Disclaimer Creates CRT

Disclaimer Creates CRT

News story posted in Letter Rulings on 9 June 1998| comments
audience: National Publication | last updated: 18 May 2011
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Summary

The Service has ruled privately that a decedent will obtain a charitable deduction for the present value of the remainder interest in a Charitable Remainder Trust that will be created pursuant to a reformation of a family trust. The beneficiary of the family trust disclaimed her interest in principal and the trustee is proposing to reform the Family Trust to create two new trusts - a CRT and another Family Trust. The Beneficiary will retain an income interest in both trusts.

Ltr. Rul. 9823037

PGDC Summary:

The Service will permit an interest under a decedent's revocable living trust to be reformed for estate tax purposes.

Facts:

Decedent provided for income and/or principal to sister during life, remainder to charity in a revocable living trust. Decedent died, Sister disclaimed her interests in discretionary distributions of the principal of the revocable living trust, and then the trustees petitioned the court for reformation. Trustee proposed to create two new trusts, a CRT and a Family Trust. Sister would be the income beneficiary of the CRT and the Family Trust.

Holding:

The reformed trust met all of the technical requirements of reformation for CRT purposes and an estate tax charitable deduction was accordingly allowed for the value of the interest passing to charity at the date of death of the decedent.

Points to Ponder:

It is interesting to note how a disclaimer and reformation was utilized in this ruling to obtain a current estate tax deduction. Did the reformation vitiate disclaimer? If so, can you use a reformation to revoke an irrevocable disclaimer?

Full Text:

Date: March 9, 1998

Refer Reply To: CC:DOM:P&SI:7 - PLR-120994-97
In Re: * * *

LEGEND:

Decedent = * * *
a = * * *
Sister = * * *
b = * * *
A = * * *
B = * * *
c = * * *
C = * * *
D = * * *
E = * * *
F = * * *
G = * * *
H = * * *
I = * * *
J = * * *
K = * * *
Charity 1 = * * *
Charity 2 = * * *
Charity 3 = * * *
Charity 4 = * * *
Charity 5 = * * *
L = * * *
Foundation = * * *
d = * * *
Fund = * * *
M = * * *
e = * * *
N = * * *
f = * * *
g = * * *
Charitable Trust = * * *
h = * * *
i = * * *
j = * * *

Dear * * *

In a letter, dated * * *, you requested several rulings concerning the estate tax consequences under section 2055 of the Internal Revenue Code of a proposed reformation of a split-interest charitable trust. This letter responds to your request.

The facts and representations submitted are summarized as follows: Decedent funded a revocable trust under a trust agreement dated a. The trust agreement provides that during Decedent's lifetime, the trustee is to accumulate the income and retain the principal, except as Decedent may otherwise direct. If at any time Decedent is unable to so direct, the trustee may pay income or principal as the trustee in its sole discretion may deem necessary to provide for Decedent's health, maintenance, support, and comfort, and to pay Decedent's obligations.

If Sister survives Decedent, the trustee is to retain the income or principal in the Family Trust for Sister's benefit. The trustee may pay to or for the benefit of Sister as much of the net income or principal of the Family Trust as the trustee deems appropriate for any purposes. On Sister's death, the trustee is to pay to her estate the cost of a headstone for her grave.

On Sister's death, or on Decedent's death if Sister does not survive Decedent, the trust is to terminate and the trustee is to distribute the principal and any undistributed income of the trust as follows:

(1) The sum of b is to be distributed to A and B, or the survivor of them, if either survives the termination of the trust. If neither A nor B survives the termination, the gift is to lapse.

(2) The sum of c is to be distributed to C, the daughter of D, if she survives the termination of the trust. If she does not survive the termination, the gift is to lapse.

(3) The sum of c is to be distributed to E, the daughter of F of G, if she survives the termination of the trust. If she does not survive the termination, the gift is to lapse.

(4) The sum of c is to be distributed to H, the son of I of J, if he survives the termination of the trust. If he does not survive the termination, the gift is to lapse.

(5) The sum of c is to be distributed to K, the daughter of I of J, if she survives the termination of the trust. If she does not survive the termination, the gift is to lapse.

(6) The sum of c is to be distributed to Charity 1, or its successor.

(7) The sum of c is to be distributed to Charity 2, or its successor.

(8) The sum of c is to be distributed to Charity 3, or its successor.

(9) The sum of c is to be distributed to Charity 4, or its successor.

(10) The sum of c is to be distributed to Charity 5, or its successor, to be used for the preservation of L.

