Two charitable remainder unitrusts with a flexible charity-designation power qualify under § 664

Plain-English summary

An individual planned to create two charitable remainder unitrusts (CRUTs), a type of trust that pays a fixed percentage to the donor (and here, in one trust, a surviving spouse) each year and leaves the remainder to charity. These trusts were drafted with several flexible features: an independent trustee could split each year's unitrust payment between the donor and charity, the donor and spouse could replace the independent trustee, the donor could pick which charities receive the charitable share, and the donor could revoke the spouse's survivor interest by will. The taxpayer asked whether these features would disqualify the trusts under Internal Revenue Code § 664 and how they affect gift and estate tax. The IRS ruled the features are all permissible: because the payout is controlled by an independent trustee and the charitable powers fit exceptions in the grantor-trust rules (§ 674), the trusts still qualify as CRUTs. On the transfer-tax side, the donor's power to name the charities keeps the gift of the discretionary "net unitrust amount" incomplete until each annual distribution actually reaches charity, at which point it is a completed gift that earns a § 2522 charitable deduction; and if the spouse is the only noncharitable beneficiary of the second trust at the donor's death, the combined § 2055 charitable and § 2056 marital deductions fully offset that trust's value in the estate. The IRS did not rule on whether the trusts are in fact valid CRUTs.

Ruling snapshot

• Question: Do the trusts' flexible trustee-removal, payout-allocation, and charity-designation provisions disqualify them as CRUTs under § 664, and what are the gift and estate tax consequences?
• Outcome: Approved (all 11 requested rulings granted; IRS did not opine on whether the trusts are in fact valid CRUTs)
• Key authorities: IRC §§ 664(d)(2), 674, 2522(a), 2055(a), 2056(a) and (b)(8); Treas. Reg. §§ 1.664-3, 1.674(b)-1, 25.2511-2, 20.2056(b)-8; Estate of Sanford v. Commissioner, 308 U.S. 39 (1939); Rev. Rul. 77-275

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 201845014                                                 Third Party Communication: None
Release Date: 11/9/2018                                           Date of Communication: Not Applicable
Index Numbers: 664.00-00, 664.03-02,
              664.03-00, 2055.00-00,                              Person To Contact:
              2056.00-00, 2522.00-00                              -----------------------, ID No. -------------------
                                                                  ---------------------------------------------------
--------------                                                    Telephone Number:
--------------------------                                        ----------------------
--------------------------------                                  Refer Reply To:
                                                                  CC:PSI:B03
                                                                  PLR-105036-18
                                                                  Date:
                                                                  August 09, 2018




Legend

X                                   =         --------------
-----------------------------------------------------------------------

Y                                   =        ----------------------------------

CRUT #1                             =        -----------------

CRUT #2                             =        ---------------------

a                                   =        ------------------

b                                   =        --

c                                   =        ----


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

This letter responds to a letter dated February 16, 2018, submitted on your behalf by
your authorized representatives, requesting whether certain trust provisions will affect
the qualification of proposed trusts as charitable remainder unitrusts (CRUTs) under
§ 664(d)(2) of the Internal Revenue Code (Code) and the applicable regulations and on
the gift and estate tax consequences of the proposed transactions.
PLR-105036-18                                 2




                                          FACTS

The information submitted states that X intends to form two CRUTs, CRUT #1 and
CRUT #2, and fund CRUT #1 and CRUT #2 with property worth approximately $a each.
CRUT #1 and CRUT #2 are intended to qualify as valid CRUTs under § 664(d)(2) and
the corresponding regulations.

CRUT #1

Article 2.01(b) provides that the unitrust amount for each taxable year shall be an
amount equal to b% of the net fair market value of the trust property determined as of
the first business day of that taxable year.

Article 2.01 provides that until the date of X's death (the "term ending date"), the trustee
shall administer the trust property as described in Article 2. Article 2.01(a)(1) provides
that in each taxable year including the year in which the term ending date occurs, the
trustee shall distribute to X (A) c% of the unitrust amount and (B) such additional portion
of the unitrust amount, if any, as the independent trustee determines is necessary to
ensure the total portion of the unitrust amount distributed to X in each taxable year shall
not be de minimis under the facts and circumstances.

