New Gifts for Old: Examining Ltr. Rul. 200152018

New Gifts for Old: Examining Ltr. Rul. 200152018

Article posted in Charitable Remainder Trust on 29 October 2002| comments
audience: Partnership for Philanthropic Planning, National Publication | last updated: 18 May 2011
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Summary

Last December, the Service delivered what many gift planners speculated might be the most exciting private letter ruling for the new year--a ruling that allowed the income recipient of a charitable remainder trust to transfer his income interest to the charitable remainderman as consideration for a charitable gift annuity and accelerate the payment of the present value of the remainder interest to the charity. Was it the most exciting ruling of the year? You be the judge as Ohio State University's Joe Bull and Laura Peebles from the national office of Deloitte & Touche, LLP explain the ruling and its opportunities for planning.

by Joseph O. Bull and Laura H. Peebles, CPA, PFS

Introduction

One does not generally associate the terms "holiday cheer" and "New Year's revelry" with the Internal Revenue Service; however, many charitable gift planners rubbed their eyes on December 28, 2001 with the release of Private Letter Ruling 200152018 which permitted a donor to transfer an income interest in a charitable remainder trust in exchange for a charitable gift annuity and accelerate the payment of the remainder interest to charity.

This ruling was a wonderful post-holiday-season gift to charitable gift planners and was quite a way to start the new year. Furthermore, it is one planners should consider as year-end philanthropic planning shifts into full gear.

What did this letter ruling really say? How was its end result accomplished technically? And what practical implications does it hold for the daily work of charitable gift planners?

The purpose of this article is to answer these questions by examining the letter ruling from both technical and practical perspectives.

Background

By definition under Internal Revenue Code §664, a charitable remainder trust must provide for a specified distribution, at least annually, to one or more persons, at least one of which is not a charitable beneficiary. The distribution can be for the life or lives of individual beneficiaries, a term of years not to exceed 20, or several permitted combinations of lives and a term of years. At the end of the specified measuring term, the remainder must either be distributed to one or more qualified charities or be held in trust for continuing charitable purposes.

There are two types of charitable remainder trusts: A charitable remainder annuity trust (CRAT) is defined in §664(d)(1) as requiring a specified sum to be paid to one or more beneficiaries, at least one of which is not a charity. The sum must be equal to at least 5% but not more than 50% of the fair market value of the trust's assets on the date the assets are transferred to the trust. A charitable remainder unitrust (CRUT) is defined in §664(d)(2) as requiring a fixed percentage of the trust's net fair market value to be paid at least annually to one or more beneficiaries, at least one of which is not a charity. The fixed percentage must be at least 5% but not more than 50% of the net fair market value of the trust assets as valued annually. Over the last several years, many of these trusts were established with payouts in the 7% to 8% range.

A unitrust may be drafted as a "net income with makeup" unitrust (NIMCRUT). These trusts provide that the unitrust payment to the beneficiary is limited to the "trust accounting income" for that year. These trusts also provide that to the extent trust accounting income is insufficient to pay the fixed percentage amount the trust may make the deficiency up in subsequent years when trust accounting income exceeds the fixed percentage. Given the current investment environment, many trusts may never be able to achieve their intended payouts, let alone "make-up" any payments to their beneficiaries. This is especially true for those trusts that do not include capital gains in their definition of "trust accounting income." A unitrust may also be drafted with a "flip" provision wherein the trust starts with a "net income only or net income with make-up" requirement at the beginning and then "flips" into a regular unitrust after the occurrence of a predefined "triggering" event.

In creating a lifetime charitable remainder trust, a grantor receives an immediate income and gift tax charitable deduction for the discounted net present value of the remainder interest that will ultimately pass to a charity.1 As long as the grantor (and/or a U.S. citizen spouse) retains the income interest, there will be no gift tax consequence in creating the trust. A charitable remainder trust is a tax-exempt entity as long as it does not incur unrelated business taxable income. Therefore, a charitable remainder trust may sell appreciated property that was contributed by the grantor and not recognize any taxable gain. The tax treatment of distributions from a charitable remainder trust is addressed in IRC §664(b) and the related regulations. These are beyond the scope of this article.

Overview of the Ruling

Ltr. Rul. 200152018 holds that the life income recipient of a charitable remainder trust may transfer his or her entire life income interest to the charitable remainderman as consideration in exchange for a charitable gift annuity.

Specifically, the Service made four rulings:

  1. An income tax charitable deduction under IRC §170(a)(1) may be claimed by the life income recipient to the extent the present value of the life income interest in the CRT exceeds the present value of the annuity payments.

  2. A gift tax charitable deduction under IRC §2522(a) may be claimed by the life income recipient to the extent the present value of the life income interest in the CRT exceeds the present value of the annuity payments.

  3. To the extent the CRT had realized capital gain income in prior years that had not yet been distributed to the life income recipient, the income recipient would not currently realize that capital gain by reason of the transfer of his life income interest to the charity.

  4. The life income recipient's unitrust interest is a capital asset. It has a basis of zero for this transaction (in other words, there will be long-term capital gain in the amount of the annuity's value that, subject to qualification requirements, can be reported ratably over the annuitant's life expectancy).


Details of the Ruling

Income Tax Deduction. The ruling reviewed in detail the rules for the income tax charitable deduction under IRC §170 and found that the life income recipient may claim an income tax charitable deduction for the amount by which the present value of the unitrust interest exceeds the present value of the gift annuity payments.

The unitrust interest is a capital asset.2 As such, the income tax charitable deduction for the year of the transfer is limited to 30% of the grantor's adjusted gross income. The five-year carry-forward for any unused deduction also applies here.

The substantiation requirements under IRC §170(f)(8) and Reg. §1.170A-13(c) for gifts of property other than publicly traded securities in excess of $5,000 were briefly reviewed. (The most important of these requirements is the qualified appraisal.) Additionally, the Letter Ruling stated the income tax charitable deduction was subject to "any other requirements and limitations under §170."

One is left to infer that the life income beneficiary must obtain a qualified appraisal and complete Form 8283 in order to claim the income tax charitable deduction. However, some practitioners believe that if the underlying assets of the CRT were cash or publicly traded securities, no appraisal would be required. Cautious donors may want to obtain a qualified appraisal.3

Gift Tax Deduction. Similarly, the ruling reviewed in detail the rules for the gift tax charitable deduction under IRC § 2522 and found that the life income recipient may claim a gift tax charitable deduction for the amount by which the present value of the unitrust interest exceeds the present value of the gift annuity payments.

The facts here were found to be "substantially identical" to those of Situation 1 of Rev. Rul. 86-60. That ruling set forth the standard that a gift tax deduction was available when a life income beneficiary relinquished the income interest to the charitable remainder beneficiary.

Additionally, the facts were found to be "substantially similar" to those of Rev. Rul. 80-281. That ruling established that a gift tax charitable deduction was available when a donor established an inter vivos charitable gift annuity.

Capital Gain Recognition. There was very little commentary on this issue. Here is the the analysis in its entirety: "We conclude that, to the extent the trustee of Trust realized capital gain income in prior years, which income was not included in the unitrust amounts paid to Taxpayer and thereby recognized by Taxpayer, that capital gain will not be currently included in Taxpayer's income by reason of his transfer of his unitrust interest to Academy." (Academy was the charity in this ruling).

Allocation of Basis. Finally, the ruling addressed the issue of the basis allocated to the gift annuity. Generally, when a long-term capital asset is used to fund a gift annuity, the gain attributable to the present value of the annuity may be recognized and reported ratably over the life expectancy of the annuitant.4

The basis is also recovered over the annuitant's life expectancy; however, this ruling focuses on the fact the capital asset used to fund the gift annuity is a term interest in property under IRC §1001(e)(2). Therefore, the ruling follows §1001(e)(1) to disregard the taxpayer's basis acquired pursuant to §1015 (an interest in trust) and determines that the taxpayer will incur long-term capital gain for the full value of the annuity payments. The ruling specifically states that the exception to §1001(e)(1) in §1001(e)(3) does not apply because the remainder beneficiary is not receiving the entire interest in trust in one transaction.

There could be an argument that if a donor has retained the right to change the charity, the donor could then irrevocably name the same charity as vested in both the income and remainder interest in the exchange for the gift annuity. In that case the donor would appear to meet the exception in §1001(e)(3), which allows the seller of a life or term interest to use the basis in "a sale or other disposition which is a part of a transaction in which the entire interest in property is transferred to any person or persons." In that case, the donor would be entitled to use allocated basis in determining gain on receipt of the annuity payments. This situation is unlikely to occur if a charity has been serving as the trustee. A charity will usually require at least a portion of the corpus to be irrevocably dedicated to themselves if they are to serve as trustee.

On a related issue, the ruling does not address the issue of the holding period as to whether the income interest from the charitable gift annuity will be long or short-term capital gain. However, under Reg. §1.1223-1(a), a taxpayer's holding period for property received in an exchange shall include the holding period for the property that was exchanged, if the property that was exchanged has the same basis in whole or in part for the basis of determining gain or loss from a sale or exchange of the property in the hands of the taxpayer. If one assumes the individual's tax basis in the annuity is the same as the income stream received from the charitable remainder trust, it would be logical that the holding period would be tacked on as well.

Planning Opportunities for Donors

Obviously, this ruling offers an innovative source of current funds for charitable organizations. Less obviously, it also offers innovative planning ideas for individuals.

There are three primary reasons that would motivate an individual to engage in this transaction:

  • when the individual wants to make an additional contribution to meet an immediate need of a charitable organization;

  • when the individual is unhappy with his or her trust distributions which are not likely to increase much (because the trust includes a net income provision and does not include capital gains in it definition of trust accounting income, nor includes a flip provision that would enable it to convert to a standard charitable remainder unitrust); and

  • when the amount of trust assets do not justify the administrative cost of continuing the trust.

    Making an Additional Contribution. First, if an individual has achieved the purpose of establishing a charitable remainder trust to defer the gain on the sale of appreciated assets, and now wants to provide an immediate instead of deferred benefit to the charitable remainderman, the individual may wish to transfer his or her retained income interest to the charity in exchange for the charitable gift annuity.

    It is possible to transfer the income interest outright to the charity, but not every donor may desire or can afford to relinquish their entire income interest. If the charity has an immediate need the individual would like to help the charity meet, the individual now has an additional resource from which he or she can make the necessary contribution. An exchange for a gift annuity allows the termination of the prior income interest and releases the present value of the remainder for immediate use by the charity.

    The charity may be required to establish reserves for the payment of the gift annuity, but if the trust has grown to more than the necessary reserve, the charity acquires immediately usable funds as part of the transaction. The individual can see the legacy he or she is creating and can help direct the use of those funds during his or her lifetime.

    However, there are a few drawbacks to an immediate vesting of the trust assets in the charity. First, in releasing the income interest and remainder to the charity, the individual then stands as only a general creditor of the charity, as opposed to having the security of the income stream from the trust, which is a separate entity. As long as the donor is comfortable with that, he or she has the intangible benefit of seeing his or her charitable vision realized much earlier, while still receiving a dependable income stream. The second issue depends on whether or not the grantor had retained any power to change the ultimate charitable beneficiary. If so, that flexibility will be lost. Obviously, at the time the charitable portion of the trust vests, the ultimate charity must be decided.

    The decision regarding whether to accept a charitable gift annuity in lieu of an income stream from a charitable remainder trust may also relate to the quantity of income to which the individual has become accustomed and which the individual needs.

    For example, if the assets have appreciated since the charitable remainder trust was funded, and it is a unitrust, the individual has enjoyed increased annual payments in direct proportion to that appreciation. In essence, this has given the individual an inflation adjustment so the benefit has inured solely to him or her. If the individual specifically chose a unitrust over an annuity trust for that reason, the individual's income goals may not be able to be achieved by exchanging the unitrust interest for a fixed payment charitable gift annuity. If, however, the nature of the assets has changed or if the individual's income need or goals have changed, a charitable gift annuity may still be sufficient. For example, a charitable remainder unitrust may have had more appeal during the recent record growth period and a recent decrease in asset value may now make it more appealing to convert to an annuity. Alternatively, if the individual's income needs have decreased from the time the charitable remainder trust was established, then the annuity amount can be adjusted to allow a larger charitable deduction.

    Looking at the Numbers. Assume that a charitable remainder unitrust holds assets valued at $100,000, and is required to pay a 6% unitrust interest in quarterly installments. Based on the Section 7520 rate of 5.6% for July 2002 a 70-year-old would receive current annual income of $6,000 (that will fluctuate with the value of the assets in the trust). The present value of the unitrust interest using an interest rate of 5.6% would be $51,755. The donor would then exchange the unitrust interest for a charitable gift annuity at an annual annuity rate of 7.2%. The present value of the charitable gift annuity would be $33,258 and the charitable deduction would be $18,497 ($51,755 - $33,258). Annual payments would be $3,726 (7.2% of $51,755).

    It is interesting to note the 7520 rate of 4.2% in October 2002 increases the value of the unitrust interest by only $259 in this scenario. The July rate of 5.6%, however, is much closer to the average rate over the past several years than the low October rate. December donors will be able to use the October rate under the two-month lookback rule under Rev. Rul. 89-34, 1989-1 C.B. 263).

    It is possible to create a gift annuity payment equal to the unitrust amount. This makes the transaction more attractive to the life income recipient. As the charitable remainder beneficiary will have the entire principal of the CRUT when the life income recipient transfers the unitrust interest, the charity can either place $80,000 in its gift annuity pool rather than $51,755 or pay a rate (subject to state gift annuity regulation) slightly higher than the ACGA recommended gift annuity rate. Again, the charity will have the entire $100,000 of principal, so the $6,000 annuity payment would be less than the recommended rate as a portion of the total assets received.

    Alternatively, assume that a charitable remainder annuity trust holds assets valued at $100,000 and is required to pay a 6% quarterly annuity. The present value of the income interest, using April 2002 rates, is $53,555, assuming quarterly payments to a 70-year-old. The donor would then exchange the annuity interest for a charitable gift annuity at an annual annuity rate of 7.2%. The present value of the charitable gift annuity would be $33,717 and the donor's charitable deduction would be $19,838.

    The October 4.2% 7520 rate increases the value of the annuity amount by $5,579 to $59,134.

    There has been some debate as to whether the gift annuity received in exchange for a CRAT income interest should be based on the present value of the income interest in the CRAT or the value of the underlying CRAT assets. If it is the latter, this would be a very attractive alternative for those whose CRAT assets rose greatly in the 1990's while not slipping too greatly in the past year or two.

    A Solution for NIMCRUTs. An individual may be motivated to exchange an income stream from a charitable remainder trust for a charitable gift annuity when the individual established a NIMCRUT that did not define trust accounting income as including post-contribution capital gains. A NIMCRUT is defined in Reg. §1.664-3(a)(1)(i)(b). Generally, Reg. §1.664(a)(1)(i)(b)(3) defines trust income as following IRC §643(b). Section 643(b) defines trust income as that "? determined under the terms of the governing instrument and applicable local law." As a further definition, Reg. §1.664-3(a)(1)(i)(b)(4) states that "? proceeds from the sale or exchange of any assets contributed to the trust by the donor must be allocated to principal and not to trust income at least to the extent of the fair market value of those assets on the date of contribution." Therefore, a NIMCRUT can provide that capital gains be included in income to the extent they exceed the fair market value of the assets on the date of contribution. Thus, if a NIMCRUT can no longer achieve its stated income distribution due to the nature of its current assets, and the trust terms do not provide flexibility, the individual donor's intentions have been frustrated.

    A trust can provide that it will "flip" to a regular CRUT, which pays the fixed percentage of the net fair market value annually, regardless of trust accounting income, but only if the document provides for this change. If the individual's hands are tied by the trust document, then an easier way to achieve an assured income stream may be to simply exchange the income interest for a charitable gift annuity.

    Continuing with the example above, those exchanges of CRT interests for CGAs do not look financially attractive from the donor's point of view (i.e., trading a payment of $6,000 for a $3,726 gift annuity). However, if the charitable remainder trust had been a NIMCRUT paying only $2,000 to 3,000 per year, the exchange would be more attractive. (Remember that a NIMCRUT only pays out "trust accounting income," and if that is only defined as interest and dividends, there won't be much of a payout these days).

    Dwindling Asset Base. Another possible reason to exchange a CRT interest is that an individual may have become frustrated by the depreciation of the value of the assets in the trust, either through market conditions or large annuity payments over time. As previously mentioned, there is a strong appeal to establishing charitable remainder trusts with low-basis stock that had significantly appreciated. However, if the stock market has significantly depreciated the value of these stocks inside the CRT, the administrative cost of having a separate trust entity may not be the most cost-effective way to manage these funds.

    If an individual established a CRAT, the trust may have gone bankrupt, resolving the problem. However, a CRUT may continue to exist despite a dwindling asset base. Another minor frustration can also be solved by the exchange. With the charity administering the gift annuity program, there is no separate trust entity with its own tax filing requirements and attendant administrative expenses (which can further reduce a net income unitrust's distributable net income). Conversely, the charitable gift annuitant must only wait to receive his or her 1099-R at the end of the tax year, instead of waiting for someone to prepare the charitable remainder trust tax returns and then provide him or her with a Schedule K-1.

    Ultimately, the individual must weigh the personal and financial benefits of exchanging his or her income interest from a charitable remainder trust for a charitable gift annuity. Considering the recent downturn in the economy, this ruling has particularly good timing. It certainly provides an opportunity to give donors a new source of funds from which they can make an immediate impact on a charity, a way to undo a trust that no longer meets the donor's goals, or a way to eliminate the cost or burden of administering the trust.

Practical Implications of the Ruling

The Edsel may well have been the best car ever manufactured by the Ford Motor Company. New Coke probably did taste better than the original version. It is entirely likely that Beta was a better video format than VHS. Unfortunately, for those who promoted these products, the marketplace did not agree.

Despite the technical superiority of these products, the court of public opinion ruled against them. Could it be the same for this ruling? Or is this ruling the planned giving answer to the old fast food question, "Where's the beef?"

From the Charity's Perspective. To liberally paraphrase Conrad Teitell in the beginning section of his Planned Giving: Starting, Marketing, Administering manual, "An outright gift should be the point of departure in any charitable gift discussion. If the outright gift is not feasible, then read this manual to learn how to secure a planned gift!"

Currently consumable cash is almost always preferable to a planned, deferred gift from the charitable organization's perspective. Charitable organizations exist to meet societal needs which are unfulfilled by the government or private sector. Those needs do not wait for a planned gift to mature. This is why many smaller and less mature charitable organizations have a difficult time embracing planned giving.

An oft-expressed frustration of many nonprofit planned giving officers is that organizational leadership places them off in the corner and views planned giving work as important, but not vital, to fulfilling the core mission of the organization. This ruling has the potential of increasing the viability of a planned giving program to the day-to-day activities of an organization.

What would a charitable organization do with the cash generated by this transaction? The flippant answer is, "Well, just about anything it wants to." The considered answer, however, is that this technique is best employed in three situations:

  1. Capital. To cover the construction costs of new or renovated physical facilities. Nearly all charitable organizations must generate philanthropic dollars to pay for expansions to their physical plants. Planned gifts traditionally have not been a source of such gifts (Is there a contractor in America who would take a bequest expectancy or charitable remainder interest in lieu of a check?). This technique unlocks a previously untapped source of capital funds.

  2. New Programs. Charitable organizations are constantly adapting to meet the changing needs and challenges of society. These adaptations often take the form of new programs or services. Unfortunately, these new programs rarely replace important, existing programs. This results in the stretching of already-thin budgets (as well as the nerves of non-profit executives) to the breaking point. This technique can help alleviate this dilemma.

  3. Research. It seems as if scientists today are on the cusp of multitudinal breakthroughs on a variety of frontiers. Such research is often quite expensive. This technique can provide a source of funds to support such vital research.


There are many other uses to which the current funds generated through this ruling might be utilized, such as scholarships, endowed chairs and program funds. However, these uses, while important, do not provide as compelling a reason for a donor to go through the effort and expense required to implement the technique in this ruling.

An additional benefit to charitable organizations is that this ruling creates an irrevocable gift from one that was likely to be revocable. The National Committee on Planned Giving's study, Planned Giving in the United States 2000: A Survey of Donors, found that the donors of 69% of all charitable remainder trusts reserve the right to alter the charitable remainder beneficiary. A charitable gift annuity is, by definition, an irrevocable gift to the annuity-issuing organization. Therefore, a donor who converts his/her CRUT income interest into a charitable gift annuity is likely to have converted a revocable gift into an irrevocable gift.

From the Donor's Perspective. A pitfall of a planned gift (perhaps the only pitfall) is that in the case of remainder gifts, the donor is not alive to experience his/her philanthropy in action. While the donor receives many tax and financial benefits from a planned gift, it is, in the final analysis, a GIFT.

Nearly every planned giving officer has worked on a number of outright gifts; as such gifts are often the natural result of a thorough gift planning process. Observing the joy of a donor meeting a scholarship recipient, dining with the new holder of the donor's endowed chair or watching a child who now walks because of his/her philanthropy is a powerful experience.

The vicarious thrill of such experiences is a major benefit of a planned giving officer's job. The inverse of this is the knowledge that not all planned giving donors will experience this high. One of the hidden benefits of this ruling is that planned giving donors will now be able to receive the psychic benefits of an outright gift while not relinquishing all of the income and financial benefits of their original deferred gift.

Most philanthropically inclined individuals support more than one charitable organization. This ruling could quite possibly facilitate a donor's support of multiple organizations. It does not appear as if this ruling requires the charitable organization issuing the gift annuity be identical to the charitable remainder beneficiary of the original CRT. Therefore, a donor could transfer his/her CRT income interest to a second charity in exchange for a charitable gift annuity. The net effect, then, would be a current gift to the original CRT remainderman, and a new planned gift to another charity. If this avenue is under consideration, more legal work will be required, since the assets of the CRT will need to be split between two charities rather than the income and remainder interests simply merging.

As a corollary, such an arrangement would allow a donor to "unlock" a previously irrevocable charitable remainder beneficiary designation. This would be ideal for a donor who becomes disenchanted with the direction of a charitable organization after naming that organization irrevocably in a CRT and wishes to support a charity that better meets his/her current interests. Additionally, if the irrevocably named charitable remainderman also serves as trustee of the CRT, this technique may require some advanced negotiating skills!

It is interesting to note that this ruling has the potential to be used to both lock in an irrevocable gift for a charity with a previously revocable interest and unlock a donor from a previously irrevocable charitable designation.

Clues to Watch For

As planned giving officers and other donor advisors contemplate how to best implement this technique, here are a few situations where such an arrangement might be beneficial:

Donor's Changed Economic Circumstances. Many donors establish CRT's, rather than making an outright gift, "just in case" they need the income. After several years, these donors often find that they do not need some or all of the income from the CRT. This ruling allows these donors to reap additional tax and psychic benefits while still holding on to some of the income, "just in case."

Old CRUT, Older Donors. Assume that a couple, both 80, established a 5% CRUT twenty years ago. The recommended gift annuity rate from the American Council on Gift Annuities for an 80-year-old couple is 7.7%. This couple could make a substantial current gift, receive a current income tax deduction and not lower their annual income substantially due to the rate difference. If the technique discussed earlier regarding utilizing a rate higher than the recommended rate can be utilized, the couple's income need not decline at all!

You are Now Like Family to Me. Many donors undergo the metamorphosis from being a supporter to becoming engrained in the fabric of a charitable organization after naming the charity as a CRT beneficiary. Such donors are likely to welcome an opportunity to provide a current gift from their CRT.

Donor as Trustee of the CRT. According to NCPG's Planned Giving 2000: A Survey of Donors, the donor serves as trustee in 38% of charitable remainder trusts. While this often works well in the beginning, this arrangement may not be so advantageous over time. Decreased mental acuity as the donor/trustee ages, the death of a co-trustee spouse, and the donor/trustee both tiring of and becoming sloppy in complying with the numerous duties of a trustee are all valid reasons for exploring this Letter Ruling with such donors/trustees.

Overfunded CRAT. If a charitable remainder annuity trust is now funded significantly in excess of the funds needed to support the annuity, those funds are "locked up" until the end of the CRAT term. The payment is fixed, so the annuitants do not benefit from the increased trust principal. This exchange could greatly benefit the institution without a major financial detriment to the donors.

"Don't Try This At Home"

While this ruling provides a wonderful new tool for the charitable gift planner, there are several caveats that must be considered:

One Size Does Not Fit All. This ruling should not become the latest "technique to be sold," a la charitable reverse split dollar insurance. The applications of this ruling, while intriguing, will not meet the needs of every donor.

Don't Jump Start a Gift Annuity Program. If a charity does not have an existing gift annuity program, it would be ill-advised to issue its initial gift annuity in the scenario presented in this ruling. The ruling states that the charity is not using the "specific property received?from Trust" to pay the annuity and that the charity is using its general funds to pay the annuity. Most charitable organizations that issue charitable gift annuities have ample reserves to back them up. Some states have stringent reserve requirements in this regard.

Multiple Charitable Beneficiaries in the CRT. Many CRT's name more than one charitable remainder beneficiary. One unanswered question in this ruling is whether a donor could carve out only a portion of the income interest in exchange for a gift annuity from only one of the named charitable remainder beneficiaries.

Isn't There a Simpler Way? Another question left unanswered by this ruling is why the donor did not merely relinquish an undivided interest in the CRUT to the charitable remainder beneficiary. This is a relatively simple technique that accomplishes the same charitable result. Assuming the desired financial and tax results could be achieved, this simple technique should be considered first.

The excitement generated by this ruling within the planned giving community is well placed. However, this enthusiasm must be tempered. This ruling is but another tool in the charitable gift planner's tool box. Like a left-handed wrench, it needs to be used in only a limited set of circumstances. Yet, when it is needed, it will be irreplaceable and will work like a charm.



  1. IRC §170(f)(2)(A) and §2522(c)(2)(A)back

  2. McAllister v. Commissioner, 157 F.2d 235 (2d Cir. 1946), cert. denied, 330 U.S. 826 (1947); Rev. Rul. 72-243, 1972-1 C.B. 233.back

  3. See John T. Hewitt and Linda Hewitt v CIR 98-2 USTC 50,880 ( aff'd 4th Cir. 98-1386)back

  4. Reg. §1.1011-2(c), Example 8.back

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