Any remaining trust assets are to be distributed to Foundation. The gift is to be divided by placing d in the Fund in M to support student scholarships and/or faculty salaries. The remaining e is to be used towards N for capital needs and renovations in support of educational programs.

On f, Sister executed a disclaimer disclaiming all right, title, and interest in and to discretionary payments of principal of the Family Trust, as well as the payment to her estate of the cost of a headstone for her grave.

The trustee proposes to petition Court to reform the trust to qualify as a charitable remainder unitrust within the meaning of section 664. It is represented that the petition will be filed within 90 days of the due date (including extensions) of Decedent's federal estate tax return.

Following the reformation, the trust will provide that on Decedent's death, the trustee is to divide the trust assets into two trusts: (1) the Family Trust, and (2) the Charitable Trust. The Family Trust is to consist of the sum of g. The Charitable Trust is to consist of the remaining assets.

The Family Trust will provide that the trustee is to pay the net income of the Family Trust to or for the benefit of Sister during her lifetime in quarterly or more frequent installments. On Sister's death, or on Decedent's death if Sister does not survive Decedent, the trustee is to distribute the principal as follows:

(1) The sum of b is to be distributed to A and B, or the survivor of them, if either survives the termination of the trust. If neither A nor B survives the termination, the gift is to lapse.

(2) The sum of c is to be distributed to C, the daughter of D, if she survives the termination of the trust. If she does not survive the termination, the gift is to lapse.

(3) The sum of c is to be distributed to E, the daughter of F of G, if she survives the termination of the trust. If she does not survive the termination, the gift is to lapse.

(4) The sum of c is to be distributed to H the son of I of J, if he survives the termination of the trust. If he does not survive the termination, the gift is to lapse.

(5) The sum of c is to be distributed to K, the daughter of I of J, if she survives the termination of the trust. If she does not survive the termination, the gift is to lapse.

(6) The trustee is to add any remaining principal or lapsed gifts to the Charitable Trust.

The Charitable Trust will provide that in each taxable year of the Charitable Trust, the trustee will pay to Sister during her lifetime, a unitrust amount equal to the lesser of: (1) the income of the Charitable Trust for the taxable year (as defined in section 643(b) and the regulations thereunder), and (2) h percent of the net fair market value of the assets of the Charitable Trust valued as of the first day of each taxable year of the Charitable Trust (valuation date). The unitrust amount is to be decreased if the taxable year is a short taxable year or is the taxable year of Sister's death. If the income of the Charitable Trust exceeds h percent of the net fair market value of its assets, the unitrust amount also is to include the excess income to the extent that the aggregate of the amounts paid in prior years was less than the aggregate of the amounts computed as h percent of the net fair market value of the assets of the Charitable Trust on the valuation dates. The trustee is to use the same valuation methods for each taxable year.

The trustee is to pay the unitrust amount in equal quarterly installments on the last day of March, June, September, and December. If the excess income for any taxable year exceeds the unitrust amount, the trustee is to add the excess to principal.

The Charitable Trust is to terminate on the earlier of: (1) the date of Sister's death, or (2) the date of Decedent's death if Sister does not survive Decedent. When the Charitable Trust terminates, the trustee is to distribute all of the assets of the Charitable Trust as follows, provided that each named organization is described in sections 170(b)(1)(A), 170(c)(2)(B), 2055(a), and 2522(a) at the time the assets of the Charitable Trust are to be distributed:

(1) The sum of c is to be distributed to Charity 1, or its successor.

(2) The sum of c is to be distributed to Charity 2, or its successor.

(3) The sum of c is to be distributed to Charity 3, or its successor.

(4) The sum of c is to be distributed to Charity 4, or its successor.

(5) The sum of c is to be distributed to Charity 5, or its successor, to be used for the preservation of L.

(6) Any remaining trust assets are to be distributed to Foundation. The gift is to be divided by placing d in the Fund in M to support student scholarships and/or faculty salaries. The remaining e is to be used towards N for capital needs and renovations in support of educational programs.

The reformation will be effective as of the date of Decedent's death and the nonremainder interest will terminate at the same time before and after the reformation.

You have requested the following rulings:

(1) The charitable remainder interest under the original trust will qualify as a reformable interest within the meaning of section 2055(e)(3)(c), provided that a petition for judicial reformation is commenced within 90 days after the last date (including extensions) for filing Decedent's estate tax return.

(2) The difference between the actuarial value of the qualified charitable remainder interest and the actuarial value of the reformable charitable remainder interest will not exceed 5 percent of the actuarial value of the reformable charitable remainder interest.

(3) The proposed reformation of the original trust will be a qualified reformation for purposes of section 2055(e)(3), and as a result Decedent's estate will be entitled to a federal estate tax charitable deduction for the remainder interest passing to charitable organizations.

Section 2055(a) provides that, for purposes of the federal estate tax, the value of the taxable estate is determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises, or transfers for public, educational, scientific, literary, charitable, or religious uses.

Section 2055(e)(2)(A) provides that where an interest in property passes or has passed from the decedent to a person, or for a use, described in section 2055(a), and an interest (other than an interest that is extinguished upon the decedent's death) in the same property passes or has passed (for less than an adequate and full consideration in money or money's worth) from the decedent to a person, or for a use, not described in section 2055(a), no deduction is allowed under section 2055(a) for the interest that passes or has passed to the person, or for a use, described in section 2055(a), unless in the case of a remainder interest, the interest is in a charitable remainder annuity trust or a charitable remainder unitrust (described in section 664) or a pooled income fund (described in section 642(c)(5)).

Section 2055(e)(3)(A) provides that a deduction is allowed under section 2055(a) for any qualified reformation.

Section 2055(e)(3)(B) defines the term "qualified reformation" to mean a change of a governing instrument by reformation, amendment, construction, or otherwise that changes a reformable interest into a qualified interest, but only if (i) any difference between the actuarial value (determined as of the date of the decedent's death) of the qualified interest, and the actuarial value (as so determined) of the reformable interest does not exceed five percent of the actuarial value (as so determined) of the reformable interest, (ii) in the case of a charitable remainder interest, the nonremainder interest (before and after the qualified reformation) terminated at the same time, or, in the case of any other interest, the reformable interest and the qualified interest are for the same period, and (iii) the change is effective as of the date of the decedent's death.

Section 2055(e)(3)(C)(i) defines the term "reformable interest" to mean any interest for which a deduction would be allowable under section 2055(a) at the time of the decedent's death but for section 2055(e)(2). Section 2055(e)(3)(C)(ii) provides that the term "reformable interest" does not include any interest unless, before the remainder vests in possession, all payments to persons other than an organization described in section 2055(a) are expressed either in specified dollar amounts or a fixed percentage of the fair market value of the property.

Section 2055(e)(3)(C)(iii) provides, in part, that section 2055(e)(3)C)(ii) does not apply to any interest if not later than 90 days after the last date (including extensions) for filing an estate tax return, if an estate tax return is required to be filed, a judicial proceeding is commenced to change the interest into a qualified interest.

Section 2055(e)(3)(D) defines the term "qualified interest" to mean an interest for which a deduction is allowable under section 2055(a).

Based on the information submitted and the representations made, we conclude that the charitable remainder interest is a reformable interest within the meaning of section 2055(e)(3)(C)(i) because an estate tax deduction for the value of the interest would have been allowable under section 2055(a) but for the provisions of section 2055(e).

The reformation of the Trust will be effective as of the date of Decedent's death and the nonremainder interest will terminate at the same time before and after the reformation. The actuarial value of the charitable remainder interest in the original trust (based on the assumption that all trust income would be distributable to the trust beneficiary) will be i and the actuarial value of the charitable remainder interest in the Charitable Trust will be j. Thus, the difference between the actuarial value of the qualified interest and the actuarial value of the reformable interest will not exceed 5 percent of the actuarial value of the reformable interests.

The Charitable Trust will contain the provisions set forth in Rev. Rul. 72-395, 1972-2 C.B. 340, as modified by Rev. Rul. 80- 123, 1980-1 C.B. 205, and Rev. Rul. 82-128, 1982-2 C.B. 71, and clarified by Rev. Rul. 82-165, 1982-2 C.B. 117. Consequently, the Charitable Trust meets the requirements of a charitable remainder unitrust as described in section 664(d)(2). Accordingly, provided that judicial proceedings to reform the original trust are commenced before the 90th day after the last date (including extensions) for filing Decedent's estate tax return, and provided also the disclaimer executed by Sister on f is a qualified disclaimer within the meaning of section 2518 and the regulations thereunder, the present value of the charitable remainder interest in the Charitable Trust will be allowed as an estate tax deduction under section 2055(a).

Except as ruled in this letter, we express or imply no opinion concerning the federal tax consequences of this transaction under the cited provisions or under any other provision of the Code. In particular, we express or imply no opinion whether the disclaimer executed by Sister on f is a qualified disclaimer within the meaning of section 2518 and the regulations thereunder.

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.

Sincerely yours,

Mary A. Berman
Assistant to the Chief, Branch 7
Office of the Assistant Chief Counsel
(Passthroughs and Special Industries)

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