Public Suggestions For Sample CRT Forms

Public Suggestions For Sample CRT Forms

News story posted in IRS Notices on 21 December 2000| comments
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Summary

Several individuals and organizations have responded to Notice 2000-37, in which the IRS invited public suggestions for updating the sample charitable remainder trust forms previously published by the IRS.

PGDC SUMMARY:

Several individuals and organizations have responded to Notice 2000-37, in which the IRS invited public suggestions for updating the sample charitable remainder trust forms previously published by the IRS.

FULL TEXT:

Grigsby Cynthia
________________

From: Horn Sharon Y
Sent: Monday, December 04, 2000 5:09 AM
To: Solomon Louis M
Cc: Grigsby Cynthia
Subject:FW: CB-NOTICE 2000-37 COMMENTS

FYI

---- Original Message ----

From: Turner, James [mailto:James.Tumer@national-city.com]
Sent: Friday, December 01, 2000 5:11 PM
To: 'sharon.y.horn@Ml.IRSCounsel.treas.gov'
Subject: CB-NOTICE 2000-37 COMMENTS

Dear Ms. Horn:

I am writing in my individual capacity to provide comments to the Cumulative Bulletin Notice 2000-37 dated July 17, 2000 regarding updates to the charitable remainder annuity and unitrust sample forms and provisions previously published by the Service.

I strongly believe that the forms need to be updated to reflect current law and numerous options which are available to the drafter of the applicable charitable trusts.

Failure to Cite or Error in Governing Revenue Ruling Not Fatal

First, while the citation to the governing Revenue Ruling under which a trust is formed is very helpful and it is good practice to provide such citation, failure to cite (or perhaps worse, an error in citation) should not result in a disqualification of the trust and should be optional provided the terms of the trust result in the operation of a trust otherwise qualifying as a charitable trust.

Borrowing upon ideas and suggestions expressed on this very topic in Drafting Inter Vivos Charitable Remainder Unitrusts Beyond the "Nuts and Bolts" by Steven R. Bone, J.D., CLU (1996, Renaissance, Inc.) option provisions could address the following:

Clauses that Fine-Tune the Basic Prototypes.

  1. Permit inter vivos and testamentary contributions from anyone.

  2. Choice of applicable state law clarifying choice of law for multi-state third-party administrators.

  3. Incompetency provisions to permit the trustee to apply payments in various ways for the use of the disabled or incompetent income beneficiaries, and also provide procedures for dealing with individual trustees who become incompetent while serving as trustee.

  4. Spendthrift/anti-alienation provisions (effect will depend upon state law, but should be especially helpful where the trust is established for the benefit of another.

  5. Limit private foundation restrictions.


Clauses Affecting Charitable Beneficiaries

  1. Limitations on Definition of Qualified Charity and require that all charities qualify under Section 170(b)(1)(A) and 170(c) of the Code.

  2. The right to amend charitable remainder beneficiary designations. This option is very important and can easily be overlooked; practitioners using the current IRS forms could mistakenly believe that no such option exists.

  3. Trustee's power to invade principal for the benefit of the charitable remaindermen.

  4. Trustee's power to guarantee loans to charitable remaindermen (PLR 8823057).


Clauses Affecting Non-Charitable Income Beneficiaries

  1. Right to revoke an income interest by will.

  2. Qualified Contingencies, permitting an income interest in a qualified CRT to terminate upon the happening of a qualified contingency (i.e., divorce, remarriage).

  3. Income sprinkling and spraying powers between or among income recipients.

  4. "Lives with Term Certain" trust durations.


Optional Clauses Affecting Trusteeship

  1. Right to remove and replace the trustee.

  2. Independent Special Trustee clauses also integrating with the Qualified Appraisal/Qualified Appraiser provisions.

  3. Right to appoint ancillary trustees or administrative agents in other jurisdictions.

  4. Limited Right to Amend clause specifically stating the right to amend the trust to bring it into compliance pursuant to IRC Section 664.

  5. Exclude trustee power lend money to the grantor's estate or to pay grantors estate taxes or expenses.

  6. Add trustee powers regarding:

    a. Exoneration from certain breaches of the duty of loyalty.

    b. Removal of limitations on annuity/life insurance investments.

    c. Prudent investor or prudent man rule inapplicable on an asset-by-asset basis (modern portfolio theory).

    d. Environmental liability protection powers.



When I was in private practice, I reviewed the sample forms of Renaissance, Inc. in Carmel, Indiana and believe that the incorporate numerous terms which are commented on above. If comments to this Notice 2000-37 from individuals, such as Mr. Bone of Renaissance, are consistent with past materials I have reviewed, and pursuant to the recommended drafting language contained in Mr. Bone's article cited above, I strongly suggest that such comments and proposed drafting language be considered in any revised CRT forms.

Thank you for soliciting comments on this topic. It has needed to be addressed for many years, and with the significant increase in individuals wishing to utilizing the CRT vehicle, this revision project will be helpful to donors, charities and practitioners alike.

James Wm. Turner, Jr.
Individually and not as an
employee of National City
Corporation

101 South Fifth Street,
4th Floor
Louisville, Kentucky 40202

502-581-5404

FULL TEXT:

November 28, 2000

Internal Revenue Service
Attn: CC:DOM:CORP:R (Notice 2000-37, Room 5226)
P.O. Box 7604, Ben Franklin Station
Washington, DC 20044

Re: Comments Concerning Specimen Remainder Trusts

Ladies and Gentlemen:

In Notice 2000-37, you invited suggestions from the public for updating charitable remainder trust ("CRT") sample forms. Before accepting your invitation, we want to commend the Service on its proposal to make this effort. The sample forms that were published in 1989 and 1990, we are convinced, saved the Service considerable amount of time and effort, as well as taxpayers, and gave taxpayers and their advisors needed guidance, thereby enhancing everyone's confidence in the tax system. Further, we agree that the sample forms do need to be updated, and we applaud your suggestion that it may be possible to incorporate principles which have been established in subsequent rulings and other legal developments in order to provide a set of documents which will be as comprehensive and complete as reasonably possible.

In some of our comments, below, we will refer to suggestions which have been recommended to us by others, most notably by Conrad Teitell of The Counsel for Advancement and Support of Education ("CASE"). As you will see, we agree with some of the CASE suggestions, and disagree with others. We wish to acknowledge that the CASE suggestions provided a very useful dialog and have been most helpful to us in preparing this letter.

For the most part, the areas in which we disagree with CASE have to do with its suggestion that warnings be given to taxpayers, as a part of or ancillary to new sample forms, concerning peripheral tax and nontax issues. For example, CASE suggested that the new forms should alert donors about the gift tax implications of various kinds of transfers to CRTs, and should warn taxpayers concerning the gift and estate tax marital deductions which may or may not be available if the CRT contains certain provisions. But the same gift principles apply whether a taxpayer is making a transfer to a CRT or to a non charitable trust or to other persons or entities. Where an issue is not unique to CRTs, we do not believe that you should be burdened with the task of trying to foresee all errors that draftsmen might make. Sample CRT forms are not, in our opinion, the place for the IRS to warn taxpayers about the gift tax effects of transfers. The gift tax Regulations is the proper place for that, and the gift tax Regs. do that pretty well, in much broader terms than you can in connection with a CRT form.

In addition, CASE has suggested that you try to list the alternatives which may be available under state law concerning issues that have no federal tax implications. For example, CASE would have you state the available alternatives regarding the manner in which a unitrust amount or annuity amount is to be allocated as between the first beneficiary, who has died during the year, and the successor beneficiary. Again, such an issue has no federal tax implications, and we do not agree that you should be expected to list all of the possible alternatives. However, it may well be helpful for you to bring to a draftsman's attention the fact that such an issue does exist, perhaps by footnote.

CASE suggests that you alert taxpayers, perhaps by footnote or annotation, concerning the differences in the amount and limitations on charitable deductions where the charitable remainderman is or may be a private foundation as opposed to a public charity. We agree that where the sample forms refer only to Section 170(c) in describing the remainder organization, a taxpayer who is not wide awake might fall asleep in the silence. Therefore, we would encourage you to mention in some fashion that if the taxpayer wants to assure the higher deduction limits, the remainder organization should be restricted to Section 170(b)(1)(A) organizations. This comment applies with respect to alternate remaindermen in the event that the primary remainderman does not qualify, as well as with respect to alternate remaindermen where the donor has retained the right to add or substitute remaindermen.

One issue which begs guidance from your office has to do with the deferral of the payment of the unitrust amount in the case of a testamentary addition to an inter vivos CRUT. We are hopeful that the new sample forms will not ignore this issue, as the earlier forms did, and that they will not merely footnote the existence of the issue. Rather, we encourage you to develop suggested language. If we can help with this, please give us a call.

CASE suggests that Rev. Rul. 77-374, 1977-2 CB 329, be withdrawn because it was never justified. To the contrary, we believe that ruling WAS justified at the time. However, now that we have a ten percent minimum remainder value test, much of the reasoning behind Rev. Rul. 77-374 is obsolete, and the existence of that Ruling merely constitutes a trap for the unwary. Therefore, we believe that Ruling should be revoked or withdrawn, or if not, at least it should be footnoted.

CASE has advocated that a sample form be provided for an "increasing payment charitable remainder annuity trust" ("IP-CRAT"). We take that suggestion with a grain of salt, and suggest that you do the same. We believe that the language of Code section 664 itself, stating that "a sum certain . . . is to be paid not less often than annually," is clear enough to preclude an IP-CRAT. Besides, it would appear that IP-CRATs would present a valuation nightmare.

We suggest that the new sample forms be published as "proposed" before being put into final form. Additional public comment on the proposed sample forms surely would not be harmful to the effort, and could be extremely helpful. Again, thank you for making this effort and for the opportunity you have given us to express our views.

Sincerely,

Jack D. Flesher
Bever & Dye
Wichita, Kansas

FULL TEXT:

November 22, 2000

Internal Revenue Service
Attn: CC:DOM:CORP:R (Notice 2000-37, Room 5226)
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Dear Internal Revenue Service Staff:

Notice 2000-37 requests input from practitioners on the forthcoming charitable remainder unitrust documents. Since the prior specimen documents now are ten years old, the Service is to be commended for updating charitable trust documents. This step is particularly important in light of the changing investment strategies for trustees of both charitable and noncharitable trusts.

When I first entered the charitable trust field in 1980, most unitrusts were invested in bonds, with a small portion in stocks. The typical portfolio balance was 70% bonds, 10% cash and 20% stocks. As trustees began to recognize the importance of "Total Return" portfolios, the investment balance has changed. Many trusts now are invested 60% or 70% in stocks, with the balance in bonds or other fixed return securities.

In recognition of this economic reality, the National Conference of Commissioners on Uniform Laws has recommended an updated Uniform Principal and Income Act. The new UPIA has been adopted in fourteen states and has been introduced in ten other states. It recognizes trustee preference for total return portfolios and provides in the statute for trustee discretion to allocate realized capital gain to income recipients.

Since trust income historically was produced through bonds, income traditionally had been synonymous with "ordinary" return as opposed to "capital gain" return. However, the economic picture has changed with the growth of the stock market during these past twenty years. Thus, in many state UPIA statutes, income is now defined as a combination of ordinary return and that portion of recognized capital gains allocated by the trustee to distributable income.

Under Reg. Sec. 1.643(b)-1, income may be defined under a trust's "governing instrument and applicable local law." It is permissible under The Uniform Principal and Income Act for a trustee to be given the power to allocate recognized capital gain to income. However, this allocation power must not be a provision "which departs fundamentally from concepts from local law in the determination of what constitutes income."

Given the rapid acceptance nationwide of the updated UPIA in which trustees of income rule trusts now are permitted by statute to allocate recognized capital gains to income, this allocation power is clearly not a fundamental departure from local law. Indeed, it is rapidly becoming a standard power in both charitable and noncharitable trust documents.

Therefore, the forthcoming specimen unitrust provisions should include an option for the trustee to use discretion in a net plus makeup unitrust to allocate post-gift recognized capital gain to distributable unitrust income. The following language could be included:

"UNDER SECTION 643(b) AND STATE LAW, THE TRUSTEE SHALL HAVE DISCRETION TO ALLOCATE REALIZED CAPITAL GAINS FROM POST-GIFT APPRECIATION TO PRINCIPAL OR TO INCOME DISTRIBUTABLE AS UNITRUST AMOUNTS."

The UPIA recognizes that this allocation power could be inappropriate for a trustee with a conflict of interest. Thus, the power to allocate is generally excluded from trustee powers if the trustee is a beneficiary of the trust.

Since it is permissible in some circumstances for a donor to serve as trustee of a unitrust, it also then is appropriate for an independent special trustee (IST) to exercise discretion with respect to allocation of capital gain. Therefore, the forthcoming unitrust documents should also include a standard provision that permits appointment of an IST for allocations of capital gain to income or to principal.

Thank you for consideration of this request for a provision that enables the trustee to allocate post-gift gain to income or to principal.

Cordially yours,

A. Charles Schultz, JD
President
Crescendo Interactive
Camarillo, California

FULL TEXT:

November 29, 2000

Internal Revenue Service
Attn: CC:DOM:CORP:R (Notice 2000-37, Room 5226)
1111 Constitution Ave., N.W.
Washington, DC 20224

Re: Response of the American College of Trust and Estate Counsel Notice 2000-37

Dear Sir or Madam:

I am the President of the American College of Trust and Estate Counsel ("College"). The College is a professional association consisting of approximately 2,700 lawyers from throughout the United States. Fellows of the College are elected to membership by their peers on the basis of professional reputation and ability in the fields of trusts and estates and on the basis of having made substantial contributions to these fields through lecturing, writing, teaching and bar activities.

One of the missions of the College is to use the technical expertise of its members for the purpose of analyzing and commenting about the law as it pertains to estates and trusts. The policy of the College is to refrain from making comments which are political in nature. Pursuant to this mission, this submission constitutes the response of the College to your request published in Notice 2000-37 for public comment concerning possible revisions to the sample charitable remainder trust forms and provisions, including comments on the format that would be most useful.

BACKGROUND

Charitable remainder trusts are a popular and visible means by which donors can make deferred charitable gifts, obtain current tax deductions, and retain economic benefits. Conceptually, charitable remainder trusts are relatively simple. They must be valid irrevocable trusts, provide for payment at least annually of a specified amount to a noncharitable beneficiary during the beneficiary's lifetime or for a term of twenty years or less, and require that after expiration of all noncharitable interests the remainder will pass to or for the benefit of a qualified charitable organization.

Structurally and operationally, however, charitable remainder trusts are considerably more complex. A structural omission or defect, or an operational mistake, can disqualify the trust, with costly results. Although anticipated tax advantages may be salvaged by a qualified reformation pursuant to sections 170(f)(7), 2055(e)(3) and 2522(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code"), or through amendment authority under state law, risk adverse practitioners reluctant to jeopardize a client's investment historically have sought the comfort and shelter of private letter rulings for even the most orthodox trusts.

REVENUE RULING 72-395

To insure a closer correlation between the amount of the charitable deduction and the actuarial value of the interest ultimately passing to charity, the Tax Reform Act of 1969 created section 664 of the Code which restricts tax qualified charitable remainder trusts to statutorily defined and technically complex annuity trust and unitrust formats. Several years later, the Internal Revenue Service provided Rev. Rul. 72-395 as a guide through the new statutory maze. Despite its commendable purpose, Rev. Rul. 72-395, as modified by later rulings, and its array of various trust provisions, left a number of questions unresolved.

THE SAMPLE "SAFE HARBOR" FORMS

In order to stem the deluge of letter ruling requests stimulated by Rev. Rul. 72-395, in 1989 and 1990 the Service published a series of Revenue Procedures containing eighteen sample forms for various types of remainder trusts, with the express assurance that if a trust contains provisions "substantially similar" to those in one of the samples, "the Service will recognize the trust as satisfying all of the applicable requirements" of the Code and the corresponding regulations. Simultaneously with the publication of the 1989 and 1990 Revenue Procedures, the Service announced it ordinarily would no longer issue rulings concerning the qualification of trusts which substantially comply with the sample forms. Rev. Procs. 89-19 and 90-33. See also Rev. Proc. 2000-3, Section 4.

The 1989 and 1990 Procedures presented a sharp substantive contrast to the format provided in Rev. Rul. 72-395, which included mandatory and optional sample trust provisions, annotated discussions of alternatives, explanations referencing relevant Code and regulation sections and cautionary notes, but which was not organized in a sample trust format and, consequently, did not expressly provide a qualification "safe harbor."

Although the sample trust forms provide qualification safe harbors, they do so at the cost of an inflexible minimalist framework. They do not purport to guaranty any particular tax result, other than qualification as a charitable remainder trust, and are not designed to promote individualized planning flexibility or to maximize tax or other economic benefits to the noncharitable beneficiary. The forms provided in the 1989 and 1990 Revenue Procedures not only provide no explanatory notes or optional provisions, but also arguably deter the use of alternative provisions by providing that substantial variance from the published forms will sacrifice safe harbor protection. For many practitioners, at best the sample forms have provided a convenient checklist of mandatory qualification provisions.

RECOMMENDATIONS

The new rules established during the last ten years following publication of the sample forms have significantly complicated the structure and administration of charitable remainder trusts. As a result, the sample "safe harbor" forms provided by the Service in the 1989 and 1990 Revenue Procedures, which always were narrowly utilitarian at best, in many respects now are hopelessly obsolete and pose a danger to persons who rely on their "safe harbor" representations.

It is thus appropriate at this time for the Service not only to issue revised sample charitable remainder trust provisions which reflect the recent substantive changes to certain governing instrument requirements, but also, because the operational rules for certain remainder trusts have become increasingly intricate, to revise substantially the format in which the forms are presented.

The following recommendations are designed to effect a workable and evolving format of continuing utility to practitioners.

Change of format. The revised format should be presented in a comprehensive new Revenue Procedure which combines recent developments and the best attributes of Rev. Rul. 72-395. The new Procedure should include (i) mandatory, alternative and optional sample trust provisions; (ii) detailed annotations explaining factors relevant to selecting among relevant alternative trust provisions; (iii) pertinent discussions of salient operational rules; and (iv) citations to relevant authorities.

Such a conceptual restructuring will necessarily require a substantial and complex Revenue Procedure, the initial drafting of which would be laborious and time consuming. Additionally, the Procedure should be reviewed and reissued with updates, if applicable, annually. Despite the intimidating prospect of drafting and regularly updating the initial Procedure, the end result of providing an "atlas" for practitioners should justify the means.

Although this conceptual renovation initially may seem overly complex, after suitable alternative mandatory and optional sample trust provisions are drafted, and appropriate but succinct discussions, explanations and references are developed, the annual maintenance of the new format should be no more onerous than that associated with publication of the annual Revenue Procedure for issuing ruling and determination letters, which contains a sample letter ruling request and a section discussing significant changes made during the intervening year. See Rev. Proc. 2000-1.

"Safe harbor" sample forms. More controversial, perhaps, than the proposed change of format is the subject of whether the new Procedure should include "safe harbor" sample trust forms.

By definition, a "safe harbor" sample trust form is a generic minimalist product which must necessarily adopt a "lowest common denominator" approach. In order to assure a certain result, such as qualification as a charitable remainder trust, such a form cannot promote individualized estate planning designed to maximize tax and other benefits available to a particular donor.

Necessarily, any deviation from the sample form must affect the application of the qualification "safe harbor," and the 1989 and 1990 Revenue Procedures alert the practitioner that any substantial variation from the sample forms will deprive a trust of qualification protection.

But what is substantially variant is incapable of precise determination. Numerous letter rulings addressing the qualification of trusts with minor variations clearly permitted under the regulations are convincing evidence that a minimal departure from the forms sacrifices "safe harbor" protection. In other words, the "safe harbor" provided by the sample forms is a shallow one and unlikely to shelter any but the most unimaginative and rudimentary trusts.

Arguably, even if the development of broadly utilitarian safe harbor forms are possible at any given time, they may be temporally impractical. The current sample forms were issued in 1989 and 1990 when the rules for charitable remainder trusts had been relatively static for twenty years. During the last decade of the twentieth century, however, substantial changes in the rules relating to such trusts challenged the proposition that static "safe harbor" sample forms are possible in a rapidly developing legal environment.

Nevertheless, it is the College's recommendation that several generic "safe harbor" forms reflecting the most common charitable remainder trust arrangements, with imited alternative and optional provisions, should be included, and regularly updated, as part of an expanded Revenue Procedure, which also includes sample provisions and relevant explanations. These sample forms should be presented in a format similar to the sample "rabbi trust" form contained in Rev. Proc.92-64.

CONCLUSION

Historically, the "safe harbor" sample charitable remainder trust forms have been of limited utility. With the increasing sophistication of estate planning, and the recent rapid evolution of rules applicable to many charitable remainder trusts, the sample forms provided in the 1989 and 1990 Revenue Procedures are hopelessly obsolete and need to be replaced.

However, the increased complexity of applicable organizational and operational rules for charitable remainder trusts requires a more expansive format than the sample trust documents presented in the 1989 and 1990 Revenue Procedures. At the very least, the new format should include mandatory and optional trust provisions, and annotated discussions of applicable alternatives and rules. We favor presentation in a Revenue Procedure issued annually.

Although the utility of sample "safe harbor" forms in a rapidly evolving legal environment is at best transient, such forms provide a basic service to practitioners, should be included in the new format, and should be updated as needed.

SAMPLE REVENUE PROCEDURE

Attached is a draft sample Revenue Procedure prepared in a format similar to Rev. Rul. 72-395. This draft discusses only the sample provisions which relate to a charitable remainder unitrust. Section 7 of the draft Revenue Procedure provides a sample inter vivos charitable remainder unitrust form with certain alternative provisions.

These comments were prepared by the College's Committee on Charitable Planning and Exempt Organizations. Principal responsibility was exercised by Randall D. Van Dolson of Baker, Donelson, Bearman & Caldwell, P.C., Chattanooga, Tennessee, who chaired the Committee's Task Force on this project, and Task Force member William Finestone of Walter, Finestone & Richter, Los Angeles, California. Jerry J. McCoy, of Washington, D.C., is Chair of the Committee.

We would welcome the opportunity to meet with the appropriate Internal Revenue Service officials to discuss this submission and to offer any additional assistance that might be desired.

Sincerely yours,

Neill G. McBryde

cc: Jerry J. McCoy, Esq.
Randall D. Van Dolson, Esq.

* * * * *


ATTACHMENT A

1.664-1: Charitable remainder trusts. Illustrations describe the mandatory and optional provisions for inclusion in the governing instrument of a charitable remainder annuity trust and a charitable remainder unitrust. REV. PROC. 2001-_______ , 12001-1 C.B. ________

TABLE OF CONTENTS
[NOT INCLUDED]

SEC. 1. PURPOSE


The purpose of this Revenue Procedure is to set forth illustrative sample provisions for inclusion in the governing instrument of a charitable remainder trust that may be used to satisfy the requirements of section 664 of the Internal Revenue Code of 1954 and the Income Tax Regulations applicable thereto.

SEC. 2. CHARITABLE REMAINDER TRUST

In general, a charitable remainder trust is a trust which provides for a specified distribution at least annually for life or a term of years, to one or more beneficiaries, at least one of which is not a charity, with an irrevocable remainder interest to be held for the benefit of, or paid over to, charity. In order to qualify under section 664 of the Code, the trust must satisfy the requirements of either a charitable remainder annuity trust or a charitable remainder unitrust.

SEC. 3. BACKGROUND

.01 The Tax Reform Act of 1969 Public Law 91-172, C.B. 1969-3, 10, imposed new requirements which must be satisfied by a charitable remainder trust in order for an income, gift, or estate tax deduction to be allowed for the transfer of a remainder interest to charity. These requirements are contained in section 664 of the Code and in the regulations thereunder.

.02 Subsequently, the Internal Revenue Service provided substantive rules and sample provisions for charitable remainder trusts in Rev. Rul. 72-395, 1972-2 C.B. 340, later modified by Rev. Rul. 80-123, 1980-1 C.B. 205; Rev. Rul. 82-128, 1982-2 C.B. 71; and Rev. Rul. 88-81, 1988-2 C.B. 127, and clarified by Rev. Rul. 82-165, 1982-2 C.B. 117. In 1989 and 1990, the Service issued a series of revenue procedures providing sample forms for one and two life inter vivos and testamentary charitable remainder trusts. Rev. Proc. 89- 20, 1989-1 C.B. 841; Rev. Proc. 89-21, 1989-1 C.B. 842; Rev. Proc. 90- 30, 1990-1 C.B. 534; Rev. Proc. 90-31, 1990-1 C.B. 539; Rev. Proc. 90- 32, 1990-1 C.B. 546. Simultaneously, the Service announced that it ordinarily would no longer issue rulings concerning the qualification of trusts which substantially comply with the sample forms. Rev. Procs. 89-19 and 90-33. See also Rev. Proc. 2000-3, Section 4.

.03 The Taxpayer Relief Act of 1997, 1997-4 (Vol. 1) C.B. 1 amended several sections of section 664 of the Code to apply new substantive rules to charitable remainder trusts, and final regulations issued on December 10, 1998 imposed several new governing instrument and operational rules as well.

SEC. 4. INSTRUCTIONS TO TAXPAYERS

.01 This Procedure contains sample illustrative provisions that may be included in the governing instrument of a charitable remainder annuity trust and a charitable remainder unitrust. These sample provisions include the mandatory provisions and certain permissible alternative and optional provisions referred to in the regulations. Provisions corresponding to these sample provisions will be accepted by the Service in the absence of any showing that they are not enforceable under applicable local law.

.02 The language and format of the sample provisions included in this Procedure are merely examples of provisions which comply with the requirements and options in the regulations. There is no fixed language or format which must be used, and any other language or format that satisfies the requirements of the regulations will be acceptable. Incorporation of a regulatory requirement in the governing instrument of the trust by a short, specific, and descriptive reference to the requirement and its citation in the regulations also will be acceptable if such a reference incorporating the regulatory requirement into the governing instrument is effective under local law. However, a general provision stating that the grantor or testator intends to create a charitable remainder trust and incorporating by general reference all necessary requirements of the Internal Revenue Code and regulations will not, by itself, be sufficient.

.03 The trust instrument must create a valid trust under applicable local law in order to qualify as a charitable remainder trust. Thus, in addition to complying with the regulations, the trust instrument should incorporate any additional provisions relating to charitable trusts that are required under applicable local law.

.04 The trust instrument may contain provisions in addition to those provisions which are intended to satisfy the requirements of the regulations, but care should be taken to determine that such provisions are not in conflict with the regulations.

.05 In addition to the sample provisions, this Procedure provides sample forms of charitable remainder trusts which meet the requirements for such trusts under section 664 of the Code, as explained below in SEC. 7.

SEC. 5. CHARITABLE REMAINDER ANNUITY TRUST PROVISIONS

[NOT INCLUDED]
SEC. 6. CHARITABLE REMAINDER UNITRUST PROVISIONS


.01 Funding of trust. The tax effects, including the charitable deduction by reason of a contribution to a charitable remainder trust, are effective upon the funding of the trust. Although funding a trust may seem a simple act, if the funding is improper, the trust may not qualify as a charitable remainder trust. The following is a sample provision for inclusion in the governing instrument.

The donor transfers to the trustee the property described in Schedule A, and the trustee accepts such property and agrees to hold, manage, and distribute such property of the trust under the terms set forth in this trust instrument.
The following comments pertain to the sample provision described above:

(1) Valuation of unmarketable assets. Unmarketable assets held by a charitable remainder trust must be valued by an independent trustee or a qualified appraiser in order for contributions to qualify for income, gift or estate tax charitable deductions. Reg. section 1.664-1(a)(7).

(2) Deductibility requirement. It is the position of the Service that funding a charitable remainder trust with property which does not qualify for an income, gift or estate tax charitable deduction at the time it is transferred to the trust will disqualify the trust.

(3) Association status. If more than one donor contributes property to the trust with the objective of carrying on a business, the trust can be recharacterized as an association which does not qualify as a charitable remainder trust. Reg. section 7701(a).

.02 Payment of unitrust amount. Under Reg. section 1.664- 3(a)(1)(i)(a), one of the requirements of a charitable remainder unitrust is that the governing instrument of the trust provide that the trust shall pay, not less often than annually, a fixed percentage of the net fair market value of the trust assets, determined annually, to one or more persons described in Reg. section 1.664-3 (a)(3) for the period specified in Reg. section 1.664-3(a)(5). Reg. section 1.664-3(a)(2)(i) provides that the fixed percentage must be at least 5 percent, and Code section 664(d)(2)(A) restricts the percentage to no more than 50 percent. Section 1.664-3(a)(3) provides that the fixed percentage of such value must be payable to or for the use of a named person or persons, at least one of which is not an organization described in section 170(c) of the Code. Section 1.664- 3(a)(5) provides that the fixed percentage of such value may be payable for either the life or lives of a named individual or individuals or for a term of years not to exceed 20 years. The following is a sample provision for inclusion in the governing instrument.

In each taxable year of the Trust, the Trustee shall pay to_____(hereinafter referred to as the "Recipient") during the Recipient's lifetime a unitrust amount equal to _____ percent of the net fair market value of the trust assets valued as of the first business day of each taxable year of the trust (the "valuation date"). The unitrust amount shall be paid in equal quarterly installments at the end of each quarter from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amount shall be added to principal.

Under Reg. section 1.664-3(a)(1)(i)(b), instead of the unitrust amount described above (i.e., a fixed percentage of the net fair market value of the trust assets, determined annually), the unitrust amount which the trust is required to pay may be defined as set out in paragraph (1) below, or as the sum of the amounts set out in paragraphs (1) and (2), below.

(1) The amount of trust income (as defined in Code section 643(b) and the regulations thereunder) for the taxable year to the extent that such amount is not more than the fixed percentage amount required to be distributed for that taxable year. The following is a sample provision for inclusion in the governing unitrust.

In each taxable year of the Trust, the Trustee shall pay to the Recipient during the Recipient's lifetime a unitrust amount equal to the lesser of (a) the trust income for the taxable year, as defined in Code section 643(b) and the regulations thereunder, and (b)_____ percent of the net fair market value of the assets of the trust valued as of the first business day of each taxable year of the trust (the "valuation date").

(2) The amount of the trust income for a taxable year which is in excess of the fixed percentage unitrust amount described in (1)(b) above for that taxable year to the extent that the aggregate of the unitrust amounts paid in prior years was less than the aggregate of the fixed percentage unitrust amounts for those prior years. The following is a sample provision for inclusion in the governing instrument.

The unitrust amount for any year also shall include any amount of trust income for such year that is in excess of the amount required to be distributed under (1)(b) (above)to the extent that the aggregate of the amounts paid in prior years was less than the aggregate of the amounts computed as (same percentage as in (1)(b)) above percent of the net fair market value of the trust assets on the valuation dates.

Under Regs. sections 1.664-3(a)(1)(i)(b)(4) and 1.664-3 (a)(1)(i)(b)(5), if the governing instrument permits the makeup of prior deficiencies in accordance with provision (2), above, pre- contribution gain inherent in the assets transferred to the trust must be allocated to income upon the sale of those assets by the trust. The governing instrument may, however, provide for allocation to income of capital gain derived by the trust from post-contribution appreciation which occurs with respect to those assets, if permitted by local law.

Under Reg. section 1.664-3(a)(1)(i)(c), the trust may require the method of payment to convert from an amount limited to the trust income for the taxable year, as defined in Code section 643(b) and the regulations thereunder, to a fixed percentage of the net fair market value of the trust assets, determined annually. The following is a sample provision for inclusion in the governing instrument.

Upon the occurrence of (specify event), effective as the first day of the year following (specify event), the Trustee shall pay to the Recipient in each taxable year of the Trust during the Recipient's lifetime a unitrust amount equal to ____% of the net fair market value of the trust assets valued as of the first business day of each taxable year of the trust (the "valuation date"). The unitrust amount shall be paid in equal quarterly installments at the end of each quarter from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amount shall be added to principal.

The following comments pertain to the sample provision described above:

(1) FREQUENCY. The conversion from a net income payment method to a fixed percentage method can occur only once.

(2) EFFECTIVE DATE. Such a conversion must be effective as of the first day of the year following the event which triggers the conversion.

(3) LOSS OF DEFICIENCY. If prior to conversion to a fixed percentage method of paying the unitrust amount the trust provided for the amount of trust income for the year in excess of the amount required to be paid to be distributed to the extent that the aggregate of the amounts paid in prior years was less than the aggregate of the amounts computed using a fixed percentage method, the deficiency must be forfeited at the time of the conversion.

(4) CONVERSION EVENTS. The events which cause the unitrust to convert from a net income method of computing the unitrust amount to a fixed percentage method must be the sale of an unmarketable asset, a specific date, or an event outside the control of the trustee or any other person.

The following comments pertain to each of the sample provisions described above:

(1) RECIPIENT. Various matters must be considered with regard to the recipient.

(a) GENERAL RULE. The unitrust amount must be paid to one or more persons, at least one of whom is not a qualified charitable organization. Reg. sections 1.664-3(a)(3)(i)and (3)(a)(4).

(b) CONCURRENT OR SUCCESSIVE RECIPIENTS. The unitrust amount may be paid to concurrent or successive recipients so long as the 5 percent test is met. Reg. section 1.664-3(a)(5)(i).

(i) If the term of the unitrust payment is measured by the life of a recipient or more than one recipient, each recipient must be living at the time the trust is created (i.e., a successor recipient whose interest will take effect only upon the death of a preceding recipient must be living at the time the trust is created). Reg. section 1.644-3(a)(3)(i).

(ii) Multiple noncharitable recipients may be described as a class, all of whom must be living and ascertainable at the time the trust is created, unless the trust is for a term of years. Under section 1.664-3(a)(3)(ii), a trust is not a charitable remainder trust if any person has the power to alter the amount to be paid to any named person, other than an organization described in Code 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 (Code sections 671 through 678) were applicable to the trust. Consequently, it is possible to grant to the trustee the power to allocate the unitrust amount among members of a class if such power comes within the exception to Code section 674(a) provided in Code section 674(c).

(iii) The following is a sample provision for inclusion in the governing instrument.

