Ltr. Rul. 8238085

Ltr. Rul. 8238085

Story posted in Letter Rulings on 5 October 1999
audience: PGDC Network | last updated: 15 June 2011
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Restricted Investment Power Disqualifies Charitable Remainder Trust

Reference:

Section 664 -- Charitable Remainder Trusts
Index Nos.: 0664.03-02

Full Text:

June 25, 1982

Refer Reply to: CC:IND:I:2:3

This is in reply to your letter dated March 22, 1982 and to prior correspondence, requesting a factor to determine the value of the charitable remainder under X.

Before a factor will be furnished a determination must be made whether X qualifies under section 664 of the Internal Revenue Code and the applicable regulations.

A copy of the governing instrument of X was submitted with your letter dated March 22, 1982. X was established on November 23, 1981 by an agreement between you, as donor, and Y, as trustee. X was funded on November 23, 1981.

Under the terms of the governing instrument of X you are the sole life income beneficiary and upon your death X will terminate and the trust assets will be distributed to several named public charities as provided in Article III of the governing instrument.

Section 1.664 - 1(a)(3) of the Income Tax Regulations provides, in part, as follows: A trust is not a charitable remainder trust if the provisions of the trust include a provision which restricts 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 the trust assets.

Paragraph 1 of Article IV of the governing instrument provides: No provisions of this trust 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.

Paragraph 1 of Article VII of the governing instrument of X provides as follows: The Trustee shall invest the trust property as provided in this paragraph.

(a) In this instrument, reference to "Fund" or "Funds" mean the one or more open-end management type investment companies (excluding any fund for variable annuity contracts) managed or advised by Y or Z or any affiliate of either. References to "reasonable return" mean the annual realization by the trust of a reasonable amount of income from or gain from the sale or disposition of a trust asset.

(b) The Trustee shall have the power and authority in its uncontrolled discretion to retain or sell any property, other than shares of a Fund, contributed to the trust. The Trustee shall invest and reinvest the proceeds from the sale, if any, of any such trust property and shall, while the Donor is living, subject to sub-paragraphs (c) and (e), invest and reinvest so much of the other trust property in shares, or a trust of shares, of such one or more of the Funds in such amounts and proportions as the Donor may direct in a writing delivered to the Trustee. If the Donor has not directed the Trustee as aforesaid at the time the Trustee holds trust property to invest under this sub-paragraph, the Trustee shall invest such property as follows:

100% -- W

but the Donor shall have the right to direct subsequent changes in investments as provided above. After the death of the Donor, the Trustee shall retain the investments held in the trust and may change them only pursuant to sub-paragraph (c) and (e) below.

(c) If any of the investments in a Fund or made pursuant to this sub-paragraph could not result in a reasonable return or if any Fund has been liquidated or dissolved, the Trustee shall reinvest such holding in shares, or a trust of shares, of such one or more of the Funds as will provide, in the opinion of the Trustee, a reasonable return, in such amount and proportions as the Trustee may select. Once having made such selection, the Trustee shall have no further responsibility whatsoever under this sub-paragraph to consider the advisability ability of retaining, disposing of or acquiring investments for the trust or to make investment decisions.

(d) Except as provided in sub-paragraph (e) below or as directed by the Donor under sub-paragraph (b) above, the Trustee shall invest additions to the trust property (except reinvestments of income and capital gains distributions) in shares, or a trust of shares, of the one or more of the Funds then held hereunder in the proportion which the aggregate value of each such holdings bears to the aggregate value of all such holdings.

(e) In the event every Fund has ceased to provide a reasonable return or has been liquidated or dissolved, the Trustee shall have the power and authority in its uncontrolled discretion from time to time to invest and reinvest the trust property in securities or any other kind of personal or real property, even though any or all of the investments made are of a character or size which but for this express authority would not be considered proper for a trustee.

Although Paragraph 1 of Article IV of the governing instrument contains the general provision prescribed by section 1.664 - 1(a)(3) of the regulations as to not restricting the trustee in his investing of trust assets, the specific provisions of Paragraph 1 of Article VII of the governing instrument do provide such restrictions. Paragraph 1 of Article VII provides, for example, that the trustee shall not sell shares of a Fund contributed to the trust and that you, as donor, while living, shall direct, by written instructions delivered to the trustee, the investing and reinvesting of the proceeds of other property contributed and in the event that there are no written directions, the governing instrument provides that such property shall be invested in the shares of W. In addition, the governing instrument provides that you, the donor, shall have the right to direct subsequent changes in investments under similar circumstances.

It is our conclusion that provisions of Paragraph 1 of Article VII of the governing instrument of X referred to above restrict the trustee from investing the trust assets in a manner that could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of trust assets in violation of section 1.664 - 1(a)(3) of the regulations.

Accordingly, we conclude that X is not a charitable remainder trust under the provisions of section 664 of the Code and the applicable regulations thereunder.

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

Sincerely yours,

Anthony Manzanares, Jr. Chief, Individual Income Tax Branch

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