient of the unitrust amount has thepower to designate a remainder beneficiary that must be a charitable organization described in section 170(c) but need not be an organization described in section 170(b)(1)(A). Because the remainder beneficiary may be a private foundation other than a private foundation described in section 170(b)(1)(E), the deduction may also be limited by section 170(e)(1)(B)(ii).

[13] In the present case, however, the deduction that H and W claimed with respect to Trust falls within the limitations set forth in sections 170(b)(1)(B) and 170(b)(1)(D), and it would not be subject to the provisions of section 170(e)(1)(B)(ii) because of the exception then in effect for contributions of publicly traded stock under section 170(e)(5). Accordingly, the proposed reformation of Trust does not adversely affect the deduction allowable for the charitable contribution that H and W made when they created Trust under section 170.

[14] After reviewing the facts and relevant documents submitted, we conclude that the proposed judicial modifications will not violate sections 1.664-1(a), 1.664-3(a)(3)(ii) and 1.664-3(a)(4) or any provisions under section 664 and the remaining regulations thereunder. Because the proposed modification is the correction of a drafting error, it will not be treated as violating the requirement that the remainder interest to charity must be irrevocable. Accordingly, we conclude that the proposed judicial modification of Trust will not adversely affect Trust's qualification as a charitable remainder unitrust if it otherwise meets the requirements of section 664 and the applicable regulations. Furthermore, the proposed judicial modification of Trust will not adversely affect H and W's income tax deduction under section 170 allowable for the charitable contribution made to Trust.

[15] This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) provides that it may not be used or cited as precedent.

[16] Pursuant to a power of attorney on file in our office, a copy of this letter is being sent to H and W.

Sincerely yours,

Brian M. Blum
Senior Technician Reviewer, Branch 1
Office of the Assistant Chief Counsel
(Passthroughs and Special Industries)

Copy for section 6110 purposes

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