The trustee shall pay, in each taxable year of the trust, a unitrust amount equal to ____ percent of the net fair market value of the trust assets valued as of the first business day of such taxable year to such member or members of a class of persons consisting of A, B, and C in such amounts and proportions as the trustee in its absolute discretion shall from time to time determine until the last to die of A, B, and C. The Trustee may pay the unitrust amount to any one member of said class or may apportion it among the various members in such manner as the trustee shall from time to time deem advisable. The unitrust amount shall be paid in equal installments at the end of each quarter from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amount shall be added to principal.

(iv) Under Reg. section 25.2702-1(c)(3), if the amount to be paid is not a fixed percentage of the value of the trust assets, for gift tax purposes an income interest retained by the donor or an applicable family member will have no value if any noncharitable beneficiary of the trust is someone other than the donor, the donor's spouse who is a United States citizen or both.

(c) REVOCATION OF RECIPIENT'S INTEREST. Under Reg. section 1.664-3(a)(4), the grantor of the trust 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) of the Code. The following is a sample provision for inclusion in the governing instrument.

The Trustee shall pay to the Donor during his life a unitrust amount equal to ____ percent of the net fair market value of the trust assets valued as of the first business day of each taxable year of the trust and upon the death of the Donor, if B survives him, the Trustee shall pay to B during B's life a unitrust amount equal to ____ percent of the net fair market value of the trust assets valued as of the first business day of each taxable year. The Donor hereby expressly reserves the power, exercisable only by the Donor's will, to revoke and terminate the interest of B under this trust. Upon the first to occur of (i) the death of the survivor of the Donor and B or (ii) the death of the Donor if the Donor effectively exercises the Donor's testamentary power to revoke and terminate the interest of B, the Trustee shall distribute all of the then principal and income of the trust, other than any amount due the Donor, to M charity. The unitrust amount shall be paid in equal quarterly installments at the end of each quarter from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amount shall be added to principal.

(d) PERSON. The "person" to whom the unitrust amount must be paid does not have to be a natural person. The term "person" as defined in section 7701(a) of the Code includes entities such as a trust, estate, partnership, association, company or corporation. It is the position of the Internal Revenue Service that payment may be made to a trust only if the beneficiary of the trust is incapacitated. If the unitrust recipient is not a natural person or a qualified charitable organization, the term of the unitrust payment cannot be measured by the life of an individual, but must be expressed as a term of 20 years or less. Reg. section 1.664-3(a)(5)(i). It is the position of the Service that unitrust payments may be made to a trust only if the beneficiary of the trust is incapacitated.

(e) PAYMENT TO CHARITY. Any part, but not all, of the unitrust amount may be paid to a qualified charitable organization instead of to a noncharitable recipient. Reg. section 1.664-3(a)(3)(i). The term of the payments to a qualified charitable organization described in Code section 170(c) can be measured by the life of a living individual. Reg. section 1.664-3(a)(5)(i). If a qualified charitable organization is a recipient of part of the unitrust amount, certain prohibitions relating to private foundations must be included in the trust instrument, as discussed below in paragraph .06.

(2) UNITRUST AMOUNT. Various rules apply to payment of the unitrust amount.

(a) 5 PERCENT TEST. The fixed unitrust percentage must be at least 5 percent of the net fair market value of the trust assets valued annually. Reg. section 1.664-3(a)(2)(i).

(b) 50 PERCENT TEST. The fixed unitrust percentage cannot exceed 50 percent of the net fair market value of the trust assets valued annually. Code section 664(d)(2)(A).

(c) TIME OF PAYMENT. Under Reg. section 1.664-3(a)(1)(i)(g), a fixed percentage unitrust generally must pay the required unitrust amount by the close of its taxable year. However, the trust may pay the required amount within a reasonable time after the close of the taxable year if the entire amount paid is characterized as income in the hands of the recipient or the trust distributes property other than cash to pay the necessary amount and the trustee elects on Form 5227 to treat any income generated by the distribution as occurring on the last day of the preceding taxable year. Also, the trust may make the required payment within a reasonable time after the close of the taxable year if the trust was created prior to December 10, 1998 and the unitrust amount is 15% or less of the value of the trust assets. Reg. section 1.664-3(a)(1)(i)(h).

(d) FREQUENCY OF PAYMENT. The unitrust amount must be paid at least annually. Code section 664(d)(2)(A).

(e) PAYMENT OF THE UNITRUST AMOUNT IN INSTALLMENTS. The unitrust amount may be paid to the recipient annually or in equal or unequal installments throughout the year. The first and each succeeding installment may fall due at the beginning or end of the period to which it applies. If neither is specified, payment must be made at the beginning of the designated period. Reg. section 1.664-4(a)(3). The amount of the charitable deduction will be affected by the frequency of payment, by whether the installments are equal or unequal, and by whether each installment must be paid at the beginning or at the end of the period for which it is paid. Failure to make a required payment when due may cause a trust to lose its qualification as a charitable remainder trust. See Est. of Atkinson v. Comr., 115 T.C. No. 3 (7/26/00).

(f) SOURCE OF PAYMENT. The unitrust amount may be paid from trust income or principal, but it must be paid from either of the two in all events. It should be noted that, in some jurisdictions, the payment of the unitrust amount may be restricted to the income of the trust unless otherwise indicated. In such jurisdictions, it is necessary that such restrictions be removed by the governing instrument of the trust. Any income of the trust in excess of the unitrust amount may, but need not, be added to principal. Care should be taken, however, to assure that, under applicable local law, such excess income is retained by the trust.

(g) REDUCTION OF UNITRUST AMOUNT. Under Reg. section 1.664-3(a)(1)(i), the fixed percentage amount must be the same either as to each recipient or as to the total of the percentages payable for each year of the term of years or the lives of the recipients. However, under Reg. sections 1.664-3(a)(1)(ii) and 1.664-3(a)(2)(ii), the fixed percentage may be reduced at the death of a recipient or expiration of a term of years if: (1) the reduced percentage is the same either as to each recipient or as to the total percentage payable each year for the balance of the period during which unitrust amounts are to be paid; (2) there is a distribution to an organization described in section 170(c) of the Code at the death of the recipient or expiration of the term of years; and (3) the total of the percentages payable each year after such distribution are not less than 5 percent. The following is a sample provision for inclusion in the governing instrument.

During the joint lives of A and B, the Trustee shall, in each taxable year of the Trust, pay to A a unitrust amount equal to X percent of the net fair market value of the trust assets valued as of the first business day of such taxable year and pay to B a unitrust amount equal to Y percent of the net fair market value of the trust assets valued as of the first business day of such taxable year. The unitrust amounts shall be paid in equal quarterly installments at the end of each quarter from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amounts shall be added to principal. Upon the death of the first to die of A and B, the Trustee shall distribute $Z (or P percent of the trust assets) to M charity, and thereafter the trustee shall pay to the survivor of A and B for his or her life a unitrust amount in each taxable year of the trust equal to (NOT LESS THAN 5) percent of the net fair market value of the trust assets valued as of the first business day of such taxable year.

(h) TERM. As an alternative to the payment of the unitrust amount for the recipient's life, the unitrust amount may be paid to the recipient for a term of 20 years or less. Reg. section 1.664-3(a)(5)(i). If the person to whom the unitrust amount is paid is not a natural person or a qualified charitable organization described in Code section 170(c), the term of the unitrusts payment cannot be measured by the life of an individual, but must be expressed as a term of 20 years or less.

(i) DISTRIBUTION TO CHARITY. Under Reg. section 1.664-3(a)(4), the governing instrument may provide that any amount, other than the unitrust amount, shall be paid (or may be paid in the discretion of the trustee) to an organization described in Code section 170(c). If such a provision is included, in the case of distributions in kind, the adjusted basis of the property distributed must be fairly representative of the adjusted basis of the property available for payment on the date of payment. The following is a sample provision for inclusion in the governing instrument.

During the life of A, the Trustee may pay to M charity any income of the Trust in excess of the unitrust amount payable to A for the taxable year of the Trust in which the income is earned. The adjusted basis for Federal income tax purposes of any trust property which the Trustee distributes in kind to M charity during the life of A must be fairly representative of the adjusted basis for such purposes of all trust property available for distribution on the date of distribution.

(j) TERMINATION OF PAYMENT. Under Reg. section 1.664- 3(a)(5)(i), the payment of the unitrust amount may terminate with the regular payment next preceding the termination of all noncharitable interests. The following is a sample provision for inclusion in the governing instrument.

The Trustee shall pay to A in each taxable year of the trust during his or her life a unitrust amount equal to Y percent of the net fair market value of the trust assets valued as of the first business day of such taxable year. However, the obligation of the Trustee to pay such unitrust amount shall terminate with the payment next preceding the death of A. The unitrust amount shall be paid in equal quarterly installments at the end of each quarter from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amount shall be added to principal.

(k) PRORATION OF UNITRUST AMOUNT. Under Reg. section 1.664-3(a)(1)(v)(a), the governing instrument must provide that, in the case of a taxable year which is for a period of less than 12 months, the unitrust amount required to be paid shall be the fixed percentage of the net fair market value of the trust assets for such year multiplied by a fraction of [sic] the numerator of which is the number of days in the taxable year of the trust and the denominator of which is 365 (366 if February 29 is a day included in the numerator). Reg. section 1.664-3(a)(1)(v)(b) provides that, in the case of the taxable year in which occurs the termination of the noncharitable interests, the unitrust amount required to be paid shall be the fixed percentage of the net fair market value of the trust assets for such year multiplied by a fraction the numerator of which is the number of days between the beginning of such taxable year and the termination of such noncharitable interests and the denominator of which is 365 (366 if February 29 is a day included in the numerator). However, under Reg. section 1.664-3(a)(5)(i), the recipients [sic] interest may terminate with the last regular payment before the death of the recipient. The following is a sample provision for inclusion in the governing instrument.

In determining the unitrust amount for a short taxable year, the Trustee shall prorate the fixed percentage unitrust amount on a daily basis; provided, however, that for the taxable year in which the Recipient's death occurs payment of the unitrust amount to the Recipient shall terminate with the regular payment next preceding the death of the Recipient.

(l) AMOUNT OF CHARITABLE DEDUCTION. The amount of the charitable deduction will be affected by the period of time between the valuation date and the payment date or dates and by the frequency of payment. Reg. section 1.664-4.

(i) At the time of any contribution or addition to the trust, the value of the charitable remainder must be at least 10 percent. Code section 664(d)(2)(D).

(ii) The amount of the charitable deduction will be determined on the basis that a fixed percentage unitrust amount will be paid to the recipient under Reg. section 1.664-3(a)(1)(i)(a). Use of permissible provisions under Reg. section 1.664-3(a)(1)(i)(b) limiting the unitrust amount to net income if less than the fixed percentage will not affect the amount of the charitable deduction.

(m) VALUATION. The governing instrument may specify the date on which trust assets will be valued (e.g., as of the first business day of each taxable year). Reg. section 1.664- 3(a)(1)(iv).

(i) VALUATION DATE. If a valuation date other than the first day of the taxable year is selected, Reg. sections 1.664-3(a)(1)(v)(a)(3) requires that the governing instrument of the trust also must provide that where no valuation date occurs in a taxable year of the trust which is a short taxable year or which is the taxable year in which the noncharitable interest terminates, the trust assets shall be valued as of the last day of such short taxable year or as of the day on which such noncharitable interest terminates. However, if no valuation date occurs after the time of an additional contribution of property to a trust, the additional property shall be valued as of the time of contribution. Reg. sec. 1.664-3(b)(1).

(ii) INCORRECT DETERMINATIONS. Under Reg. section 1.664-3(a)(1)(iii), the governing instrument of the trust must provide that, in the case where the net fair market value of the trust assets is incorrectly determined by the fiduciary, the trust shall pay to the recipient (in the case of an undervaluation) or be repaid by the recipient (in the case of an overvaluation) an amount equal to the difference between the amount which the trust should have paid the recipient if the correct value were used and the amount which the trust actually paid the recipient. The following is a sample provision for inclusion in the governing instrument.

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, the Trustee shall pay to the Recipient in the case of an undervaluation, or shall receive from the Recipient in the case of an overvaluation, an amount equal to the difference between the unitrust amount properly payable and the unitrust amount actually paid.

.03 PAYMENT OF FEDERAL ESTATE TAX AND STATE DEATH TAX. A trust for the benefit of more than one noncharitable beneficiary must contain a provision requiring payment of federal estate and state death taxes upon the death of a preceding beneficiary from a source other than the trust. Reg. section 1.664-1(a)(6), Ex. (3); Rev. Rul. 82-128. The following is a sample provision for inclusion in the governing instrument.

The unitrust interest of a succeeding Recipient will take effect upon the death of the first Recipient only if the funds for payment of any federal estate taxes or state death taxes for which the Trustee may be liable upon the death of the first Recipient are paid from the donor's estate, by the succeeding Recipient or from some other source other than the Trust.

The following comment pertains to the sample provision described above:

It may be prudent also to require that any transferree gift tax liability by reason of a gift transfer to the trust be paid from a source other than the trust.

.04 DISTRIBUTION TO CHARITY. Under Reg. section 1.664-3(a)(6)(i), the entire corpus of the trust must be irrevocably transferred, in whole or in part, to or for the use of one or more organizations described in section 170(c) of the Code or retained, in whole or in part, for such use upon the termination of the noncharitable interests. The following is a sample provision for inclusion in the governing instrument.

Upon the death of the Recipient, the Trustee shall distribute all of the then principal and income of the trust, other than any amount due the Recipient or the Recipient's estate, ____, an organization described in sections 170(b)(1)(A), 170(c), 2055 and 2522 of the Code (hereinafter referred to as the "Charitable Organization").

The following comments pertain to the sample provision described above:

(1) PERMISSIBLE REMAINDERMAN. The charitable remainderman must be an organization described in Code section 170(c) at the time of the transfer to the charitable remainder unitrust. Reg. section 1.664-3(a)(6)(i). If a deduction is sought under Code sections 2055 or 2522, the remainderman also must be an organization described in Code sections 2055(a) or 2522(a) or (b), respectively.

(2) IDENTIFICATION OF CHARITY. Identification of the charitable remainderman by reference only to Code section 170(c) will subject the donor to the limitations on income tax charitable deductions applicable to contributions to private foundations. To avoid these limitations, it is necessary to include in the description of the charitable remainderman a reference to Code section 170(b)(1)(A). If the donor anticipates a distribution to or for the benefit of a private foundation, the reference to section 170(b)(1)(A) should be deleted.

(3) PERMISSIBLE DISPOSITIONS OF REMAINDER INTEREST. Upon the termination of the noncharitable interest, the charitable remainder may be (i) distributed outright to one or more charities, (ii) held in further trust for one or more charities, or (iii) held in further trust for charitable purposes. The trust may provide for any combination of the foregoing. Reg. section 1.664-3(a)(6)(i).

(4) ALTERNATIVE CHARITABLE ORGANIZATIONS. Under Reg. section 1.664-3(a)(6)(iv), the governing instrument of the trust must provide that, in the event that an organization to or for the use of which the trust corpus is to be transferred or retained is not an organization described in Code section 170(c) at the time when any amount is to be irrevocably transferred to or for the use of such organization, such amount shall be transferred to or for the use of or retained for the use of one or more alternative organizations which are described in Code section 170(c) at such time. The following is a sample provision for inclusion in the governing instrument which satisfies the requirements of the mandatory provision described in this subsection:

If the Charitable Organization is not an organization described in sections 170(b)(1)(A), 170(c), 2055(a) and 2522(a) of the Code at the time when any principal or income of the trust is to be distributed to it, the Trustee shall distribute such principal or income to one or more organizations then described in sections 170(b)(1)(A), 170(c), 2055(a) and 2522(a) as the Trustee shall select in its sole discretion.

(5) SELECTION OF ALTERNATIVE CHARITABLE REMAINDERMAN. One or more alternate charities may be selected in any manner provided in the trust instrument. Reg. section 1.664- 3(a)(6)(iv).

.05 ADDITIONAL CONTRIBUTIONS. Under Reg. section 1.664-3(b), the governing instrument must provide either that no additional contributions may be made to the trust after the initial contribution or that the unitrust amount for the taxable year of a contribution shall be computed by multiplying the fixed percentage by the sum of (1) the net fair market value of the trust assets (excluding the value of the additional contribution and any earned income from and any appreciation on such property after its contribution) and (2) that proportion of the value of the additional property (that was excluded under (1)) which the number of days in the period which begins with the date of contribution and ends with the earlier of the last day of such taxable year or the last day of the period described in Reg. section 1.664-3(a)(5) bears to the number of days in the period which begins with the first day of such taxable year and ends with the earlier of the last day of such taxable year or the last day of the period described in Reg. section 1.664-3(a)(5). If additional contributions are not prohibited, Reg. section 1.664-3(b) also provides that the governing instrument must provide that, where no valuation date occurs after the time of the contribution and during the taxable year in which the contribution is made, the additional property shall be valued as of the time of contribution. The following is a sample provision for inclusion in the governing instrument.

If any additional contribution is made to the Trust after the initial contribution, the unitrust amount for the year in which the additional contribution is made shall be ____ percent (the same percentage as established in paragraph .02) of the sum of (a) the net fair market value of trust assets as of the valuation date (excluding the assets so added and any income from, or appreciation on, such assets) and (b) that proportion of the fair market value of the assets so added that was excluded under (a) that the number of days in the period which begins with the date of contribution and ends with the earlier of the last day of the taxable year or the date of death of the Recipient bears to the number of days in the period which begin on the first day of such taxable year and ends with the earlier of the last day in such taxable year or the date of death of the Recipient. In the case where there is no valuation date after the time of contribution, the assets so added shall be valued as of the time of contribution.

The following comments pertain to the sample provision described above:

(1) NO ADDITIONAL CONTRIBUTIONS. In lieu of the above provision, the governing instrument may provide that no additional contribution shall be made to the trust. Reg. section 1.664-3(b).

(2) PROPERTY PASSING BY REASON OF DEATH. All property passing to the trust by reason of death of the grantor shall be considered one contribution. Reg. section 1.664-3(b).

(3) VALUE OF CHARITABLE REMAINDER INTEREST. The value of the charitable remainder trust must be 10 percent or more at the time of any additional contribution. Reg. section 664(d)(2)(D) of the Code.

.06 PROHIBITED TRANSACTIONS. Section 4947(a)(2) of the Code makes Code section 508(e) applicable to a charitable remainder unitrust to the extent that other provisions of chapter 42 of the Code are also made applicable to such a trust. Code section 4947(a)(2) makes Code sections 4941, 4943, 4944, and 4945 applicable to such trusts except for the payment of the unitrust amount to the income beneficiary. Code section 4947(b)(3)(B) excludes such trusts from the application of Code sections 4943 and 4944 in cases where a deduction was allowed for amounts going to every remainder beneficiary but not to any income beneficiary. The following is a sample provision for inclusion in the governing instrument.

The Trustee shall make distributions at such time and in such manner as not to subject the trust to tax under Code section 4942. Except for the payment of the unitrust amount to the Recipient, the Trustee shall not engage in any act of self- dealing, as defined in Code section 4941(d), and shall not make any taxable expenditures, as defined in Code section 4945(d). During any period in which any part of the unitrust amount is paid to charity, or during which the Trust no longer is a charitable remainder trust but instead is retained for the use of one or more organizations described in Code section 170(c), the Trustee shall not make any investment that jeopardizes the charitable purpose of the Trust, within the meaning of Code section 4944 and the regulations thereunder, or retain any excess business holdings, within the meaning of Code section 4943(c) and the regulations thereunder.

The following comments pertain to the sample provision described above.

(1) RULE IF PART OF THE UNITRUST AMOUNT IS PAID TO CHARITY. The governing instrument of the trust must prohibit the trustee from engaging in activities described in Code sections 4943 and 4944 during any period in which any part of the unitrust amount is paid to charity. Reg. section 1.664-3(a)(6).

(2) RULE IF NO PART OF THE UNITRUST AMOUNT IS PAID TO CHARITY. During any period in which no part of the unitrust amount is paid to charity, the governing instrument of the trust does not have to prohibit the trustee from engaging in activities described in Code sections 4943 and 4944.

(3) APPLICATION OF PROVISIONS AFTER THE TRUST CEASES TO BE A CHARITABLE REMAINDER UNITRUST. To retain its exempt status after the trust ceases to be a charitable remainder unitrust, the trust's governing instrument also must prohibit the trustee from engaging in any activities described in Code sections 4943 and 4944 and must require the trustee to distribute property at such times and in such manner as not to subject the trust to tax under Code sections 4942 during any period after the date the trust is no longer treated as a trust described in Code section 4947(a)(2) and the regulations thereunder. Reg. section 1.664- 3(a)(6)(ii).

(4) APPLICATION OF STATE LAW. The requirements of Code section 508(e) are satisfied if provided by state law, in which case there is no need specifically to refer to them in the trust agreement. Reg. section 1.508-3(d).

.07 INVESTMENT OF TRUST ASSETS. Under Reg. section 1.664-3(a)(3), the provisions of the trust may not include any provisions which restrict the trustee from investing the trust assets in a manner which could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of trust assets. The following is a sample provision for inclusion in the trust instrument.

Nothing in this trust instrument shall be construed to restrict the Trustee from investing the trust assets in a manner which could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of trust assets.

If a charitable remainder trust has any unrelated business taxable income in a tax year, all of its income in that year is subject to tax. Code section 664(c). For example, investment in an entity such as a partnership through which the characteristics of the entity's income pass through to the owner of an interest in the entity may result in the trust losing its qualification if the entity produces unrelated business taxable income. Leila G. Newhall Unitrust, 104 T.C. 236 (1995), aff'd 105 F.3d 482 (9th Cir. 1997).

.08 TESTAMENTARY TRUSTS. Reg. section 1.664-1(a)(5)(i) provides, in effect, that a deduction is not allowable under Code sections 2055 or 2106 unless the obligation to pay the unitrust amount with respect to the property passing in trust at the date of death begins as of the date of death of the decedent. Nonetheless, the requirement to pay such amount may be deferred until the end of the taxable year of the trust in which occurs the complete funding of the trust if such deferral is permitted by applicable local law or authorized by the provisions of the governing instrument.

All the rest, residue and remainder of my property and estate, real and personal, of whatever nature and wherever situated, I give, devise, and bequeath to my Trustee in trust, to invest and reinvest the same during the life of A and in each taxable year of the trust to pay, in equal quarterly installments at the end of each quarter, to A, a unitrust amount equal to Y percent of the net fair market value of the trust assets valued as of the first business day of each taxable year of the trust. The unitrust amount shall be paid from income and, to the extent income is not sufficient, from principal. Any income of the Trust for a taxable year in excess of the unitrust amount shall be added to principal.

The obligation to pay the unitrust amount shall commence with the date of my death, but payment of the unitrust amount may be deferred from such date until the end of the taxable year of the trust in which occurs the complete funding of the Trust. Within a reasonable time after the end of the year in which the complete funding of the Trust occurs, the Trustee must pay to the Recipient (in the case of an underpayment) or receive from the Recipient (in the case of an overpayment) the difference between: (1) any unitrust amounts actually paid, plus interest compounded annually, computed for any period at the rate of interest that the federal income tax regulations under section 664 of the Code prescribe for the trust for such computation for such period; and (2) the unitrust amounts payable, plus interest compounded annually, computed for any period at the rate of interest that the federal income tax regulations under section 664 prescribe for the trust for such computation for such period.

The following comments pertain to the sample provision described above:

(1) DEFERRAL AND COMPUTATION OF UNITRUST AMOUNT FOR PERIOD OF ADMINISTRATION. The second paragraph of the above provision may be included in cases where funds pass to a charitable remainder unitrust by reason of death, but the actual amount passing in trust may not be known until the trust has been completely funded. The cited section of the regulations contains a formula under which the unitrust amount may be retroactively computed during a reasonable period of administration or settlement.

(2) INCORPORATION BY REFERENCE. If the reference to the regulations is not effective under the law governing the trust to incorporate the regulatory provision into the governing instrument, the formula contained in the regulations should be restated in the governing instrument.

.09 REVOCABLE TRUST. Under Code section 1.664-1(a)(4), in order for a trust to be a charitable remainder unitrust, the trust must function exclusively as a charitable remainder unitrust from its creation. Consequently, a revocable inter vivos trust which is used to administer the estate of the decedent cannot qualify as a charitable remainder unitrust. However, the regulations permit the revocable inter vivos trust to distribute assets to another trust which does qualify as a charitable remainder unitrust. The following is a sample provision for inclusion in the governing instrument of the revocable inter vivos trust which provides that the revocable inter vivos trust will be used to partially administer the estate of the decedent and then distribute assets to another trust which is a charitable remainder unitrust:

The Trustee shall pay to A all of the income from the trust assets for A's life, during which the trust shall be fully revocable by A. Upon A's death the trust shall become irrevocable and the Trustee shall pay all debts, taxes and other expenses of the administration of A's estate. After the payment or satisfaction of all such debts, taxes and expenses, the Trustee shall transfer all of the then principal and income of the Trust to the Trustee of the charitable remainder unitrust hereinafter established to be held, administered and distributed in the manner and according to the terms and conditions hereinafter provided.

The following comments pertain to the sample provision described above:

(1) TRUST PROVISIONS DURING LIFE. There are no restrictions on the dispositive provisions of the above trust during the period it is fully revocable.

(2) PROVISION FOR BOTH TRUSTS IN SAME INSTRUMENT. The same governing instrument may provide for both the revocable inter vivos trust and the charitable remainder unitrust, and both trusts may have the same trustee.

SEC. 7. SAMPLE TRUST FORMS

.01 This Section provides sample forms of trusts that meet the requirements for charitable remainder trusts as described in Code section 664 of the Internal Revenue Code.

.02 In order to provide a service to taxpayers and to save the time and expense involved in requesting and processing rulings on proposed charitable remainder trusts, this Section allows taxpayers who make transfers to a trust that substantially follows one of the sample forms of the trusts contained herein to be assured that the Service will recognize the trust as meeting all of the requirements of a charitable remainder trust, provided that the trust operates in a manner consistent with the terms of the instrument creating the trust and is a valid trust under applicable local law.

.03 The sample forms of trusts meet all of the applicable requirements of Code section 664 and the regulations thereunder, and include the following:

[LIST OF TRUST FORMS NOT INCLUDED]

In all cases, in order to come within the protection provided by these forms, the termination of the noncharitable interest must be followed by a distribution of the trust assets to the charitable remainder beneficiary.

If the trust provisions are substantially similar to those in one of the samples provided in this Section, the Service will recognize the trust in satisfying all of the applicable requirements of Code section 664 and the regulations thereunder. A document will be considered to be substantially similar to one of the samples even though, for example, the wording is varied to comport with local law and practice as necessary to create trusts, define legal relationships, pass property by bequest, provide for the appointment of alternative and successor trustees, or designate alternative charitable remaindermen. Moreover, for transfers to a qualifying charitable remainder unitrust, the remainder interest will be deductible under Code sections 170(f)(2)(A) 2055(e)(2)(A) and 2522(c)(2)(A) for income, estate and gift tax purposes, respectively, if the charitable remainder beneficiary otherwise meets all of the requirements of those provisions. Therefore, it will not be necessary for a taxpayer to request a ruling on the qualification of a substantially similar trust.

A trust that contains substantive provisions in addition to those provided in the sample forms contained in this Section, other than provisions necessary to establish a valid trust under applicable local law, or that omits any of these provisions will not necessarily be disqualified, but will not be assured of qualification under the provisions of this Section.

.04 SAMPLE INTER VIVOS CHARITABLE REMAINDER UNITRUST.

On this_____day of_____, 20_____I,_____(hereinafter referred to as the "Donor"), desiring to establish a charitable remainder unitrust within the meaning of Section 6 of Rev. Proc. 2001-__ and Section 664 of the Internal Revenue Code (hereinafter referred to as the "Code"), and the corresponding regulations, hereby create the _____Charitable Remainder Unitrust and designate_____ as the Trustee. [Alternative or successor trustees may be designated.]

1. FUNDING OF TRUST. The Donor hereby transfers to the Trustee the property described in Schedule A and the Trustee accepts such property and agrees to hold, manage, and distribute such property of the Trust under the terms set forth in this Trust instrument [See discussion in Section 60.1.]

2. PAYMENT OF UNITRUST AMOUNT. In each taxable year of the Trust, the Trustee shall pay to [an individual living at the time the trust is created] (hereinafter referred to as the "Recipient") during the Recipient's lifetime a unitrust amount equal to [at least 5 and not more than 50] percent of the net fair market value of the trust assets valued as of the first business day of each taxable year of the trust (the "valuation date"). The unitrust amount shall be paid in equal quarterly installments at the end of each quarter from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amount shall be added to principal. [See discussion in Section 6.02.]

ALTERNATIVE 1 -- Select (a); (a) and (b); (a) and (c); or (a), (b) and (c).

(a) In each taxable year of the Trust, the Trustee shall pay to Recipient during the Recipient's lifetime, a unitrust amount equal to the lesser of (i) the trust income for the taxable year, as defined in section 643(b) of the Code and the regulations thereunder, and (ii) [at least 5 and not more than 50] percent of the net fair market value of the assets on the valuation date. The unitrust amount shall be paid in equal quarterly installments at the end of each quarter. In addition, trust income for the taxable year shall include any gain realized during the taxable year from the sale of trust property, but only to the extent that such gain is attributable to appreciation of trust property occurring after the contribution of that property to the trust. Any income of the trust for a taxable year in excess of the unitrust amount shall be added to principal.

(b) The unitrust amount for any year shall also include any amount of trust income for such year that is in excess of [same percentage as in (a), (ii), above] percent, to the extent that the aggregate of the amounts paid in prior years was less than the aggregate of the amounts computed as [same percentage as in (a), (ii), above] percent of the net fair market value of the trust assets on the valuation date.

(c) Upon the occurrence of (specify event), effective as the first day of the year following (specify same event), the Trustee shall pay to the Recipient in each taxable year of the Trust during the Recipient's lifetime a unitrust amount equal to [at least 5 and not more than 50] percent of the net fair market value of the trust assets on the valuation date. Following [specify the same event], the unitrust amount shall be paid in equal quarterly installments at the end of each quarter from income and, to the extent that income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the unitrust amount shall be added to principal.

ALTERNATIVE 2. The sample payment provision in this Paragraph 2, and in Alternative 1, provide for the payment of the unitrust amount to a single Recipient. Alternatively, the trust instrument may require payment of the unitrust amount to concurrent and/or successive recipients. [See discussion in Section 60.2.] If payment is required to concurrent and/or successive recipients, the following language should be substituted for the first sentence of Paragraph 2, and for the first sentences of Alternatives 1(a) and (1)(c).

(a) CONCURRENT AND CONSECUTIVE RECIPIENTS. In each taxable year of the Trust, the Trustee shall pay to [an individual living at the time the trust is created] and [another individual living at the time the trust is created] (hereinafter referred to as the "Recipients") in equal shares during their lifetimes and, upon the death of the first of the Recipients to die, to the survivor Recipient, a unitrust amount equal to [at least 5 and not more than 50] percent of the net fair market value of the trust assets on the valuation date.

(b) CONSECUTIVE RECIPIENTS. In each taxable year of the Trust, the Trustee shall pay to [an Individual living at the time the trust is created] during the Recipient's lifetime, and after this Recipient's death, to [another individual living at the time the trust is created] (each hereinafter referred to as the "Recipient"), for such time as he or she lives, a unitrust amount equal to [at least 5 and not more than 50] percent of the net fair market value of the trust assets on the valuation date.

3. PAYMENT OF FEDERAL ESTATE TAXES AND STATE DEATH TAXES. The unitrust interest of a succeeding or surviving Recipient will take effect upon the death of the first Recipient only if the funds for payment of any federal estate taxes or state death taxes for which the Trustee may be liable upon the death of the first Recipient are paid from the donor's estate, by the succeeding or surviving Recipient or from some other source other than the Trust. [This provision is mandatory only if all or a portion of the Trust may be subject to such taxes on the death of the first Recipient. See discussion in Section 60.3.]

4. PRORATION OF THE UNITRUST AMOUNT. In determining the unitrust amount for a short taxable year, the Trustee shall prorate the fixed percentage unitrust amount on a daily basis; provided, however, that for the taxable year in which a Recipient's death occurs payment of the unitrust amount to that Recipient shall terminate with the regular payment next preceding the death of that Recipient.

5. DISTRIBUTION TO CHARITY. Upon the death of the Recipient, the Trustee shall distribute all of the then principal and income of the trust, other than any amount due the Recipient or the Recipient's estate, to_____, an organization described in sections 170(b)(1)(A), 170(c), 2055(a), and 2522(a) of the Code (hereinafter referred to as the "Charitable Organization"). If the Charitable Organization is not an organization described in sections 170(b)(1)(A), 170(c), 2055(a) and 2522(a) of the Code at the time when any principal or income of the Trust is to be distributed to it, the Trustee shall distribute such principal or income to one or more organizations then described in sections 170(b)(1)(A), 170(c), 2055(a) and 2522(a) of the Code as the Trustee shall select in its sole discretion. [See discussion in Section 60.4.]

ALTERNATIVE. If the Charitable Organization is, or may be, a private foundation, the references to section 170(b)(1)(A) of the Code in the above provision must be deleted.

6. ADDITIONAL CONTRIBUTIONS. If any additional contribution is made to the Trust after the initial contribution, the unitrust amount for the year in which the additional contribution is made shall be [the same percentage as established in paragraph 2] percent of the sum of (a) the net fair market value of trust assets as of the valuation date (excluding the assets so added and any income from, or appreciation on, such assets) and (b) that proportion of the fair market value of the assets so added that was excluded under (a) that the number of days in the period which begins with the date of contribution and ends with the earlier of the last day of the taxable year or the date of death of the recipient bears to the number of days in the period which begin on the first day of such taxable year and ends with the earlier of the last day in such taxable year or the date of death of the recipient. In the case where there is no valuation date after the time of contribution, the assets so added shall be valued as of the time of contribution. [See discussion in Section 60.5.]

7. PROHIBITED TRANSACTIONS. The trustee shall make distributions at such time and in such manner as not to subject the trust to tax under section section 4942 of the Code. Except for the payment of the unitrust amount to the Recipient, the Trustee shall not engage in any act of self-dealing, as defined in section 4941(d) of the Code, and shall not make any taxable expenditures, as defined in section 4945(d) of the Code. During any period in which any part of the unitrust amount is paid to charity, or during which the Trust no longer is a charitable remainder trust but instead is retained for the use of one or more organizations described in Code section 170(c), the Trustee shall not make any investment that jeopardizes the charitable purpose of the Trust, within the meaning of section 4944 of the Code, or retain any excess business holdings, within the meaning of section 4943(c) of the Code. [See discussion in Section 60.6.]

8. TAXABLE YEAR. The taxable year of the Trust shall be the calendar year.

9. GOVERNING LAW. The operation of the Trust shall be governed by the laws of the State of_____. The Trustee, however, is prohibited from exercising any power or discretion granted under said laws that would be inconsistent with the qualification of the Trust under section 664 of the Code and the corresponding regulations.

10. LIMITED POWER OF AMENDMENT. The Trust is irrevocable. The Trustee, however, shall have the power, acting alone, to amend the Trust in any manner required for the sole purpose of insuring that the trust qualifies and continues to qualify as a charitable remainder unitrust within the meaning of section 664 of the Code and the corresponding regulations. 11. INVESTMENT OF TRUST ASSETS. Nothing in this trust instrument shall be construed to restrict the Trustee from investing the trust assets in a manner which could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of trust assets.

FULL TEXT:

November 30, 2000

Internal Revenue Service
Attn: CC:DOM:CORP:R (Notice 2000-37, Room 5226)
PO Box 7604, Ben Franklin Station
Washington, DC 20044

Thank you for the opportunity to submit suggestions for updating the charitable remainder unitrust and annuity trust specimen agreements that IRS has previously published.

United Jewish Communities is a national charitable umbrella organization that represents and serves 189 local Jewish Federations and an additional 400 Jewish communities without Federations across North America.

In 1997/98 alone, the Jewish Federations nationwide received approximately $2 billion in charitable contributions for their annual campaigns, supplemental campaigns, and endowment programs. Approximately 120 Jewish Federations have endowment fund programs (or in some cases, separate foundations associated with the Federation). Federation endowment assets totaled over $7 billion last year, with charitable grants and distributions from these funds totaling over $650 million. These endowment programs have played an increasingly important role to Federations in fulfilling their mission. Federations currently have remainder interests in charitable remainder trusts valued at over $200 million.

We suggest:

OPTIONAL PROVISIONS OR SELF-CONTAINED GENERIC TRUSTS? Optional component provisions dealing with different situations are preferable to self-contained trust documents unless IRS provides different self-contained CRUT's and CRATs for EACH type of property ownership (separate property, joint property, tenancy in common and community property).

An individual using a generic form (not taking the type of property ownership into account) could have unexpected gift tax consequences. If IRS decides to provide specimen self-contained trusts, we suggest that the specimens not only reflect how the funding assets are owned but also cover situations where the donor or donors are to be the life income beneficiaries (recipients) AND those where individuals other than the donor or donors are to be the beneficiaries.

Whatever the format (generic trust documents or component provisions), we ask IRS to state that its specimens provide a safe harbor but that other language -- meeting the requirements of the Code, regulations and revenue rulings -- is also acceptable. In all cases, annotations should alert drafters to the 5% minimum payout, the 50% maximum payout and the 10% minimum remainder interest requirements.

GIFT TAX CONCERNS ABOUT IRS's CURRENT SPECIMENS. Frequently, the donor is one of the beneficiaries of a two-life CRUT or CRAT funded with the donor's separate property. The trust provides payments to the donor for life and then to a survivor for life. It is generally wise for the donor to reserve a testamentary right to revoke the survivor beneficiary's interest. That keeps the non- charitable gift to the survivor income beneficiary (a sibling, for example) incomplete and thus not subject to gift tax.

We ask that IRS's new inter vivos specimens alert donors about the gift tax implications and also warn that the gift and estate tax marital deductions are not available if the trust has any recipient who is not a spouse. For example: "Pay me, then my American spouse, remainder to charity" qualifies for the gift and estate tax marital deductions. But: "Pay me, then my American spouse, then my child, remainder to charity" does not qualify.

TWO-LIFE CRUTs AND CRATs -- IRS's CURRENT SPECIMENS FOR COMPUTING THE PAYMENT AFTER THE DEATH OF THE FIRST BENEFICIARY. The current specimen trusts do not specify how unitrust and annuity trust payments are to be allocated in the year the first beneficiary dies. State law may give the answer if the trust is silent, but it is better to be specific. Annotations to new specimens should state the alternatives: the next payment that would have been paid to the deceased beneficiary had she lived is to be prorated between the deceased and survivor beneficiary; or that the life interest of the first beneficiary to die ends with the payment preceding her death and the survivor gets the entire payment.

LAST TAXABLE YEAR -- IRS's CURRENT SPECIMENS. The specimens provide that unitrust and annuity amounts will be prorated in the year of the beneficiary's death, more or less following Reg. sections 1.664-3(a)(1)(ii)(b)(1) and -2(a)(1)(ii)(a)(iv)(b). However, Reg. section 1.664-3(a)(5)(i) says that unitrust payments can stop with the last regular payment before the trust ends. (The same goes for annuity payments; see Reg. section 1.664-2(a)(5)(i).) Doing it the latter way means more money for the charitable remainder organization. We ask that an annotation explain the options.

PROPERLY DESCRIBING THE IRC CATEGORY OF CHARITABLE REMAINDER ORGANIZATIONS -- IRS's CURRENT SPECIMENS. IRS's specimens require that the charitable remainder organization (and any alternate remainder organization) be described in IRC sections 170(c), 2055(a) and 2522(a). But there is a pitfall. In Rev. Rul. 79-368, 1979-2 CB 109, a donor kept the power to substitute for the named charity any other charity as remainder organization, as long as it was described in IRC section 170(c). That subsection encompasses both public charities and private foundations so the donor could have named a private foundation. Because the donor's choice was not restricted to organizations also described in IRC section 170(b)(1)(A) -- public charities -- IRS ruled that his charitable deduction was subject to the lower deductibility limits for gifts to private foundations.

We ask that an annotation state that if the donor wants the remainder organization to be a public charity, require that it (and any alternate remainder organizations that will receive the assets if the named public charity is not qualified) be described in IRC section 170(b)(1)(A) in addition to being described in IRC sections 170(c), 2055(a) and 2522(a).

MAKE-UP PROVISIONS FOR DEFERRED FUNDING OF TESTAMENTARY TRANSFERS -- IRS's CURRENT SPECIMENS. The specimens incorporate generic language for making retroactive payments when the funding of the trust by a testamentary transfer is delayed. Rev. Rul. 88-81, 1988-2 CB 127. The idea is to treat the trust -- and pay the beneficiary -- as though the trust were up and running on the date of the decedent-donor's death even though the trust is not fully founded until later. When the trust is fully funded, the trustee pays the beneficiary the difference between what he or she actually received and what the beneficiary should have received in the interim.

The amount a unitrust beneficiary should have received can be determined one or two ways: using the method in either Reg. section 1.6644(a)(5)(i) or (ii). IRS's current specimen is noncommittal; it just refers to "THE UNITRUST AMOUNTS PAYABLE." That gives flexibility and should be retained. However, an annotation should explain the alternatives.

IRS's current inter vivos unitrust specimens, however, do not include the retroactive payment language of its testamentary specimen -- even though additional contributions to the inter vivos unitrust are authorized. A similar provision should be included in those specimens in case an additional contribution is made by the donor's or another individual's will (because funding of that additional amount would be delayed).

ADDITIONAL CONTRIBUTIONS TO TESTAMENTARY UNITRUSTS -- IRS's CURRENT SPECIMENS. The specimens -- both one-life and two-life -- prohibit additional contributions. Perhaps IRS did not think that beneficiaries or third parties add to testamentary unitrusts. In any event, there is no reason for a trust instrument to shut the door.

DEATH TAX PROVISION -- IRS's CURRENT SPECIMENS. Complying with Rev. Rul. 82-128, 1982-2 CB 71, IRS's two-life inter vivos CRUTs and CRATs require the second beneficiary to pay any federal estate tax or state death tax for which the trust might be liable when the first beneficiary dies. Another option is to state that it is the obligation of the donor's estate to pay any death taxes -- but if not paid, the beneficiary has to pay or forfeit his or her life interest. We ask that an annotation tell about that.

PROHIBITED TRANSACTIONS -- IRS's CURRENT SPECIMENS. The specimens prohibit self-dealing, taxable expenditures, jeopardy investments and excess business holdings. However, the two latter prohibitions need not be included in CRUTs and CRATs when a public charity is the remainder organization. We ask that an annotation explain this.

IRS's MODEL TRUSTS AND "SUBSTANTIAL" COMPLIANCE. Currently trusts that substantially follow IRS's specimens are qualified. But IRS's specimens do not have trustee's powers because that is often a matter of state law.

We ask IRS to announce that the substantial compliance rule will apply even though a trust adds typical trustee's powers authorized by state law as long as the governing instrument states: "Notwithstanding any other provisions of the agreement, the trustee is prohibited -- except for the payment of the unitrust [annuity] amount -- from engaging in any act of self-dealing as defined in section 4941(d) of the Code, from retaining any excess business holdings as defined in section 4943(c) of the Code that would subject the trust to tax under section 4943 of the Code, from making any investments that would subject the trust to tax under section 4944 of the Code, and from making any taxable expenditures as defined in section 4945(d) of the Code. If section 4942 of the Code is deemed applicable to the trust by reason of section 508(e) of the Code or otherwise, the trustee shall make distributions at such time and in such manner as not to subject the trust to tax under section 4942 of the Code."

10% MINIMUM REMAINDER INTEREST REQUIREMENT. We ask that IRS give specimen language for correcting a CRUT or CRAT when the 10% minimum remainder interest requirement is not met on the trust's initial funding or on later additions to a CRUT.

ADJUSTMENT TO MEET THE 10% MINIMUM REMAINDER INTEREST REQUIREMENT. For a unitrust or annuity trust that does not meet that requirement, we ask the IRS to clarify that it is possible to adjust (not just decrease) the trust term and/or payout rate in order to comply with the minimum remainder interest requirement. In a particular case, a trust measured by an individual's life may have to be reformed to be measured by a maximum term of 20 years in order to meet the 10% minimum remainder interest requirement. However, once converting the trust from one measured by a life or lives to a term- of-years trust, the percentage payout could be increased and still pass the 10% minimum remainder interest requirement. Without that ability, a reformation could result in requiring a trust to have a remainder interest much greater than 10% in order to be reformed.

DONOR AS TRUSTEE OF CRUT -- HARD-TO-VALUE PROPERTY. We ask that IRS give specimen language that provides that the governing instrument may state that in determining the annual net fair market value of unitrust assets, the donor who is the trustee has the option of either appointing an independent trustee to make the annual determination of net fair market value or retain a qualified appraiser. This ability should be available on a year-by-year basis throughout the term of the trust. In some years the donor may wish to appoint an independent trustee, and in other years she may wish to retain a qualified appraiser. She should have that option.

LAST TAXABLE YEAR -- PRORATING PAYMENTS FOR UNITRUSTS AND ANNUITY TRUSTS. IRS's current forms prorate based upon the number of days in the last taxable year. We believe the proration should properly be based on the number of days the recipient LIVED in the last taxable year and the new specimens should so provide.

TESTAMENTARY CHARITABLE REMAINDER UNITRUSTS AND ANNUITY TRUSTS FUNDED WITH INCOME-IN-RESPECT-OF-A-DECEDENT ASSETS. Please provide specimen language and explain the ramifications of funding testamentary CRUTs and CRATs with pension plans and other IRD assets.

FLIP-CRUTs -- TRIGGERING EVENTS. We request that IRS expand the list of examples of triggering events given in the regulations and state that the list is illustrative and not exclusive.

INCREASING PAYMENT CHARITABLE REMAINDER ANNUITY TRUST (IP- CRAT). We ask IRS to provide specimen language for an IP-CRAT.

First some background: Charitable remainder annuity trusts enable donors to keep life income and provide protection against trust assets going down in value. Once the fixed annual payment is set, it remains the same even though the trust's value decreases. However, if the value of the trust increases, there is no increase in payments.

Although CRUTs can provide a hedge against inflation if the value of a CRUT's assets keep pace with inflation, they do not provide the down-side protection of a CRAT.

Summing up, a CRAT protects against trust values going down and a CRUT can provide increased income if the trust assets go up in value. An IP-CRAT would provide a floor for the payments and provide a predetermined increase in payments over the trust term. The payments would be specified for the entire trust term on the trust's creation. So there would be no variation depending on each year's valuation of the trust assets (as with a CRUT).

A charitable remainder annuity trust must pay a sum certain annually. That requirement would be met because the sum certain for each year would be specified when the trust is created. At the outset, a fixed dollar amount would be set for the trust's first year. Each year's subsequent payments would be a fixed dollar amount -- but an increased amount -- specified at the time the trust is created.

EXAMPLE. An IP-CRAT funded with $100,000 provides for a payment of $5,000 in year one, $5,250 in year two, $5,500 in year 3, $5,750 in year four and so on each year. Or a formula could be used that each succeeding year's payment is to be a specified percentage greater than the prior year's payment.

The trust instrument would provide that the minimum payment is 5%, the maximum payment cannot be greater than 50%. The trust would have to pass the 10% minimum remainder interest requirement at the outset. If IRS retains Rev. Rul. 77-374, the payments would have to be so set as to also pass that test.

What is the authority for an IP-CRAT? IRC section 664 -- governing charitable remainder annuity trusts -- specifies that annuity trusts must pay a sum certain each year. It is not required that the sum certain be the same each year. We believe that the trust will pay a sum certain each year if the sums are specified at the time the trust is created -- either by specifying the payment for each year or giving a formula for determining the amount each year based upon the prior year's payment (or based on a different non- changeable formula specified when the trust is created).

Charitable remainder annuity trusts and charitable lead annuity trusts are comparable. In Letter Rulings 9112009, 199927031, 199952044 and 200029033, IRS approved lead trusts with payments that increase over the trust term.

Reg. section 1.664-2(a)(1)(ii) might seem to inhibit an IP-CRAT. But that regulation deals with changing annuity amounts when there is more than one recipient (beneficiary). If IRS reads the regulation to prohibit an IP-CRAT, we ask that the regulation be amended.

IRC section 664 itself states that for a CRAT "a sum certain . . . is to be paid not less often than annually." It does not require that the sum certain must be the same for every year of the trust term. As noted, IRS has approved increasing payment charitable lead annuity trusts, and there appears to be no policy reason to treat charitable remainder annuity trusts differently.

THE PUBLIC SHOULD BE GIVEN THE OPPORTUNITY TO COMMENT ON NEW IRS SPECIMEN CRUTs AND CRATs. We ask IRS to publish the new specimens for public comment BEFORE making them "final." That way possible future problems for both IRS and donors will be avoided.

NOW THAT THE IRS IS REVIEWING CRUTS AND CRATS, WE ASK THAT IT TAKE THE OPPORTUNITY TO REMOVE UNINTENDED TAX TRAPS AND RESOLVE GIFT-INHIBITING ISSUES.

TOPICS OF CONCERN: (1) charitable remainder annuity trusts and the 5% probability test of Rev. Rul. 77-374; (2) multiple grantor charitable remainder trusts; (3) CRTs funded with undivided property interests; and (4) transfers of mortgaged property to CRTs. The "law" on the last three items consists of letter rulings. Although not precedential, those rulings have inhibited important donations. We ask IRS to put all the issues to rest for these reasons:

(1) CRATs-5% PROBABILITY TEST. We believe that Rev. Rul. 77-374,1977-2 CB 329 should be withdrawn. That ruling disqualifies a CRAT if the probability of its running dry is not so remote as to be negligible (more than a 5% probability). The ruling's method of determining the 5% probability is inconsistent with the way the Code and IRS prescribe for determining the charitable remainder value. A CRAT can have a charitable remainder interest of over 40% and nevertheless flunk Rev. Rul. 77-374's test. The Taxpayers Relief Act of 1997 (20 years after IRS issued Rev. Rul. 77-374) should allay IRS's concerns. That law requires that the actuarial value of a CRAT's remainder interest be at least 10% of the initial net fair market value of the transferred assets. Thus meeting that statutory 10% test is sufficient to qualify a CRAT.

If IRS does not withdraw the ruling, we ask that it annotate its new specimens to remind drafters about the ruling. The annotation should also state that if the 5% probability test is met at the time an inter vivos trust is created, it shall be deemed met at death for estate tax purposes if there is a survivor beneficiary. That is the case with the 10% minimum remainder interest requirement. If it is met at creation, it is deemed met for all other purposes.

Under current law, it is virtually impossible to reform an annuity trust that flunks the 5% probability test. The rules of IRC section 2055(e)(3)(B) require that the value of the interest before and after reformation cannot vary by more than 5%.

Regarding the 10% minimum remainder interest requirement, the Congressional Conference Report states that the "5% variance rule" is relaxed to the extent necessary to reform a trust to meet the 10% requirement. If IRS retains Rev. Rul. 77-374 (which we believe is unnecessary because of the 10% minimum remainder interest requirement), IRS should specifically relax the 5% variance rule so that a trust not meeting the 5% probability test can be reformed. We also ask IRS to relax the 5% variance rule so that CRATs and CRUTs can be amended to meet the 50% maximum payout requirement and the 5% minimum payout requirement.

(2) MULTIPLE GRANTOR CRUTs AND CRATs. We ask IRS to announce that multiple grantors will not disqualify charitable remainder trusts. In Letter Ruling 9547004, IRS privately ruled that a charitable remainder unitrust with more than one grantor is not a qualified trust. Responding to numerous requests that the ruling be withdrawn and that IRS affirmatively announce that multiple grantor unitrusts and annuity trusts are okay, the letter ruling's author wrote that a letter ruling is not a precedent but then went on to say that IRS held to its position. The IRS staff person did say that the letter ruling would not apply if spouses are the grantors or when a multiple grantor trust is a charitable remainder annuity trust (rather than a charitable remainder unitrust).

We surmise that Letter Ruling 9547004 was IRS's attempt to thwart the near-zero-net-income-with-makeup charitable remainder unitrust. Some donors apparently had created NIM-CRUTs to pass assets to family members at no or reduced gift tax. Yet, what the family member received down the line could have great value. A donor could, for example, create a NIM-CRUT paying a unitrust amount to the donor for 15 years or his life, whichever is shorter, and then to the donor's daughter for her life. The donor's gift to his daughter is relatively small (discounted for the period she has to wait) compared to the amount the daughter would actually receive. She typically would receive something worth much more than the discounted value because the trustee could invest the NIM-CRUT assets in a way to produce little or no income while the donor was entitled to receive the income, creating substantial makeup amounts. When the donor's interest ends, the trustee switches to an income-producing investment. The trustee would then pay the daughter the makeup amount. That created an opportunity to transfer property to a family member free of or at greatly reduced gift tax.

A recent IRS regulation -- Reg. section 25.2702-1(c)(2) -- eliminates that strategy by valuing the donor's retained interest at zero, making the value of the daughter's interest, in the example, equal to the full fair market value of the assets used to fund the trust. So -- in light of the recent regulation -- we ask that IRS withdraw Letter Ruling 9547004 and announce that multiple grantor CRUTs and CRATs are allowable in all cases.

(3) FUNDING CRTS WITH UNDIVIDED PROPERTY INTERESTS. Spouses wanted to fund CRUTs with an undivided interest in a shopping center keeping an undivided interest for themselves in Letter Ruling 9114025. But the IRS -- we understand -- warned the spouses that common ownership of the center with the trusts would be deemed self- dealing. So the couple transferred their interests to a limited partnership and funded the CRUTs with part of the partnership interest. The partnership arrangement apparently "cleansed" the relationship to the IRS's satisfaction, and it ruled that the CRUTs qualified. This artificial end-run should not be required. We ask IRS to announce that donors may fund CRTs with undivided interests in property even if they plan to keep undivided interests in the same property.

(4) FUNDING CRTs WITH MORTGAGED PROPERTY. IRS disqualified a CRUT because it was funded with mortgaged property and the donor remained personally liable on the mortgage. A CRT must function exclusively as one from its creation. But a trust is not deemed "created," said IRS, as long as the donor is treated as an owner of the trust under the grantor trust rules discussed in Letter Ruling 9015049. From 1970 until 1990, many donors funded charitable remainder trusts with mortgaged property without a concern expressed by IRS. We ask IRS to announce that CRTs may be funded with mortgaged property whether or not the donor is personally liable on the mortgage.

The Code and regulations contemplate that mortgaged property will be used to fund charitable remainder unitrusts and annuity trusts. For example, IRS's recently released Exempt Organizations Continuing Professional Education (CPE) Program for FY 2001 discusses the tax implication of a CRT "taking property subject to a mortgage."

A charitable remainder trust that realizes any amount of unrelated business income, as defined in IRC section 512, is taxed as a complex trust for that year. Regs. section 1.664-1(c). Typically, IRC section 514 creates the problem, as a trust has debt financed income if it takes property subject to a mortgage. There are two exceptions.

(1) A trust will not have unrelated business income for a period of ten years following a gift as long as it does not assume the debt.

(2) An inter vivos trust will not have unrelated business income for a period of 10 years following a gift as long as the debt was placed on the property for more than 5 years from the making of the gift and the debt is not assumed.

We believe that Letter Ruling 9015049 disqualifying a trust with mortgaged property cannot be reconciled with the Code and regulations specifying the consequences of a qualified charitable remainder trust's having mortgaged property. We ask that the letter ruling be withdrawn and that IRS announce that unitrusts and annuity trusts will qualify if funded with mortgaged property as long as the trust takes subject to but does not assume the mortgage. Thank you again for the opportunity of giving our views.

Sincerely,

Conrad Teitell
Partner, Cummings & Lockwood
Legal Counsel to Planned Giving &
Endowments,
United Jewish Communities

Joseph C. Imbernian
Associate Vice-President,
Planned Giving & Endowments,
United Jewish Communities

Members of the CRT Subgroup of the Legal and Technical Subcommittee of the UJC Endowment Professionals Advisory Committee:

David Belkin
Assistant Executive Vice-President
Jewish Federation of Greater
Washington

Michael I. Friedman
Vice-President, Planned Giving &
Endowments
THE ASSOCIATED: Jewish
Community Federation of Baltimore

Gilbert H. Jacobson
Associate Executive Director,
Planned Giving & Endowments
UJA-Federation of New York

United Jewish Communities
New York, New York

cc: Victoria Agron
Diana Aviv
Robin Easton
Jonathan Lichter
Stephen Solender

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