IRS Approves Reformation into Charitable Remainder Unitrust

IRS Approves Reformation into Charitable Remainder Unitrust

News story posted in Letter Rulings on 26 May 1998| comments
audience: National Publication | last updated: 18 May 2011
Print
||
Rate:

Summary

The IRS has ruled privately that a testamentary trust can be reformed into a NIMCRUT with a 7.5 percent unitrust amount payable to the named beneficiary for her lifetime or until she remarries.

Ltr. Rul. 9821009

PGDC Summary:

A decedent left a trust which provided income to the trust beneficiary for the shorter of her life or until she remarried with the remainder to four charities. The trustee of the trust petitioned the local court to reform the trust into a NIMCRUT with a 7.5% payout. The trust was to end upon the earlier of death or remarriage, with the remainder passing only to those charities qualified as such under Sections 170(c), 2055(a) and 2522(a).

Holding:

The reformation is a valid reformation under Sec. 2055(e). The difference between the actuarial value of the qualified interest and the actuarial value of the reformable interest does not exceed 5% of the actuarial value of the reformable interest.

Points to Ponder:

There appears to be significant flexibility available to alert post-mortem planners! Note that the Service approved the creation of a NIMCRUT out of the "reformable" interest. Also note the use of a qualified contingency that terminates the trust upon the beneficiary's remarriage.

Full Text:

Date: February 9, 1998

Refer Reply to: CC:DOM:P&SI:7 - PLR-102241-97

In re: * * *

LEGEND:

Trust = * * *
Trustee = * * *
Trust Agreement = * * *
Decedent = * * *
Trust Beneficiary = * * *
Charity 1 = * * *
Charity 2 = * * *
Charity 3 = * * *
Charity 4 = * * *
Court = * * *
Reformed Trust = * * *
a = * * *
b = * * *
c = * * *
d = * * *
e = * * *
f = * * *
g = * * *

Dear * * *

We received your letter requesting rulings concerning the application of section 2055(e)(3) of the Internal Revenue Code to the proposed reformation of Trust. Specifically, you request rulings that:

1. 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;

2. The reformation of Trust is a qualified reformation for purposes of section 2055(e)(3);

3. Reformed Trust will qualify as a charitable remainder unitrust described under section 664; and

4. The interest passing to the charities under the charitable remainder unitrust will be deductible by Decedent's estate under section 2055(a).

The facts and representations submitted are summarized as follows: Decedent died on a. Decedent executed Trust Agreement on b.

Section VI of Trust Agreement provides that, upon the death of Decedent, if Trust Beneficiary survives Decedent, Trustee shall distribute the net income of Trust, in quarterly or more frequent installments to Trust Beneficiary, so long as she shall live and remain unmarried.

Section VI of Trust Agreement further provides that, upon the death or remarriage of Trust Beneficiary, Trust shall terminate and Trustee is to distribute the entire balance of the trust principal and any accrued undistributed income to Charity 1, Charity 2, Charity 3, and Charity 4 (collectively referred to as Charities).

On e, Trustee petitioned Court to reform Trust to provide a new section VI effective as of a. The proposed reformation provides that all the rest, residue, and remainder of Trust estate shall continue to be held by Trustee as Successor Trustee and Trust shall be renamed Decedent's Charitable Remainder Unitrust.

In each tax year of Reformed Trust, Trustee shall pay to Trust Beneficiary a unitrust amount equal to the lesser of: (a) the trust income for the tax year, as defined in section 643(b) or (b) 7.5 percent of the net fair market value of the assets of Reformed Trust valued as of the first day of each tax year of Reformed Trust. The unitrust amount for any year shall also include any amount of trust income for such year that is in excess of the amount required to be distributed under (b) above, to the extent that the aggregate of the amounts paid in prior years was less than the aggregate of the amounts computed at 7.5 percent of the net fair market value of Reformed Trust assets on the valuation dates.

The unitrust amount shall be paid in quarterly installments. Any trust income for a tax year in excess of the unitrust amount shall be added to principal. If for any year the net fair market value of the Trust assets is incorrectly determined, then within a reasonable period after the value is finally determined for federal tax purposes, Trustee shall pay to Trust Beneficiary (in the case of an undervaluation) or receive from the Trust Beneficiary (in the case of an overvaluation) an amount equal to the difference between the unitrust amount properly payable and the unitrust amount actually paid.

The obligation to pay the unitrust amount shall commence as of the date of Decedent's death, but payment of the unitrust amount may be deferred until the end of the tax year of Reformed Trust in which occurs the complete funding of Reformed Trust. If the unitrust payments are deferred, interest compounded annually must be paid for the deferral period.

Upon the death or remarriage of Trust Beneficiary, Reformed Trust will terminate, and Reformed Trust assets will be distributed to Charities. If one or more of the Charities is not an organization described in sections 170(c), 2055(a), and 2522(a), at the time when any principal or income of Trust is to be distributed to Charities, then Trustee shall distribute Reformed Trust assets to one or more organizations described in those sections as Trustee shall select in its sole discretion.

Section 2055(a) provides that the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises, and transfers to or for a corporation or certain other organizations organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes.

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 (I) the actuarial value (determined as of the date of the decedent's death) of the qualified interest, and (II) the actuarial value (as so determined) of the reformable interest does not exceed 5 percent of the actuarial value (as so determined) of the reformable interest,

(ii) in the case of (I) a charitable remainder interest, the nonremainder interest (before and after the qualified reformation) terminated at the same time, or, (II) 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 generally 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, the representations made, and assuming that the residence owned by Decedent at the time of his death is not part of Trust or Reformed Trust, we make the following conclusions. The interest passing to Charities under Trust is a reformable interest within the meaning of section 2055(e)(3)(C)(i) because an estate tax deduction for the value of the remainder 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 Trust before the reformation (based on the assumption that all trust income would be distributable to the Trust Beneficiary) was f and the actuarial value of the charitable remainder interest in Reformed Trust was g. The difference between the actuarial value of the qualified interest and the actuarial value of the reformable interest does not exceed 5 percent of the actuarial value of the reformable interest.

Reformed Trust contains 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. We conclude that the reformation of Trust is a qualified reformation for purposes of section 2055(e)(3), and Reformed Trust meets the requirements of a charitable remainder unitrust as described in section 664(d)(2). Accordingly, the present value of the remainder interest in Reformed Trust will be allowed as an estate tax deduction under section 2055(a), because judicial proceedings to reform Trust were commenced before the 90th day after the last date (including extensions) for filing Decedent's estate tax return. Except as ruled above, we express or imply no opinion concerning the federal tax consequences of this transaction under the cited provisions of the Code or any other provision of the Code.

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. Temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted. Therefore, this ruling will be modified or revoked by adoption of temporary regulations, to the extent the regulations are inconsistent with any conclusions in the ruling. See section 12.04 of Rev. Proc. 98-1, 1998-1 I.R.B. 7, 47. However, when the criteria in section 12.05 of Rev. Proc. 98-1 are satisfied, a ruling is not revoked or modified retroactively, except in rare or unusual circumstances.

In accordance with the power of attorney on file with this office, the original letter is being sent to your authorized representative.

Sincerely yours,

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

Add comment

Login or register to post comments

Comments

Group details

Follow

RSS

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