Ltr. Rul. 9440010

Ltr. Rul. 9440010

Story posted in Letter Rulings on 21 September 1999
audience: PGDC Network | last updated: 15 June 2011
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Note: This ruling is revoked by Ltr. Rul. 9532006

Reference:

Section 2652 -- Generation-Skipping Definitions
UIL Number(s) 2652.00-00

Full Text:

Date: July 5, 1994

Refer Reply to: CC:DOM:P&SI:4/TR-31-1613-94
Re: * * *

Dear * * *

This is in response to your letter dated June 10, 1994, and other submissions in which you request a ruling with respect to the generation-skipping transfer tax consequences under section 2652 of the Internal Revenue Code of a charitable trust created under the decedent's inter vivos trust and taking effect at the decedent's death.

You represent that the decedent, a United States citizen, died in May 1993. The decedent had created a revocable inter vivos trust in 1986 and had amended the trust in 1990. The terms of the trust provide that, upon the decedent's death, the residue of the trust estate after certain cash distributions is to be set aside in a trust for the benefit of a grandniece and grandnephew during their joint lives with the remainder to be paid to a charitable organization. You represent that the charitable trust satisfies all of the requirements of a charitable remainder annuity trust under section 664. Based on the applicable section 7520 rate at the date of the decedent's death of 6.6 percent and the stated annuity rate under the charitable trust of 8 percent, and based upon the ages of the grandniece and grandnephew, the possibility that the charitable transfer will become effective is so remote as to be negligible and, thus, no federal estate tax charitable deduction is allowable for the property passing to the charitable organization under the charitable trust.

You request that we rule as follows:

1. The charitable trust created under the decedent's inter vivos trust qualifies as a charitable remainder annuity trust for purposes of section 2652(c)(1)(C)(i).

2. The interest of the charitable organization in the charitable trust is that of a non-skip person under section 2613 and, thus, the charitable trust is not a skip person.

3. The distribution of assets from the decedent's inter vivos trust to the charitable trust will constitute neither a taxable termination nor a direct skip under section 2612 and is, thus, not subject to the generation-skipping transfer tax on the distribution to the charitable trust.

ISSUE 1 (Qualification as Charitable Remainder Annuity Trust)

Section 2601 imposes a tax on every generation-skipping transfer. Section 2612 defines these transfers to include a taxable termination, a taxable distribution, and a direct skip. Section 2612(a) provides that a "taxable termination" means a termination by death, lapse of time, release of power, or otherwise of an interest in property held in a trust unless, immediately after such termination, a non-skip person has an interest in the property or at no time after the distribution may a distribution be made from the trust to a skip person.

Section 2612(b) provides that a "taxable distribution" means any distribution from a trust to a skip person other than a taxable termination or a direct skip. Section 2612(c) provides that a "direct skip" is a transfer, subject to tax under Chapters 11 or 12, of an interest in property to a skip person.

Section 2613(a) provides that a "skip person" is 1) a natural person assigned to a generation which is two or more generations below the assignment of the transferor, or 2) a trust if either a) all interests in the trust are held by skip persons or b) there is no person holding an interest in the trust and at no time after the transfer may distributions be made from the trust to a non-skip person. Section 2613(b) provides that a "non-skip person" means any person who is not a skip person.

Section 2652(c) provides that a person has an interest in property held in a trust if the person 1) has the right (other than a future right) to receive income or corpus from the trust, 2) is a permissible current recipient of income or corpus and is not a charitable organization described in section 2055(a), or 3) is a charitable organization described in section 2055(a) and the trust is a charitable remainder annuity trust or charitable remainder unitrust described in section 664, or a pooled income fund described in section 642.

Section 664(d)(1) provides that a charitable remainder annuity trust is a trust from which a sum certain (which is not less than 5 percent of the initial fair market value of all property placed in the trust) is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c)) for a term of years not in excess of 20 years or for the life or lives of such individual or individuals. In addition, no amount (other than the payments described above) may be paid to or for the use of any person other than an organization described in section 170(c) and, following the termination of the payments described above, the remainder interest is to be transferred to or for the use of an organization described in section 170(c).

Section 20.2055-2(e) of the Estate Tax Regulations provides that where an interest in property has passed from the decedent for both charitable and private purposes, no deduction is allowable under section 2055 for the value of the interest passing for charitable purposes unless the charitable interest is a remainder interest in a trust which is a charitable remainder annuity trust as defined in section 664(d)(1), a charitable remainder unitrust as defined in section 664(d)(2) and (3), or a pooled income fund as defined in section 642(c)(5). Section 20.2055-2(b)(1) provides that if, as of the date of a decedent's death, a transfer for charitable purposes is dependent on the performance of some act in order that it might become effective, no deduction is allowable unless the possibility that the charitable transfer will not become effective is so remote as to be negligible.

Rev. Rul. 70-452, 1970-2 C.B. 199, holds that a charitable deduction is not allowable where the probability exceeds 5 percent that a noncharitable beneficiary will survive the exhaustion of a fund in which the charity has a remainder interest. Any possibility in excess of 5 percent that the contingency will occur and defeat the charity's interest is not considered so remote as to be negligible within the meaning of section 20.2055-2(b). It should be noted that the fact that the probability exceeds 5 percent that a noncharitable beneficiary will survive the exhaustion of a fund in which the charity has a remainder interest and, thus, the estate will not be eligible for a charitable deduction, does not, however, affect the classification of the trust as a charitable remainder annuity trust. See Rev. Rul. 77-374, 1977-2 C.B. 330.

In the present case, you represent that the terms of the charitable trust satisfy the requirements of section 664 and, thus, is a charitable remainder annuity trust for purposes of section 664. Based on the applicable federal rate at the decedent's death, the annuity payout rate, and the ages of the noncharitable beneficiaries, the probability that the grandniece and grandnephew will survive the exhaustion of the trust funds exceeds 5 percent. The trust will, thus, not be eligible for a federal estate tax charitable deduction. However, this does not compromise its classification as a charitable remainder annuity trust under sections 664 or 20.2055-2(e).

Accordingly we conclude that the charitable trust created under the decedent's inter vivos trust will qualify as a charitable remainder annuity trust for purposes of section 2652(c)(1)(C)(i).

ISSUE 2 (Charitable Organization as Non-skip Person)

As described above, section 2613(a) provides that a skip person is either a natural person assigned to a generation which is two or more generations below the assignment of the transferor, or a trust in which either all interests in the trust are held by skip persons or in which a person holds an interest and distributions will be made to non-skip persons. The charitable organization, in the present case, is neither a natural person nor a trust satisfying the specified requirements. Thus, the charitable organization is not a skip person for purposes of section 2613(a). Pursuant to section 2613(b), a non-skip person is any person who is not a skip person.

Accordingly, we conclude that the interest of the charitable organization in the charitable trust is that of a non-skip person under section 2613 and, thus, the charitable trust is not a skip person.

ISSUE 3 (Taxation of Transfer to Non-skip Persons)

The grandniece and grandnephew, in the present case, are natural persons assigned to a generation which is two generations below the assignment of the decedent. Accordingly, the grandniece and grandnephew are skip persons for purposes of section 2613.

Section 2651(e)(2) provides that if an estate, trust, partnership, corporation, or other entity has an interest in property, each individual having a beneficial interest in that entity is treated as having an interest in the property and is assigned to a particular generation based on the provisions of section 2651. Section 2612(c)(3) provides, however, that, solely for purposes of determining whether a transfer to a trust is a direct skip, the rules of section 2651(e)(2) shall not apply. Accordingly, the creation of the charitable remainder annuity trust at the decedent's death is not a direct skip for purposes of section 2612.

The creation of the charitable remainder annuity trust is not a taxable termination because the creation of the trust occurs as a result of a transfer (i.e., the death of the decedent) which is subject to estate tax. Thus, the transfers to the grandniece and grandnephew are taxable distributions because they are distributions from a trust to skip persons that are other than a taxable termination or direct skips.

We conclude that the distribution of assets from the decedent's inter vivos trust to the charitable remainder annuity trust will constitute neither a taxable termination nor a direct skip under section 2612, and is, thus, not subject to the generation-skipping transfer tax on the distribution to the charitable remainder annuity trust.

Except as we have specifically ruled herein, we express no opinion under the cited provisions or under any other provision of the Code.

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

Final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted. Therefore, to the extent that regulations are adopted that are inconsistent with any conclusion herein, this ruling will be modified. See section 11.04 of Rev. Proc. 94-1, 1994-1 I.R.B. 10. However, when the criteria in section 11.05 of Rev. Proc. 94-1 are satisfied, a ruling is neither revoked nor modified retroactively except in rare or unusual circumstances.

Sincerely yours,

Assistant Chief Counsel
(Passthroughs and Special Industries)

By: Lee A. Dunn
Senior Technician Reviewer
Branch 4

Enclosure
Copy for 6110 purposes

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