Article 2.01(a)(2) provides that after providing for distribution of the minimum amount
(the aggregate of amounts described in Article 2.01(a)(1)(A) and (B)) the trustee shall
distribute the balance of the unitrust amount (the "net unitrust amount") to such one or
more of X and one or more charitable organizations (as are described in §§ 170(c),
2055(a) and 2522(a) of the Code) included in the charitable class as the independent
trustee selects in the independent trustee's sole discretion without the approval or
consent of any other person, and in such equal or unequal portions as the independent
trustee determines in the independent trustee's sole discretion without the approval or
consent of any other person. The independent trustee shall designate by signed
irrevocable written instrument delivered to X on or before the date that is thirty (30) days
before the payment date, if X is then living, the portion of the net unitrust amount to be
paid to the charitable class for the taxable year. Under Article 6.07, the term "payment
date" means the last day of each calendar year and the term ending date.

Article 2.01(a)(3) the charitable class means (A) such one or more charitable
organizations that X, as an individual and not in any fiduciary capacity, designates as
potential recipients of the charitable portion by signed written instrument delivered to the
independent trustee, which shall remain revocable until the payment date such that X
retains the power to designate the charitable class until such power lapses on the
payment date, or if X does not provide such designation on or before the payment date,
PLR-105036-18                                 3

(B) such one or more charitable organizations as the independent trustee, in the
independent trustee's sole discretion, shall determine.

Article 2.02 provides that as of the term ending date, the trustee shall distribute the trust
property remaining after providing for the payment of all unitrust amounts under the
preceding provisions of Article 2 to one or more charitable organizations in such
proportion among them as X may appoint by will, or to the extent X does not exercise
the power of appointment, to Y, if it is a charitable organization on the term ending date,
or if not, to such one or more charitable organizations and in such equal or unequal
proportions among them as the trustee, in the trustee's sole discretion, decides.

Article 3.02 provides that at all times at least one independent trustee must be acting.
"Independent trustee" means a trustee other than X, X's spouse, or a subordinate party
as to either X or X's spouse. The term "subordinate party" is defined in Article 6.07(f) to
mean any individual or entity that would be a related or subordinate party within the
meaning of § 672(c) assuming that the grantor for purposes of § 672 was that person.
Article 3.02 further provides that if at any time a vacancy occurs in the office of
independent trustee, the appointer shall fill the vacancy by appointing an independent
trustee. The authority of the independent trustee shall be solely limited to the actions
described in Articles 2.01(a)(1), 2.01(a)(2), 2.01(a)(3) and 3.02.

Article 3.04 provides, in part, that whenever the identity of the appointer is to be
determined, the appointer shall be X or if X fails to act, X's wife. A person named as
appointer shall not be deemed to have failed to act unless (a) the vacancy in any office
is required to be filled and that person has not appointed a successor within 30 days
after that person has been notified of the vacancy, or (b) that person declines to act as
appointer to fill that vacancy or any vacancy by signed instrument delivered to the
individuals or entities named to act as appointer if that person fails to act and to the
trustee.

Article 3.05 provides, in part, that at any time or times the remover may remove an
independent trustee. X is the initial remover, and when X ceases to act, X's wife is the
remover.

Article 5.01 provides that X intends that CRUT #1 be a "CRUT" (meaning a charitable
remainder unitrust as defined in § 664(d)(2)) which will qualify for all applicable income,
gift and estate tax charitable deductions allowable with respect to charitable remainder
unitrusts under the Code. Articles 5.02 through 5.05 include certain provisions relevant
to CRUT #1's qualification as a CRUT described in § 664(d)(2), including provisions
relating to incorrect payments, valuation of unmarketable assets, investment of trust
assets, proration of additional contributions, severance of certain additional
contributions, prohibited transactions described in §§ 4941, 4943, 4944 and 4945, and a
tax payment clause.
PLR-105036-18                                  4




CRUT #2

Except as identified below, the provisions of CRUT #2 are identical to the provisions of
CRUT #1. While CRUT #1 proposes an inter vivos CRUT with one measuring life, X,
CRUT #2 proposes an inter vivos CRUT with consecutive interests with two measuring
lives, X and X's spouse, subject to X's right to revoke the survivor unitrust interest.

Article 2.01 provides that until the date of the survivor of X's wife and X's death (the
"term ending date"), the trustee shall administer the trust property as described in
Article 2. Article 2.01(a)(1) provides that in each taxable year including the year in
which the term ending date occurs, the trustee shall distribute to X (A) c% of the unitrust
amount and (B) such additional portion of the unitrust amount, if any, as the
independent trustee determines is necessary to ensure the total portion of the unitrust
amount distributed to the recipient in each taxable year shall not be de minimis under
the facts and circumstances. The "recipient" means X, or after X's death, X's wife if she
survives X and X has not revoked the survivor unitrust interest.

