IRS Allows Reformation of CRT to Include Private Foundation

IRS Allows Reformation of CRT to Include Private Foundation

News story posted in Letter Rulings on 4 May 1998| comments
audience: National Publication | last updated: 18 May 2011
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Summary

The IRS has ruled privately that a charitable remainder trust, that through a drafting error permitted naming only public charities as remaindermen, could be reformed to enable the trustor to designate the remainder interest to one or more private nonoperating foundations.

Ltr. Rul. 9818027

Full Text:

Date: January 20, 1998
In Reference to: CC:DOM:P&SI:1
PLR-114139-97

LEGEND:

Trust = * * *
A = * * *
D1 = * * *
State = * * *

Dear * * *

[1] This responds to your December 23, 1997, letter, and prior correspondence, submitted on behalf of A and Trust, requesting rulings under sections 170 and 664 of the Internal Revenue Code concerning the effect of a proposed reformation of Trust on the assumed qualification of Trust as a charitable remainder unitrust under section 664 and the applicable deduction to A under section 170.

SUBMITTED FACTS

[2] On D1, A created Trust. Trust is represented to be a charitable remainder unitrust. A funded Trust with publicly traded securities. The governing instrument names A and A's daughter as co- trustees. Trust is required to pay annually to A 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 A, the remainder of Trust's property is to be distributed to an organization designated in the trust agreement provided that the designated organization is a charitable organization (defined in the trust agreement as an organization described in each of sections 170(b)(1)(A), 170(c), 2055(a), and 2522(a)). If the designated organization is not a "charitable organization" as defined in the trust agreement or is not in existence at the time the assets become distributable, then the trustee will create an organization that qualifies as a "charitable organization" and is an organization described in section 509(a)(3).

[3] A states that the proposed reformation of the irrevocable trust is necessary due to a drafting error that makes it impossible for her to designate one or more private foundations, organizations described in section 170(c) but not in section 170(b)(1)(A) or in section 509(a)(3), as remainder beneficiaries as she originally intended. To establish her original intent, A has provided a comprehensive explanation of her overall estate plan, copies of documents evidencing that estate plan, and letters from her former representative who drafted the estate documents, including the unitrust. The documents indicate that A's estate plan involved leaving the bulk of her assets to one or more private foundations controlled by family members. The letters from her former representative, which were written contemporaneous with changes to the taxpayer's will and creation of one of the private foundations mentioned, contain language confirming that a primary concern of A was to allow her family to direct the ultimate charitable disposition of her assets after her death. The letters clearly focus on the family private foundations, which do not qualify as section 170(b)(1)(A) organizations. The documents submitted establish that A's original intent in creating Trust was to be able to designate one or more private foundations as remainder beneficiaries. As reformed, the trust agreement would allow A to designate one or more substitute charitable organizations as remainder beneficiaries provided that they qualify at the time of distribution as organizations described in sections 170(c), 2055(a), and 2522(a).

[4] A represents that State law permits reformation of an irrevocable trust upon the consent of all interested parties. A also represents that State's Attorney General has the right to object to the proposed reformation on behalf of any named or unnamed charitable remaindermen.

LAW AND ANALYSIS

[5] 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 section 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).

[6] 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).

[7] 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.

[8] 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).

[9] Section 170(e)(1)(B) generally limits the amount of a contribution to a private foundation to the donor's basis in the property.

[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 the power 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] After reviewing the facts and relevant documents submitted, we conclude that the proposed reformation 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 reformation 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 reformation 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.

[14] However, the proposed reformation of Trust will affect A's income tax deduction under section 170 allowable for the charitable contribution made to Trust. The deduction is 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 not in effect when A funded the trust. Under section 170(e)(1)(B)(ii) the value of the contribution will be determined using the taxpayer's adjusted basis, rather than the fair market value, in the contributed stock. In addition, under section 170(b)(1)(D)(i)(1)(I) the taxpayer's charitable contribution deduction will now be limited to 20% of the taxpayer's contribution base. Consequently, this ruling is conditioned on A's filing a timely amended return for the tax year that includes D1 reporting a reduced charitable deduction because of the limitation of the deduction to basis, rather than fair market value, and because of the 20% limitation.

[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 A, Trust, and A's authorized representative.

Sincerely yours,

Dianna K. Miosi
Chief, Branch 1
Office of the Assistant Chief Counsel
(Passthroughs and SpecialIndustries)

Date Published: 05-01-98

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