Nonreversionary Grantor CLT Approved

Nonreversionary Grantor CLT Approved

News story posted in Letter Rulings on 25 August 1992| comments
audience: National Publication | last updated: 18 May 2011
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Summary

The Service has ruled privately that an inter vivos nonreversionary charitable lead unitrust will be treated as owned by the grantor under section 671 due to the presence of an intentional drafting defect that enables a specified individual to acquire any property in the trust by substituting other property of equivalent value. That right is excercisable in a nonfiduciary capacity without approval or consent of any person acting in a fiduciary capacity. The grantor will be entitled to a gift tax and income tax charitable deduction for the present value of the income interest payable to charity at the time the trust is created. Furthermore, the trust will not be includable in the grantor's estate.
Ltr. Rul. 9247024

Full Text:

UIL Number(s) 0671.00-00, 0170.12-02, 2522.02-04

Date: August 24, 1992

Refer Reply to: CC:P&SI:3 TR-31-1002-92

Dear * * *

This is in response to a letter dated May 21, 1992, submitted by your authorized representative, requesting rulings on the establishment of a charitable lead unitrust. Specifically, the rulings requested are: (1) the Grantor will be treated as the owner of the entire Trust for purposes of section 671 of the Internal Revenue Code; (2) the Trust will qualify as a charitable lead unitrust for purposes of the income tax and gift tax charitable deductions under sections 170(f)(2)(B) and 2522(c)(2)(B); (3) the Grantor will be entitled to deduct, for federal income tax purposes, the value of the unitrust interest under section 170(f)(2); and (4) no portion of the Trust's assets will be includible, for federal estate tax purposes, in the gross estate of the Grantor.

The Trust is intended to qualify as a charitable lead unitrust under sections 170(f)(2)(B) and 2522(c)(2)(B) of the Code. The governing instrument provides that, in each taxable year of the Trust, the Trustee will pay to C a unitrust amount equal to six percent of the net fair market value of the Trust's assets, valued as of the first day of each taxable year. The Grantor's Sons are the trustees of C. If, at any time during the term of the Trust, C is not an organization described in sections 170(c), 2055(a), and 2522(a), the Trustee will distribute the unitrust amount to a qualifying charitable organization selected by the Grantor's Sons, who have been designated as Trustees of the Trust for this purpose. The governing instrument provides that the interest of the charitable organization shall not be subject to commutation. During the term of the Trust, no payment may be made to any person other than C or the alternate charitable organization.

During the term of the Trust, the governing instrument provides that A shall have the right at any time to acquire any property held in the Trust by substituting other property of equivalent value. Such right is exercisable in a non-fiduciary capacity, without the approval or consent of any person acting in a fiduciary capacity. It has been represented that A is not a trustee of the Trust or of C and is not an adverse party within the meaning of section 672(a) of the Code.

If A exercises the power of substitution, the governing instrument provides that A shall certify in writing that the substituted property is of equivalent value to the property for which it is substituted and the Trustee may independently verify such certification of value. Any dispute regarding the value of the substituted assets may be resolved in an appropriate judicial forum.

The governing instrument provides that the Trust will terminate 10 years from the date its is created. Upon termination, the remainder interest will be transferred to the Grantor's Sons in equal shares, or to each of the Sons' respective issue if he is not surviving, or to his sibling if he has no issue surviving.

ISSUE 1

Section 671 of the Code provides the general rule that if the grantor is treated as the owner of any portion of a trust, his taxable income and credits shall include those items of income, deduction, and credits against tax of the trust that are attributable to that portion of the trust to the extent that such items would be taken into account in computing the taxable income or credits against tax of an individual.

Section 1.671-3(b) of the Income Tax Regulations provides that if a grantor is treated as the owner of a portion of a trust, that portion may or may not include both ordinary income and other income allocable to corpus. Section 1.671-3(b)(3) provides that if the grantor is treated as an owner under section 675 of the Code because of a power over corpus, then the grantor includes both ordinary and other income allocable to corpus in the portion he is treated as owning.

Section 675(4) of the Code provides that the grantor shall be treated as the owner of any portion of a trust in respect of which a power of administration is exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity. For purposes of section 675(4), the term "power of administration" includes a power to reacquire the trust corpus by substituting other property of an equivalent value.

Section 1.675-1(a) of the regulations provides that the grantor is treated as the owner of any portion of a trust if, under the terms of the trust instrument or circumstances attendant on its operation, administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiaries of the trust. Section 1.674-1(b) provides that circumstances that cause administrative controls to be considered exercisable primarily for the benefit of the grantor include the existence of certain powers of administration exercisable in a nonfiduciary capacity by any nonadverse party without the approval or consent of any person in a fiduciary capacity. Such a power of administration includes a power to reacquire the trust corpus by substituting other property of an equivalent value.

The governing instrument gives A the power, without the consent or approval of any person in a fiduciary capacity, to acquire the Trust's assets by substituting assets of equivalent value. Thus, based on the information submitted and the representations made, we conclude that the Grantor will be treated as the owner of the entire Trust under section 675 of the Code. Accordingly, all items of income, deductions, and credits against tax of the Trust must be taken into account in computing the Grantor's income under section 671.

ISSUE 2

Section 170(f)(2)(B) of the Code provides that no charitable contribution deduction is allowed for the value of any interest in property (other than a remainder interest) transferred in trust unless the interest is in the form of a guaranteed annuity or the trust instrument specifies that the interest is a fixed percentage distributed yearly of the fair market value of the trust property (to be determined yearly) and the grantor is treated as the owner of the interest for purposes of applying section 671.

Section 1.170A-6(c)(2)(ii)(A) of the regulations provides that an income interest is a "unitrust interest" only if it is an irrevocable right pursuant to the governing instrument of the trust to receive payment, not less often than annually, of a fixed percentage of the net fair market value of the trust assets, determined annually.

With exceptions not relevant here, section 1.170A-6(c)(2)(ii)(D) of the regulations provides that an income interest in the form of a unitrust interest will not be considered a unitrust interest if any amount other than an amount in payment of a unitrust interest may be paid by the trust for a private purpose before the expiration of all the income interests for a charitable purpose.

Section 2522(a) of the Code provides generally that a gift tax charitable deduction is allowable in the case of a gift to a trust provided the gift is to be used exclusively for the purposes enumerated in section 2522(a)(2).

Under section 2522(c)(2)(B) of the Code, where an interest in property (other than an interest described in section 170(f)(3)(B)) passes or has passed from a donor to a person, or for a use, described in section 2522(a) or (b), and an interest in the same property is retained by the donor or is transferred or has been transferred (for less than an adequate and full consideration in money or money's worth) from a donor to a person, or for a use, not described in section 2522(a) or (b), no deduction shall be allowed for the interest which is, or has been transferred to the person, or for the use, described in section 2522(a) or (b) unless, in the case of any interest other than a remainder interest, such interest is in the form of a guaranteed annuity or is a fixed percentage distributed yearly of the fair market value of the property (to be determined yearly).

The governing instrument specifies that the interest to be paid annually to the charitable organization is a fixed percentage of the fair market value of the Trust property determined as of the first day of each taxable year of the Trust. The terms of the governing instrument prohibit the Trustee from making any unitrust payments to an organization that is not described in sections 170(c), 2055(a), and 2522(a) of the Code. Thus, a charitable organization has an irrevocable right to receive the unitrust payments. In addition, no other payments are permitted from the Trust during its term.

Because the Grantor is treated as the owner of the entire Trust for purposes of applying section 671 of the Code, we conclude that the Trust qualifies under section 170(f)(2)(B) as a charitable lead unitrust. In addition, because the unitrust interest comes within the meaning of section 2522(c)(2)(B), the fact that the interest is a split interest will not result in the disallowance of the gift tax charitable deduction. Therefore, a deduction under section 2522(a) will be allowed in an amount equal to the present value of the unitrust interest valued as of the date of the transfer of the property to the Trust.

ISSUE 3

Section 1.170A-6(c)(3)(ii) of the regulations provides that the deduction allowed under section 170(f)(2)(B) of the Code for a charitable contribution of a unitrust interest is limited to the fair market value of the unitrust interest on the date of contribution. The fair market value of the unitrust interest is determined by subtracting the present val[u]e of all interests in the transferred property other than the unitrust interest from the value market value of the transferred property.

Because the Trust qualifies under section 170(f)(2)(B) of the Code as a charitable lead unitrust, the Grantor will be able to deduct for federal income tax purposes the fair market value of the unitrust interest on the date of the contribution, subject to the applicable limitations of section 170.

ISSUE 4

Section 2033 of the Code provides that the value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.

Under section 2035(a) and (d)(2) of the Code, the value of the gross estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer during the 3-year period ending on the date of the decedent's death if such interest would have been included under sections 2036, 2037, 2038, or 2042 if such interest had been retained by the decedent.

Section 2036(a) of the Code provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in the case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which dos not in fact end before his death -- (1) the possession or enjoyment of, or the right to income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

Rev. Rul. 72-522, 1972-2 C.B. 525, holds that the value of inter vivos transfers to a charitable corporation is includible in the estate of the donor under section 2036 of the Code where the donor, as president of the corporation at the time of and subsequent to the transfers, retained power over the disposition of its funds.

Section 2037(a) of the Code provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in the case of a bona fide sale for full and adequate consideration in money or money's worth), by trust or otherwise if -- (1) possession or enjoyment of the property can, through ownership of such interest, be obtained only by surviving the decedent, and (2) the decedent has retained a reversionary interest in the property, and the value of such reversionary interest immediately before the death of the decedent exceeds five percent of the value of such property.

Section 2038(a)(1) of the Code provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in the case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person to alter, amend, revoke, or terminate, or when any such power is relinquished during the 3-year period ending on the date of the decedent's death.

Section 2041(a)(2) of the Code provides in relevant part that the value of the gross estate shall include the value of all property with respect to which the decedent has at the time of his death a general power of appointment created after October 21, 1942, or with respect to which the decedent has at any time exercised or released such power of appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent, such property would be includible in the decedent's gross estate under sections 2035 to 2038, inclusive.

Section 2041(b)(1)(A) of the Code defines the term "general power of appointment" to mean a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate; except that a power to consume, invade or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent shall not be deemed a general power of appointment.

Section 2042 of the Code provides generally that the value of the gross estate shall include all amounts receivable as insurance on the life of the decedent.

The Grantor will not retain an interest in any of the property transferred to the Trust. In addition, the Grantor will not retain the right to designate the persons who will enjoy any of the Trust income because under the governing instrument, the Grantor's Sons will choose the alternate charitable recipient if C is not qualified. Rev. Rul. 72-552 is distinguishable from the instant case because here the Grantor is not a trustee of C prior to the formation of the Trust. Therefore, assuming that at no time in the future will Grantor occupy a position from which he can designate, either alone or in conjunction with any other person, the persons who shall possess any of the C's funds or enjoy any of the income therefrom, no part of the Trust property will be includible in his gross estate under section 2036 of the Code. In addition, we conclude that no part of the Trust property will be includible in the Grantor's estate under section 2033, 2035, 2037, 2038, 2041, or 2042 of the Code.

Section 5.03 of Rev. Proc. 92-1, 1992-1 I.R.B. 9, provides that the estate tax rulings are based on the facts and applicable law in effect on the date of this letter. If there is a change in material fact or law (local or federal) before the death of the Grantor, the estate tax rulings will have no force or effect. If the Grantor is in doubt whether there has been a change in material fact or law, a request for reconsideration of this ruling should be submitted.

Except as specifically ruled on above, we express no opinion about the federal tax consequences of any aspect of the above- described transaction. This ruling is directed only to the taxpayer who requested it. Under section 6110(j)(3) of the Code, this ruling may not be cited or used as precedent.

A copy of this letter should be attached to the Grantor's federal income tax return and gift tax return filed for the year in which the Trust is created. Copies are enclosed for that purpose.

In accordance with the power of attorney submitted, we are sending a copy of this letter to your authorized representative.

                                   Sincerely yours,

                                   Frances D. Schafer
                                   Senior Technician Reviewer
                                   Branch 3
                                   Office of Assistant
                                     Chief Counsel
                                   (Passthroughs and Special
                                     Industries)

Enclosures (3)
  Two copies of this letter
  Copy for section 6110 purposes

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