Article 2.01(a)(2) provides that after providing for distribution of the minimum amount
(the aggregate of amounts described in Article 2.01(a)(1)(A) and (B)) the trustee shall
distribute the balance of the unitrust amount (the "net unitrust amount") to such one or
more of the recipient and any one or more charitable organizations (as are described in
§§ 170(c), 2055(a) and 2522(a) of the Code) included in the charitable class as the
independent trustee selects in the independent trustee's sole discretion without the
approval or consent of any other person, and in such equal or unequal portions as the
independent trustee determines in the independent trustee's sole discretion without the
approval or consent of any other person.

Article 2.01(a)(2) further provides that the independent trustee shall designate by signed
irrevocable written instrument delivered to X on or before the date that is thirty (30) days
before the payment date, if X is then living, the portion of the net unitrust amount to be
paid to the charitable class for the taxable year. Under Article 6.07 the term "payment
date" means the last day of each calendar year and the term ending date.

Article 2.01(b) provides that X may revoke the survivor unitrust interest by will
specifically referring to this right of revocation. The term "survivor unitrust interest"
means the right to receive the unitrust amounts, if any, payable on payment dates
following X's death.

Your authorized representatives have requested the following rulings with respect to
CRUT #1 and CRUT #2:
PLR-105036-18                               5


    1. The independent trustee's power to allocate a portion of the unitrust amount of
     CRUT #1 between noncharitable and charitable beneficiaries will not prevent
     CRUT #1 from qualifying as a qualified CRUT under § 664.

    2. The independent trustee's power to allocate a portion of the unitrust amount of
     CRUT #2 between noncharitable and charitable beneficiaries will not prevent
     CRUT #2 from qualifying as a qualified CRUT under § 664.

    3. X and X's wife's powers to replace the independent trustee will not prevent
     CRUT #1 from qualifying as a qualified CRUT under § 664.

    4. X and X's wife's powers to replace the independent trustee will not prevent
     CRUT #2 from qualifying as a qualified CRUT under § 664.

    5. X's power to designate the charitable class of CRUT #1 will not prevent CRUT #1
     from qualifying as a qualified CRUT under § 664.

    6. X's power to designate the charitable class of CRUT #2 will not prevent CRUT #2
     from qualifying as a qualified CRUT under § 664.

    7. X''s testamentary power to revoke by a provision in his will all interests in the
     survivor unitrust will not prevent CRUT #2 from qualifying as a qualified CRUT
     under § 664.

    8. Regarding CRUT #1, X's power to designate the charitable class will prevent
     completion of the gift of the net unitrust amount (defined in Article 2.01(a)(2) of
     CRUT #1) during X's lifetime until such power lapses. Upon the annual lapse of
     X's power to designate the charitable class during X's lifetime and to the extent
     each year the net unitrust amount is distributed to one or more charitable
     organizations (defined in Article 6.07(a)), the distributions will be completed gifts
     and will qualify for the gift tax charitable deduction under § 2522(a).

    9. Regarding CRUT #2, X's power to designate the charitable class will prevent
     completion of the gift of the net unitrust amount (defined in Article 2.01(a)(2) of
     CRUT #2) during X's lifetime until such power lapses. Upon the annual lapse of
     X's power to designate the charitable class during X's lifetime and to the extent
     each year the net unitrust amount is distributed to one or more charitable
     organizations (defined in Article 6.07(a)), the distributions will be completed gifts
     and will qualify for the gift tax charitable deduction under § 2522(a).
PLR-105036-18                                  6

        10. Regarding CRUT #2, X's testamentary power to revoke by a provision in his will
       all interests in the survivor unitrust interest will cause X's gift of the survivor
       unitrust interest to remain incomplete until X's death.

        11. Regarding CRUT #2, if X's spouse survives X and if X does not revoke the
       survivor unitrust interest at X's death, the entire value of the assets of CRUT #2
       included in X's estate will be deductible because of the combined charitable and
       marital estate tax deductions available under §§ 2055(a) and 2056(a).

                                   LAW AND ANALYSIS

CRUT Issues

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 net fair market value of its assets, valued annually, 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, (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 use of any
person other than an organization described in § 170(c), (C) following the termination of
the payments described in § 664(d)(2)(A), the remainder interest 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 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 by § 664(g)), and (D) with respect to each contribution of property to
the trust, the value (as determined under § 7520) of such remainder interest in such
property is at least 10 percent of the net fair market value of such property as of the
date such property is contributed to the trust.

