PLR 200617026: Limited early charity payments do not disqualify annuity trust

Plain-English summary

A charitable remainder annuity trust paid an annual amount to the settlor's son, with the remaining assets ultimately going to its charitable trustee. The trustee proposed limited annual payments of principal to itself for a scholarship program when the trust's assets exceeded a specified value. The son consented, and a court approved the change subject to a favorable IRS ruling. The IRS ruled that the proposed modification would not disqualify the trust under section 664. It did not decide whether the trust had originally qualified or currently qualified as a charitable remainder annuity trust.

Ruling snapshot

• Question: Would limited payments to the charitable remainder beneficiary during the annuity period disqualify the trust?
• Outcome: Approved: the proposed modification would not disqualify the trust under section 664.
• Key authorities: IRC §§ 664(d)(1), 170(c); Treas. Reg. § 1.664-2(a)(4).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200617026
Third Party Communication: None
Release Date: 4/28/2006
Date of Communication: Not Applicable
Index Number: 664.03-01
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:PSI:B02
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PLR-151566-05
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Date:
January 05, 2006
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Trust = -------------------------------------------------------------------------
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Trustee = ----------------------------------------
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A = ------------------

B = ------------------------
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d1 = ---------------------

d2 = -------------------

d3 = -------------------

d4 = ------------------

Date = -----------

s = ---------

t = -----------

u = -----------

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v = -----------

x = ---------

Court = -----------------------------------------------------
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Dear ----------------:

This letter responds to a letter dated October 5, 2005 submitted by the authorized representative of Trust requesting a ruling that a proposed modification of Trust will not disqualify Trust as a charitable remainder annuity trust (CRAT) under § 664 of the Internal Revenue Code.

On d1, A established Trust as a CRAT. Trustee is the trustee and the charitable remainder beneficiary of Trust. Paragraph 2 of Trust’s governing document requires Trustee to pay A, during A’s lifetime, an annuity of s dollars annually. Upon the death of A, trustee is to pay the same annuity annually to A’s son, B. Paragraph 5 provides that, upon the death of both A and B, Trustee is to distribute all the principal and income of Trust to itself, as the charitable remainder beneficiary. A died on d2, and B is the current annuity recipient. It has been represented that the initial net fair market value of the assets of Trust was t dollars and that the net fair market value of the assets of Trust has increased to approximately u dollars, as of d3.

To better fund its scholarship program, Trustee, with B’s consent, proposes to reform the terms of Trust to permit Trustee to make annual distributions of principal to itself as the charitable beneficiary of Trust. Specifically, Trustee would value the assets of Trust as of Date each year. To the extent that the net fair market value of assets of Trust exceeds v dollars as of Date, the Trustee would distribute a maximum of x dollars to itself to be used by Trustee’s scholarship program. If the net fair market value of Trust is v dollars or less, the Trustee will not make any distributions to itself. The modification of Trust will not jeopardize B’s interest as the current annuity recipient.

By an order dated d4, Court has approved the modification of Trust to allow the limited distributions to the charitable beneficiary described above, effective upon the receipt of a private letter ruling from the Internal Revenue Service that the modification of Trust will not disqualify Trust as a charitable remainder trust under § 664. Upon receipt of a favorable ruling request, Trustee will seek a revised order incorporating the letter ruling into the Court’s findings and will ask the Court to further modify Trust to conform it with § 1.664-2(a)(4) so that the terms of Trust will require the adjusted basis of assets distributed by the Trustee in kind be fairly representative of the adjusted basis of the assets available for distribution as of the distribution date.

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Section 664(d)(1) of the Code sets forth the requirements for a trust to be a charitable remainder annuity trust. Section 664(d)(1)(A) provides that a sum certain (which is not less that 5 percent nor more than 50 percent of the initial net fair market value of all property placed in 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 § 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 life or lives of such individual or individuals. Section 664(d)(1)(B) provides that no amount other than the payments described in § 664(d)(1)(A) and other than gratuitous transfers described in § 664(d)(1)(C) may be paid to or for the use of any person other than an organization described in § 170(c).

Section 1.664-2(a)(1)(i) of the Income Tax Regulations provides that, in general, the governing instrument of a CRAT must provide that the trust will pay a sum certain not less often than annually to a person or persons described in § 1.664-2(a)(3) for each taxable year of the period specified in § 1.664-2(a)(5).

Section 1.664-2(a)(3)(i) provides, in part, that the amount described in § 1.664-2(a)(1) 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 § 170(c).

Section 1.664-2(a)(4) provides, in part, that no amount other than the amount described in § 1.664-2(a)(1) may be paid to or for the use of any person other than an organization described in § 170(c). The trust may not be subject to a power to invade, alter, amend, or revoke for the beneficial use of a person other than an organization described in § 170(c). The governing instrument may provide that any amount other than the amount described in § 1.664-2(a)(1) shall be paid (or may be paid in the discretion of the trustee) to an organization described in § 170(c) provided that, in the case of distributions in kind, the adjusted basis of the property distributed is fairly representative of the adjusted basis of the property available for payment on the date of payment. It further states that the governing instrument may provide that a portion of the trust assets may be distributed currently, or upon the death of one or more recipients, to an organization described in § 170(c).

Section 1.664-1(e)(1) provides that an amount distributed by a charitable remainder trust to an organization described in § 170(c) other than the annuity or unitrust amount shall be considered as a distribution of corpus and of those categories of income specified in § 1.664-1(d)(1) in an order inverse to that described in § 1.664- 1(d)(1). The character of such amounts shall be determined as of the end of the taxable year of the trust in which the distribution is made after the character of the annuity or unitrust amount has been determined.

Based solely on the facts and representations submitted, we rule that the proposed modification of Trust discussed above will not disqualify Trust as a CRAT under § 664.

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Except as specifically set forth above, no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the Code, including whether Trust was or is a CRAT under § 664 of the Code.

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

Pursuant to a power of attorney on file with this office, a copy of this letter is being sent to Trust's authorized representative.

Sincerely,

Bradford R. Poston
Senior Counsel, Branch 2
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures: 2
Copy of this letter
Copy for § 6110 purposes cc: