Ltr. Rul. 9253055

Ltr. Rul. 9253055

Story posted in Letter Rulings on 17 August 1999
audience: PGDC Network | last updated: 15 June 2011
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TRUST QUALIFIES AS CHARITABLE REMAINDER UNITRUST

Reference:

Section 664 -- Charitable Remainder Trusts
UIL Number(s) 0664.03-02

Full Text:

Date: October 8, 1992

Refer Reply to: CC:P&SI:Br3/TR-31-1108-92

Dear * * *

This is in response to a letter dated June 3, 1992, and supplemental correspondence submitted on behalf of your client, the Grantor, concerning the qualification of proposed Trust A as a charitable remainder unitrust under section 664 of the Internal Revenue Code and the applicable regulations.

The terms of Trust A provide that the unitrust recipient is Trust B. The unitrust recipient will receive six percent of the net fair market value of the assets of Trust A valued annually. The unitrust amount will be paid in equal quarterly amounts from income and, to the extent that income is not sufficient, from principal.

The term of Trust A is 20 years. At the end of 20 years, Trust A will terminate, and all the assets will be paid to the qualified charitable organizations.

Trust B will terminate on the earlier of 25 years after the creation of the trust or the death of the last survivor of the named beneficiaries. However, in no event will Trust B terminate before 20 years after its creation.

The trustee of Trust A and of Trust B will be an independent corporate trustee. The terms of Trust B provide that the trustee will pay or apply to or for the use of the beneficiaries, or upon the death of the last survivor of the beneficiaries before 20 years after the creation of the trust, to the Grantor's then living issue her stirpes so much, including all, the net income and principal of the trust as the trustee determines in its sole and absolute discretion.

Section 664(d)(2) of the Code sets forth the requirements to be a charitable remainder unitrust. Section 664(d)(2)(A) provides that the unitrust amount must be paid "to one or more persons (at least one of which is not an organization described in section 170(c) and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the live or lives of such individual or individuals."

Section 1.664-3(a)(3)(i) of the Income Tax Regulations provides that the unitrust amount 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)(i) provides that the period for which the unitrust amount is payable begins with the first year of the charitable remainder trust and continues either for the life or lives of a named individual or individuals or for a term of years not to exceed 20 years. Only an individual or an organization described in section 170(c) may receive an amount for the life of an individual.

Section 7701(a)(1) of the Code defines a "person" to include an individual, trust, estate, association, company, corporation, and partnership.

In the present situation, Trust A provides that the unitrust amount is payable for a term of 20 years. Because the term of Trust A is a term of years not to exceed 20 years, the recipient of the unitrust amount may be any person or persons, including a trust, so long as at least one such person is not a charitable organization. Thus, Trust B is a permissible recipient of the unitrust amount. The fact that the independent trustee of Trust B has the power to allocate distributions among the named beneficiaries of Trust B has no effect on the qualification of Trust A as a charitable remainder unitrust.

The governing instrument of Trust A as submitted contains provisions set forth in Rev. Rul. 72-395, 1972-2 C.B. 340, as modified by Rev. Rul. 80-123, 1980-1 C.B. 205, and Rev. Rul. 82-128, 1982-2 C.B. 71, and clarified by Rev. Rul. 82-165, 1982-2 C.B. 117.

Accordingly, Trust A will qualify as a charitable remainder unitrust, for federal income tax purposes, for any year in which it continues to meet the definition of and functions exclusively as a charitable remainder unitrust. For such year, Trust A will be exempt from taxes imposed by subtitle A of the Code unless it has any unrelated business taxable income as defined in section 512 of the Code and the regulations applicable thereto.

Because Trust A will qualify as a charitable remainder unitrust, section 170(f)(2)(A) of the Code will not disallow a deduction under section 170. Therefore, a charitable contribution deduction will be allowed under section 170 based upon the present value of the remainder interest created. The amount of any charitable contribution deduction in respect of such remainder interest for any taxable year of a donor will be determined in accordance with section 170 and the applicable regulations.

Section 2501 of the Code imposes a tax on the transfer of property by gift by an individual.

Section 2511 of the Code provides that the gift tax applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.

Section 2522 of the Code provides for a gift tax charitable deduction for the value of property transferred to or for the use of charitable organizations.

Section 2522(c)(2)(A) of the Code provides that when a donor retains an interest in property or transfers an interest in property to a noncharitable donee, no deduction is allowed for the transfer of a remainder interest in trust in the same property to a charitable donee unless the remainder interest is in a charitable remainder annuity trust or charitable remainder unitrust (described in section 664) or in a pooled income fund (described in section 642(c)(5)).

In the present case, Trust A will qualify under the provisions of section 664 of the Code, and a gift tax charitable deduction will be allowed for the present value of the remainder interest passing to qualified charitable organizations within the meaning of section 2522.

No opinion is expressed as to any other provisions of Trust A or Trust B. No opinion is expressed as to the federal tax consequences of the formation or operation of Trust A or Trust B under the provisions of any other section of the Code.

A copy of this letter should be attached to the federal tax return for the tax year that Trust A is formed. A copy of this letter is enclosed for that purpose.

This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be cited as precedent.

Sincerely yours,

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

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