Section 1.664-1(a)(i) of the Income Tax Regulations provides that, generally, a
charitable remainder trust is a trust which provides for a specified distribution, at least
annually, to one or more beneficiaries, at least one of which is not a charity, for life or for
a term of years, with an irrevocable remainder interest to be held for the benefit of, or
paid over to, charity. In the case of a charitable remainder unitrust, the specified
distribution to be paid at least annually must be a fixed percentage which is not less
than 5 percent of the net fair market value of the trust assets, valued annually.

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 creation of the trust. Solely for the purposes of § 664 and the regulations
PLR-105036-18                                 7

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 of the Code (relating to grantors and other
treated as substantial owners), but in no event prior to the time property is first
transferred to the trust. For purposes of the preceding sentence, neither the grantor nor
his spouse shall be treated as the owner of the trust under such subpart E merely
because the grantor or his spouse is named as a recipient.

Section 1.664-3(a)(1)(i) requires that the governing instrument provides that the trust
will pay not less often than annually a fixed percentage of the net fair market value of
the trust assets determined annually to a person or persons described in § 1.664-3(a)(3)
for each taxable year of the period specified in § 1.664-3(a)(5).

Section 1.664-3(a)(3)(i) provides that the amount described in § 1.664-3(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). If the amount described in § 1.664-3(a)(1) is to be
paid to an individual or individuals, all such individuals must be living at the time of
creation of the trust. A named person or persons may include members of a named
class except in the case of a class which includes an individual, all such individuals
must be alive and ascertainable at the time of the creation of the trust unless the period
for which the unitrust amount is to be paid to such class consists solely of a term of
years.

Section 1.664-3(a)(3)(ii) provides that a trust is 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 of the Code were applicable to such trust. The governing
instrument may not grant the trustee the power to allocate the fixed percentage among
members of a class unless such power falls within one of the exceptions to § 674(a).

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 the approval or consent of an adverse party.

Section 674(b)(3) provides § 674(a) shall not apply to a power exercisable only by will,
other than a power in the grantor to appoint by will the income of the trust where the
income is accumulated for such disposition by the grantor or may be so accumulated in
the discretion of the grantor or a nonadverse party, or both, without the approval or
consent of any adverse party.

Section 674(b)(4) provides that § 674(a) shall not apply to a power to determine the
beneficial enjoyment of the corpus or the income therefrom if the corpus or income is
PLR-105036-18                                  8

irrevocably payable for a purpose specified in § 170(c) (relating to the definition of
charitable contributions) or to an employee stock ownership plan (as defined in
§ 4975(e)(7)) in a qualified gratuitous transfer (as defined in § 664(g)(1)).

Section 1.674(b)-1(b)(4) provides that under § 674(b)(4) a power in any person to
determine the beneficial enjoyment of corpus or income which is irrevocably payable
(currently or in the future) for purposes specified in § 170(c) (relating to the definition of
charitable contributions) will not cause the grantor to be treated as an owner under
§ 674(a). For example, if a grantor creates a trust, the income of which is irrevocably
payable solely to educational or other organizations that qualify under § 170(c), he is
not treated as an owner under § 674 although he retains the power to allocate the
income among such organizations.

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 (1) to distribute, apportion, or
accumulate income to or for a beneficiary or beneficiaries, or to, for, or within a class of
beneficiaries; or (2) to pay out corpus to or for a beneficiary, or beneficiaries or to or for
a class of beneficiaries (whether or not income beneficiaries).

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
beneficiaries or to or for a 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 a trust from qualifying under § 674(c) or (d). On the other hand, if
the grantor's power to remove, substitute, or add trustees is limited so that its exercise
could not alter the trust in a manner that would disqualify it under § 674(c) or (d), as the
case may be, the power itself does not disqualify the trust. Thus, for example, a power
in the grantor to remove or discharge an independent trustee on the condition that he
substitute another independent trustee will not prevent the trust from qualifying under
§ 674(c).

Ruling #1 and Ruling #2

In the present case, with respect to CRUT #1 and CRUT #2, Article 2.01(a)(2) provides
that after providing for distribution of the minimum amount (the aggregate of amounts
described in Article 2.01(a)(1)(A) and (B)) the trustee shall distribute the balance of the
PLR-105036-18                                  9

unitrust amount to such one or more of X and one or more charitable organizations
(organization described in §§ 170(c), 2055(a) and 2522(a)) included in the charitable
class as the independent trustee selects in the independent trustee's sole discretion
without the approval or consent of any other person, and in such equal or unequal
portions as the independent trustee determines in the independent trustee's sole
discretion without the approval or consent of any other person.

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 classes 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, and based solely on the information submitted and
representations made, we conclude that the provisions in CRUT #1 and CRUT #2 that
give the independent trustee the power to allocate a portion of the unitrust amount
between noncharitable and charitable beneficiaries will not prevent CRUT #1 or CRUT
#2 from qualifying as a CRUT under § 664(d)(2).

Ruling #3 and Ruling #4

With respect to both CRUT #1 and CRUT #2, Article 3.02 provides that at all times at
least one independent trustee must be acting. "Independent trustee" means a trustee
other than X, X's spouse, or a subordinate party as to either X or X's spouse. If at any
time a vacancy occurs in the office of independent trustee, the appointer shall fill the
vacancy by appointing an independent trustee.

Article 3.04 provides, in part, that the appointer shall be X or if X fails to act, X's wife.
Article 3.05 provides, in part, that at any time or times the remover may remove an
independent trustee. X is the initial remover, and when X ceases to act, X's wife is the
remover.

Based solely on the information submitted and representations made, with respect to
CRUT #1 and CRUT #2, we conclude that X and X's wife have not retained a power to
remove the independent trustee that would allow either of them to substitute any
person, including themselves, as independent trustee, or that would subordinate the
independent trustee to X or X's wife. Article 3.02 and Article 3.04 of CRUT #1 and
CRUT #2 provide that the independent trustee can be replaced only by the persons
named in the trust agreements and in the order they are named. In no event will the
independent trustee be a person or entity related to or subordinate to X or X's wife. For
PLR-105036-18                                  10

these reasons, we conclude that X and X's wife's powers to replace the independent
trustee will not prevent CRUT #1 or CRUT #2 from qualifying as a CRUT under
§ 664(d)(2).

Ruling #5 and Ruling #6

Article 2.01(a)(3) of both CRUT #1 and CRUT #2 defines the charitable class as one or
more charitable organizations that X designates or, if X does not designate a charitable
class before the payment date, one or more charitable organizations as the independent
trustee in the independent trustee's sole discretion shall determine.

Article 2.01(a)(2) of both CRUT #1 and CRUT #2 provides, in part, that the independent
trustee shall designate by signed irrevocable written instrument delivered to X on or
before the date that is thirty (30) days before the payment date, if X is then living, the
portion of the net unitrust amount to be paid to the charitable class for the taxable year.
Under Article 6.07, the term "payment date" means the last day of each calendar year
and the term ending date.

Section 674(b)(4) provides that § 674(a) shall not apply to a power to determine the
beneficial enjoyment of the corpus or the income therefrom if the corpus or income is
irrevocably payable for a purpose specified in § 170(c) (relating to the definition of
charitable contributions) or to an employee stock ownership plan (as defined in
§ 4975(e)(7)) in a qualified gratuitous transfer (as defined in § 664(g)(1)).

Based solely on the information submitted and representations made, we conclude that
X's power to designate the charitable class of CRUT #1 and CRUT #2 will not prevent
CRUT #1 or CRUT #2 from qualifying as a CRUT under § 664(d)(2).

Ruling #7

Article 2.01(b) of CRUT #2 provides that X may revoke the survivor unitrust interest by
will specifically referring to this right of revocation. "Survivor unitrust interest" means the
right to receive the unitrust amounts, if any, payable on dates following X's death.

As mentioned above, § 674(b)(3) provides an exception to the application of § 674(a)
where a power is exercisable only by will, other than a power in the grantor to appoint
by will the income of the trust where the income is accumulated for such disposition by
the grantor or may be so accumulated in the discretion of the grantor or a nonadverse
party, or both, without the approval or consent of the adverse party. Section 1.664-
3(a)(4) provides, in part, that 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). Notwithstanding the preceding sentence, the grantor may retain
the power exercisable only by will to revoke or terminate the interest of any recipient
other than an organization described in § 170(c).
PLR-105036-18                                 11


For these reasons, and based solely on the information submitted and representations
made, we conclude that X's testamentary power to revoke by a provision in X's will all
interests in the survivor unitrust in CRUT #2 will not prevent CRUT #2 from qualifying as
a CRUT under § 664(d)(2).

Gift and Estate Tax Issues

Rulings #8 - #10

Section 2501 imposes a tax for each calendar year on the transfer of property by gift by
any individual. Section 2511(a) provides, in part, that subject to limitations contained in
chapter 12, the tax imposed by § 2501 shall apply 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 25.2511-2(a) of the Gift Tax Regulations provides that the gift tax is not
imposed upon the receipt of the property by the donee, nor is it necessarily determined
by the measure of enrichment resulting to the donee from the transfer. The tax is a
primary and personal liability of the donor, is measured by the value of the property
passing from the donor, and attaches at the time the property passes, regardless of the
fact that the identity of the donee may not then be known or ascertainable.

Section 25.2511-2(b) provides, in relevant part, that a gift is complete and subject to the
gift tax when the donor has so parted with dominion and control over the property
transferred as to leave in the donor no power to change its disposition, whether for the
donor's own benefit or for the benefit of another.

Section 25.2511-2(c) provides, in relevant part, that a gift is incomplete in every
instance in which a donor reserves the power to revest the beneficial title to the property
in himself. A gift is also incomplete if and to the extent that a reserved power gives the
donor the power to name new beneficiaries or to change the interests of the
beneficiaries as between themselves.

Section 25.2511-2(d) provides, in relevant part, that a gift is not considered incomplete
merely because the donor reserves the power to change the manner or time of
enjoyment.

Section 25.2511-2(e) provides that a donor is considered to have a power if it is
exercisable by the donor in conjunction with any person not having a substantial
adverse interest in the disposition of the transferred property, such as a trustee.

Section 25.2511-2(f) provides, in relevant part, that the relinquishment or termination of
the power to change the beneficiaries of transferred property, occurring otherwise than
PLR-105036-18                                   12

by the death of the donor, is regarded as the event which completes the gift and causes
the gift tax to apply.

Section 2522(a) provides, in part, that, in computing taxable gifts for the calendar year,
there is allowed a deduction for the amount of: all gifts to or for the use of a corporation
or trust organized and operated exclusively for religious, charitable, scientific, literary, or
educational purposes.

Section 2522(c)(2)(B) provides that, where a donor transfers an interest in property to
both a charitable and a noncharitable person or entity, no deduction shall be allowed for
the charitable portion of the gift, unless the interest is in the form of a guaranteed
annuity or is a fixed percentage distributed annually of the fair market value of the
property determined on an annual basis.

Section 25.2522(c)-3(c)(2)(vii) defines the term "unitrust interest" to mean an irrevocable
right pursuant to an instrument of transfer to receive payment, not less often than
annually, of a fixed percentage of the net fair market value, determined annually, of the
property which funds the unitrust interest.

Section 25.2522(c)-3(d)(1) provides that the amount of the deduction for a unitrust
interest is limited to the fair market value of the unitrust interest on the date of the gift.
The fair market value of a unitrust interest is its present value.

Section 25.2522(c)-3(d)(2)(v) provides that the present value of a unitrust interest is
determined by subtracting the present value of all interests in the transferred property
other than the unitrust interest from the fair market value of the transferred property.

In Estate of Sanford v. Commissioner, 308 U.S. 39 (1939), the taxpayer created a trust
for the benefit of named beneficiaries and reserved the power to revoke the trust in
whole or in part, and to designate new beneficiaries other than himself. Six years later,
in 1919, the taxpayer relinquished the power to revoke the trust, but retained the right to
change the beneficiaries. In 1924, the taxpayer relinquished the right to change the
beneficiaries. The Court stated that the taxpayer's gift is not complete, for purposes of
the gift tax, when the donor has reserved the power to determine those others who
would ultimately receive the property. Accordingly, the Court held that the taxpayer's
gift was complete in 1924, when he relinquished his right to change the beneficiaries of
the trust. A grantor's retention of a power to change the beneficial interests in a trust
causes the transfer to the trust to be incomplete for gift tax purposes, even though the
power may be defeated by the actions of third parties. Goldstein v. Commissioner, 37
T.C. 897 (1962). See also Estate of Goelet v. Commissioner, 51 T.C. 352 (1968).

In Rev. Rul. 77-275, 1977-2 C.B. 346, the settlor created a trust that provided for the
distribution of the annual income therefrom to charitable organizations described in
§§ 170(c) and 2522. Settlor reserved the power to designate the charitable
PLR-105036-18                                 13

organizations which would receive the income for the year. If the settlor did not make
the designation prior to the beginning of the year, the trustee was empowered to select
the charitable organizations at the end of the year and distribute the year's income to
the selected organizations. The trust provided for reversion of principal to the settlor or
the settlor's estate after ten years and one month. The revenue ruling concludes that
the gift of the income interest is incomplete upon creation of the trust, in view of
§ 25.2511-2(c). Further, although a completed gift of future income results from the
settlor's exercise or lapse of his beneficial power of designation, no deduction is
allowable for the present value of the interest since the trust is not in the form required
under § 2522(c)(2). The revenue ruling states that if the trust had provided for the
settlor's designation to be made after the end of the year in which the income was
earned, the gift occurring by reason of such designation, or by the lapse of the right to
designate, would be a gift of money, separate from the trust property itself, and thus a
deduction would be allowable under § 2522.

In the present case, the situation is similar to that in Rev. Rul. 77-275, except that X's
designation power here extends until the time income is actually distributed to the
charitable organizations on the payment date. Prior to actual distribution, X may revoke
any previously-made designation of the charitable class and will retain the power to
designate the charitable class until the payment date, when the power lapses.
Therefore, during X's lifetime, a completed gift occurs when the distribution of the net
unitrust amount is actually made to the charitable organizations, rather than upon the
creation and funding of CRUT #1 or CRUT #2 or upon any designation of the charitable
class by X. Pursuant to Rev. Rul. 77-275, a deduction is allowable under § 2522 for this
gift of money, which is separate from the trust property itself.

Accordingly, based on the facts submitted and the representations made, we conclude
that X's power to designate the charitable class will prevent completion of the gift of the
net unitrust amount of CRUT #1 and the net unitrust amount of CRUT #2 during X's
lifetime until such power lapses. Furthermore, upon the annual lapse of X's power to
designate the charitable class during X's lifetime and to the extent each year the net
unitrust amount is distributed to one or more charitable organizations within the
meaning of Article 6.07(a) of each of CRUT #1 and CRUT #2, the distributions will be
completed gifts and will qualify for the gift tax charitable deduction under § 2522(a).

With regard to X's testamentary power to revoke by a provision in his will all interests in
the survivor unitrust interest of CRUT #2 (to include both the minimum unitrust amount
and the net unitrust amount), retention of this power will cause X's gift of the survivor
unitrust interest to remain incomplete until his death. See § 25.2511-2.

Ruling #11

Section 1.664-3(c) indicates that § 1.664-4 provides the rules relating to the calculation
of the fair market value of the remainder interest of a charitable remainder unitrust.
PLR-105036-18                                  14


Section 1.664-4(a) provides that for purposes of §§ 170, 2055, 2106, and 2522, the fair
market value of a remainder interest in a charitable remainder unitrust is its present
value determined under § 1.664-4(d), to be computed, in part, on the assumption that
the amount described in § 1.664-3(a)(1)(i)(a) is distributed in accordance with the
payout sequence described in the governing instrument. Under § 1.664-4(a)(3), if the
governing instrument does not prescribe when the distribution is made during the period
for which the payment is made, the distribution is considered payable on the first day of
the period for which the payment is made.

Section 1.664-4(c) provides that any claim for a deduction on any return for the value of
a remainder interest in a charitable remainder unitrust must be supported by a full
statement attached to the return showing the computation of the present value of such
interest.

Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent
who is a citizen or resident of the United States.

Section 2055(a) provides that for purposes of the tax imposed by § 2001, the value of
the taxable estate shall be determined by deducting from the value of the gross estate
the amount of all bequests, legacies, devises, or transfers to or for the use of charitable,
religious, scientific, literary, or educational organizations described in § 2055(a)(1)-(a)(4)
of the Estate Tax Regulations.

Section 20.2055-2(e)(1) provides that where an interest in property passes or has
passed from the decedent for charitable purposes and an interest in the same property
passes or has passed from the decedent for private purposes (for less than an
adequate and full consideration in money or money's worth) no deduction is allowed
under § 2055 for the value of the interest which passes or has passed for charitable
purposes unless the interest in property is a deductible interest described in
§ 20.2055-2(e)(2).

Section 20.2055-2(e)(2)(v) provides, in part, that a remainder interest in a trust that is a
charitable remainder unitrust, as defined in § 664(d)(2) and (3) and § 1.664-3, is a
deductible interest.

Section 20.2055-2(e)(2)(vii) provides, in part, that a unitrust interest is a deductible
interest. For purposes of § 20.2055-2(e)(2)(vii), the term "unitrust interest" means the
right pursuant to the instrument of transfer to receive payment, not less often than
annually, of a fixed percentage of the net fair market value, determined annually, of the
property which funds the unitrust interest.

Section 2056(a) provides that for purposes of the tax imposed by § 2001, the value of
the taxable estate shall, except as limited by § 2056(b), be determined by deducting
from the value of the gross estate an amount equal to the value of any interest in
PLR-105036-18                                 15

property which passes or has passed from the decedent to his surviving spouse, but
only to the extent that such interest is included in determining the value of the gross
estate.

Section 2056(b)(1) provides, in pertinent part, that no deduction shall be allowed under
§ 2056(a) where, on the lapse of time, on the occurrence of an event or contingency, or
on the failure of an event or contingency to occur, an interest passing to the surviving
spouse will terminate or fail, and on such termination, the property passes to a person
other than the surviving spouse or the spouse's estate.

Section 2056(b)(8) provides that, if the surviving spouse of a decedent is the only
noncharitable beneficiary of a qualified charitable remainder trust, then § 2056(b)(1),
which disallows a deduction for certain terminable interests passing to a surviving
spouse, shall not apply to any interest in such trust that passes or has passed from the
decedent to the surviving spouse.

Section 2056(b)(8)(B)(iii) provides that the term "qualified charitable remainder trust"
means a charitable remainder annuity trust or charitable remainder unitrust described in
§ 664.

Section 20.2056(b)-8(a)(1) provides, in part, that if the surviving spouse of the decedent
is the only noncharitable beneficiary of a charitable remainder unitrust described in
§ 664, § 2056(b)(1) does not apply to the interest in the trust that is transferred to the
surviving spouse. Thus, the value of the unitrust interest passing to the spouse qualifies
for a marital deduction under § 2056(b)(8) and the value of the remainder interest
qualifies for a charitable deduction under § 2055.

In the legislative history to the Economic Recovery Tax Act of 1981, the House Ways
and Means Committee stated:

       If an individual transfers property outright to charity, no transfer taxes
       generally are imposed. Similarly, under the unlimited marital deduction
       provided in the committee bill, no tax generally will be imposed on an
       outright gift to the decedent's spouse. As a result, the committee finds no
       justification for imposing transfer taxes on a transfer split between a
       spouse and a qualifying charity. Accordingly, the bill provides a special
       rule for transfers of interests in the same property to a spouse and a
       qualifying charity.

       Under the bill, if an individual creates a qualified charitable remainder
       annuity trust or a qualified charitable remainder unitrust, and the only
       noncharitable beneficiaries are donor and his spouse, the disallowance
       rule for terminable interests does not apply. Therefore, the individual will
       receive a charitable deduction (under § 2055 or 2522) for the amount of
PLR-105036-18                                 16




       the remainder interest and a marital deduction (under § 2056 or 2523) for
       the value of the annuity or unitrust interest; no transfer tax will be imposed.

H.R. Rep. No. 97-201, at 162 (1981).

In this case, the entire value of CRUT #2 as of X's date of death will be includible in X's
gross estate. If CRUT #2 satisfies the requirements of § 664, the value of the charitable
remainder interest will qualify for a charitable deduction under § 2055(e)(2)(A) because
the remainder interest is in a charitable remainder unitrust described in § 664. If
CRUT #2 satisfies the requirements of § 664, the value of X's spouse's interest in the
survivor unitrust interest qualifies for a marital deduction under § 2056(b)(8). However,
in this case, the value of X's spouse's interest in the survivor unitrust interest for
purposes of determining the deduction available pursuant to § 2056(b)(8) is unclear as
only a portion of the unitrust amount (the minimum amount) is required to be paid to X's
spouse's under the instrument, with a larger portion of the unitrust amount (the net
unitrust amount) payable to either X's spouse or the charitable beneficiaries, a
determination made after the death of X by the independent trustee, as the independent
trustee may annually decide. In light of the legislative history noted above, we conclude
that under these facts, where X's spouse is the only noncharitable beneficiary of the
survivor unitrust interest, the estate tax marital deduction under § 2056(a) will
completely offset the value of the assets of CRUT #2 included in the gross estate of X
after deducting the value of the remainder interest of CRUT #2 qualifying for a
charitable deduction under § 2055(a).

Except as specifically ruled upon above, no opinion is expressed or implied concerning
the tax consequences of any aspect of any transaction or item discussed or referenced
in this letter. Specifically, no opinion is expressed or implied concerning whether CRUT
#1 or CRUT #2 will be valid CRUTs.

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

Pursuant to the power of attorney on file with this office, we are sending a copy of this
letter to X's authorized representatives.
PLR-105036-18                               17



The ruling contained in this letter is based upon information and representations
submitted by the taxpayer 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 ruling request, it is subject to verification on examination.



                                     Sincerely,



                                     James A. Quinn
                                     Senior Counsel, Branch 3
                                     Office of the Associate Chief Counsel
                                     (Passthroughs & Special Industries)




Enclosures (2):
      Copy of this letter
      Copy for § 6110 purposes



cc: