PLR 200813023: Trustee discretion and replacement power need not disqualify charitable unitrust

Plain-English summary

A donor proposed a charitable remainder unitrust that would pay half its annual unitrust amount to the donor and let an independent special trustee allocate the other half among the donor and eligible charities. The IRS ruled that this allocation power would not prevent unitrust qualification, with a meaningful annual payment to the noncharitable beneficiary required. It also ruled that the donor's limited power to replace the special trustee would not prevent qualification because the replacement could not be the donor or a related or subordinate party. The donor could replace the charitable remainder beneficiary without disqualifying an otherwise qualifying unitrust, although that retained power meant the remainder gift was not completed at creation. The IRS did not issue an overall advance ruling that the trust met every unitrust requirement.

Ruling snapshot

• Question: Do the special trustee's allocation discretion and the donor's trustee replacement power prevent charitable remainder unitrust status?
• Outcome: Approved for those provisions; overall qualification was not decided.
• Key authorities: IRC §§ 664(d)(2), 672(c), 674(c); Treas. Reg. §§ 1.664-3(a)(3)(ii), 1.674(d)-2(a).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200813023
Third Party Communication: None
Release Date: 3/28/2008
Date of Communication: Not Applicable
Index Number: 664.03-02, 674.00-00
Person To Contact:
------------------------
--------------------------, ID No. -------------
-------------------------------
Telephone Number:
-----------------------------------
---------------------
Refer Reply To:
CC:PSI:B04
PLR-133825-07
Date:
November 21, 2007

LEGEND

Taxpayer = ------------------------
$a = -----------------
x% = ----
Charity = -----------------------------------------------------------------

Dear ---- ----------:

This is in response to a letter from your authorized representative, dated June 8, 2007, requesting rulings on whether certain trust provisions will affect the qualification of a proposed trust as a charitable remainder unitrust (CRUT) under § 664(d)(2) of the Internal Revenue Code (Code).

Taxpayer intends to form a trust and fund the trust with stock valued at $a. The proposed trust (Trust) is intended to qualify as a valid CRUT under § 664(d)(2) and the corresponding regulations.

Article 2.1 of Trust provides for a unitrust amount of x% of the net fair market value of the assets of the trust, valued on the first day of each taxable year. In each taxable year of the unitrust period, the trustee shall pay (i) fifty percent of the unitrust amount to Taxpayer, and (ii) fifty percent of the unitrust amount to one or more of Taxpayer and any organization described on §§ 170(c), 2055(a), and 2522(a), as the Special Trustee, in the exercise of absolute discretion, directs. The first day of the unitrust period shall be the date property is first transferred to the trust and the last day of the unitrust period shall be the date of Taxpayer’s death.

Article 2.5 of Trust provides that at the termination of the unitrust period, the trustee shall distribute all of the principal and income of Trust to Charity; provided,
PLR-133825-07
2

however, that Taxpayer shall have the power to replace Charity as the charitable remainder beneficiary with one or more other organizations described in §§ 170(c), 2055(a), and 2522(a) as Taxpayer may have designated in a written instrument delivered to the trustee, except that at least one-third of such principal and income must be distributed to one or more organizations described in §§ 170(b)(1)(A), 170(c), 2055(a), and 2522(a). If Charity or any charitable organization designated by Taxpayer is not an organization described in §§ 170(c), 2055(a), and 2522(a) at the time when any income or principal of the trust is to be distributed to it, the trustee shall distribute such income or principal to such organizations described in §§ 170(c), 2055(a), and 2522(a) as the trustee shall select in the trustee’s sole discretion, and if less than one- third of such principal and income would otherwise pass to organizations described in
§§ 170(b)(1)(A), 170(c), 2055(a), and 2522(a), the trustee shall distribute to one or more organizations selected by the trustee such additional amount necessary to result in one- third of such principal and income being distributed to organizations described in
§§ 170(b)(1)(A), 170(c), 2055(a), and 2522(a).

Section 3.2 of Trust designates the initial Special Trustee and successor Special Trustees and provides that in no event shall Taxpayer, or any party who is related or subordinate to Taxpayer, within the meaning of § 672(c), act as the Special Trustee.

Pursuant to Article 3.3 of Trust, Taxpayer, who is the initial trustee of Trust, reserves the right to remove the Special Trustee then in office and replace such Special Trustee with another Special Trustee, provided, however, that in no event shall Taxpayer or any party who is related or subordinate to Taxpayer, within the meaning of § 672(c), act as the Special Trustee.

Taxpayer represents that at the time Trust is funded, the present value of the remainder interest will be at least ten percent of the value of the property contributed to Trust.

Your authorized representative has requested the following rulings with regard to the proposed trust:

1. Trust qualifies as a CRUT under § 664(d)(2);

2. The power of the Special Trustee to allocate payments of a portion of the unitrust amount among the beneficiaries does not prevent Trust from qualifying as a CRUT;

3. The power retained by Taxpayer to appoint a successor Special Trustee and to remove the Special Trustee and substitute another Special Trustee does not prevent Trust from qualifying as a CRUT;

Law and Analysis
PLR-133825-07
3

Pursuant to § 4.01(37) of Rev. Proc. 2007-3, 2007-1 I.R.B. 114, the Internal Revenue Service (Service) ordinarily will not issue rulings as to whether a charitable remainder trust that provides for annuity or unitrust payments for one or two measuring lives satisfies the requirements described in § 664.

In lieu of seeking the Service’s advance approval of a CRUT, Taxpayer is directed to follow the sample CRUT provisions outlined in Rev. Proc. 2005-52, 2005-2 C.B. 326. By following the models contained in Rev. Proc. 2005-52, Taxpayer can be assured that the Service will recognize a trust as meeting all of the requirements of a qualified CRUT under § 664(d)(2), provided that the trust operates in a manner that is consistent with the terms of the trust instrument and provided the trust is a valid trust under applicable local law.

In the present case, Trust contains provisions not addressed in Rev. Proc. 2005-

52. Therefore, we will rule on whether those provisions disqualify Trust as a CRUT
    under § 664(d)(2).

    Section 664(d)(2) provides that for purposes of § 664, a charitable remainder
    

    unitrust is a trust: (A) from which a fixed percentage (which is not less than 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 frequently 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 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; (B) from which no amount other than the payments described in § 664(d)(2)(A) and other than qualified gratuitous transfers described in § 664(d)(2)(C) may be paid to or for the uses of any person other than an organization described in § 170(c); (C) following termination of the payments described in § 664(d)(2)(A), the remainder interest in the trust is to be transferred to, or for the use of, an organization described in § 170(c) or is to be retained by the trust for such a use or, to the extent the remainder interest is in qualified employer securities (as defined in § 664(g)(4)), all or a part of such securities are to be transferred to an employee stock ownership plan (as defined in § 4975(e)(7)) in a qualified gratuitous transfer (as defined in § 664(g)); and (D) with respect to each contribution of property to the trust, the value (determined under § 7520) of the remainder interest passing to charity is at least 10 percent of the initial net fair market value of all property placed in the trust.

    Section 1.664-1(a)(1)(i) of the Income Tax Regulations provides that, generally, a
    

    charitable remainder trust is a trust that provides for a specified distribution, at least annually, to one or more beneficiaries, at least one of which is not a charity, for the life or for a term of years, with an irrevocable remainder interest to be held for the benefit of, or paid over to, charity.
    PLR-133825-07 4

    Section 1.664-1(a)(4) provides that in order for a trust to be a charitable
    

    remainder trust it must meet the definition of, and function exclusively as, a charitable remainder trust from the date or time of the creation of the trust. Solely for purposes, of
    § 664 and the regulations thereunder, the trust will be deemed to be created at the earliest time that neither the grantor nor any other person is treated as the owner of the entire trust under subpart E, part 1, subchapter J, chapter 1, subtitle A. For purposes of the preceding sentence, neither the grantor nor the grantor’s spouse shall be treated as the owner of the trust under subpart E merely because the grantor or the spouse is named as a recipient.

    Section 1.664-3(a)(3)(ii) provides that a trust is a not a charitable remainder
    

    unitrust if any person has the power to alter the amount to be paid to any named person other than an organization described in § 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, part 1, subchapter J, chapter 1, subtitle A were applicable to such trust.

    Section 674(a) provides the general rule that the grantor shall be treated as the
    

    owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without approval or consent of any adverse party.

    Section 674(c) provides that § 674(a) shall not apply to a power solely
    exercisable (without the approval or consent of any other person) by a trustee or trustees, none of whom is the grantor, and no more than half of whom are related or subordinate parties who are subservient to the wishes of the grantor, to apportion the income within a class of beneficiaries, or to pay corpus to a class of beneficiaries. See also Rev. Rul. 77-73, 1977-1 C.B. 175.

    Section 1.674(c)-1 provides that the powers to which § 674(c) applies are powers
    

    (a) to distribute, apportion, or accumulate income to or for a beneficiary or beneficiaries, or to, for, or within a class of beneficiaries, or (b) to pay out corpus to or for a beneficiary or class of beneficiaries (whether or not income beneficiaries). In order for such a power to fall within the exception of § 674(c) it must be exercisable solely (without the approval or consent of any other person) by a trustee or trustees, none of whom is the grantor and no more than half of whom are related or subordinate parties who are subservient to the wishes of the grantor.

    Section 1.674(d)-2(a) provides that a power in the grantor to remove, substitute,
    or add trustees may prevent the trust from qualifying under § 674(c) or (d). For example, if a grantor has an unrestricted power to remove an independent trustee and substitute any person including the grantor as trustee, the trustee will not qualify under
    § 674(c) or (d). See Rev. Rul. 77-285, 1977-2 C.B. 213.
    PLR-133825-07 5

    Article 2.1 of Trust provides for a unitrust amount of x% of the net fair market
    value of the assets of the trust, valued on the first day of the unitrust period. In each taxable year of the unitrust period, the trustee shall pay (i) fifty percent of the unitrust amount to Taxpayer, and (ii) fifty percent of the unitrust amount to such one or more of Taxpayer and any organization described on §§ 170(c), 2055(a), and 2522(a), as the Special Trustee, in the exercise of absolute discretion, directs.

    As noted above, § 674(c) provides an exception to the general rule of § 674(a)
    with regard to certain powers to apportion trust income or principal among a class of beneficiaries. Thus, a provision that gives an independent trustee the power to allocate the unitrust amount among the charitable and noncharitable beneficiaries on an annual basis is not inconsistent with the provisions of the Code and regulations governing charitable remainder trusts, provided that the governing instrument requires that a portion of the unitrust amount must be allocated and paid to the noncharitable beneficiaries each year and provided that the portion of the unitrust amount so paid is not de minimis under the facts and circumstances for each year.

    Based on the foregoing, we conclude that the provision in Trust that gives the
    Special Trustee the power to allocate a portion of the unitrust amount among charitable and noncharitable beneficiaries will not preclude Trust from qualifying as a CRUT under
    § 664(d)(2).

    In addition, under Article 3.3 of Trust, Taxpayer reserves the right to remove the
    

    Special Trustee then in office and replace such Special Trustee with another Special Trustee, provided, however, that in no event shall Taxpayer or any party who is related or subordinate to Taxpayer, within the meaning of § 672(c), act as the Special Trustee. Article 3.2 designates the initial Special Trustee and the successor Special Trustee and provides that in no event shall Taxpayer or any party who is related or subordinate to Taxpayer, within the meaning of § 672(c), act as the Special Trustee.

    Based solely on the information submitted and representations made, we
    conclude that Taxpayer has not retained a power to remove the Special Trustee that would allow him to substitute any person, including himself, as Special Trustee, or that would subordinate the Special Trustee to Taxpayer. Article 3.2 of the trust agreement provides that the Special Trustee can be replaced only by the persons named in the trust agreement and in the order they are named. In no event will the Special Trustee be a person or entity related to or subordinate to Taxpayer. For these reasons, we conclude that the Special Trustee is an independent trustee within the meaning of
    § 674(c).

    Further, we conclude that the provisions in the trust agreement providing
    Taxpayer with the power to replace the Special Trustee will not cause any person to be treated as the owner of the trust, or any portion thereof. Accordingly, this provision will not prevent Trust from qualifying as a CRUT under § 664(d)(2).
    PLR-133825-07 6

    We note that in this case the trust instrument provides Taxpayer with the power
    to replace Charity as the charitable remainder beneficiary with one or more substitute charitable organizations. Because Taxpayer will retain the right to designate the charitable remainder beneficiary or beneficiaries of the CRUT, he will not make a completed gift of the remainder when the trust is created. However, the retention of this power will not disqualify an otherwise qualifying charitable remainder trust under § 664 and the applicable regulations. Rev. Rul. 76-8, 1976-1 C.B. 179.

    Except as expressly provided herein, no opinion is expressed or implied
    concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

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

     In accordance with the Power of Attorney on file with this office, a copy of this
    

    letter is being sent to your authorized representative.

    The rulings contained in this letter are based upon information and
    representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

                                    Sincerely,
    
                                    James F. Hogan
                                    Senior Technician Reviewer, Branch 4
                                    (Passthroughs & Special Industries)
    

Enclosure
Copy for 6110 purposes

cc: