No estate-tax deduction for a charitable-remainder-trust payout the trustee can split between spouse and charity at will

Plain-English summary

This is internal Chief Counsel advice to an IRS area counsel, not a ruling to a
taxpayer. A decedent left part of his estate to a charitable remainder unitrust
(CRUT) paying 5% a year for his surviving spouse's life. Of that payout, 25% must
go to the spouse, but the trustee has complete discretion to send the other 75%
to either the spouse or the charity each year. On the spouse's death the rest
goes to charity. The question was whether the estate can deduct the value of that
discretionary 75% slice, either as a charitable deduction (§ 2055) or a marital
deduction (§ 2056). Chief Counsel concluded no on both counts: the charity's
share of that slice is not a fixed, ascertainable amount, so it fails § 2055's
requirements, and the spouse's share cannot be valued at death because it depends
entirely on the trustee's discretion, so it is not treated as passing to the
spouse under § 2056. Only the mandatory 25% (marital) and the final remainder
(charitable) are deductible. Notably, Chief Counsel disavowed four earlier PLRs
that had reached the opposite result, saying they no longer reflect the office's
position.

Ruling snapshot

• Question: Can an estate deduct (as charitable or marital) the part of a CRUT unitrust payout that the trustee may distribute to either the spouse or charity at its discretion?
• Outcome: Advice given (no deduction under either § 2055 or § 2056 for the discretionary portion)
• Key authorities: IRC §§ 2055, 2056(b)(8), 664; Treas. Reg. §§ 20.2055-2(a), 20.2056(b)-8, 20.2056(c)-2(a); Estate of Turner v. Commissioner, 138 T.C. 306 (2012)

Full text (IRS public release)

   Office of Chief Counsel
   Internal Revenue Service
   memorandum
   Number: 202233014
   Release Date: 8/19/2022
   CC:PSI:B04 DGespass
   POSTN-120392-21

 UILC:     2055.12-06, 2056.00-00, 2056.08-00

  date:    July 12, 2022

     to:   Janice B. Geier
           Associate Area Counsel, Portland
           (Small Business/Self-Employed)

  from:    Holly Porter
           Associate Chief Counsel
           (Passthroughs & Special Industries)


subject:   Estate tax deductions under §§ 2055 and 2056 for discretionary interests


   ISSUE

   Whether a decedent’s estate is entitled to an estate tax charitable deduction under
   § 2055 of the Internal Revenue Code or an estate tax marital deduction under § 2056
   for the value of the portion of the unitrust interest of a testamentary charitable remainder
   unitrust that may be distributed between charity and the decedent’s spouse at the
   discretion of a trustee.

   CONCLUSION

   A decedent’s estate is not entitled to an estate tax deduction under § 2055 or § 2056 for
   the portion of the unitrust interest that may be distributed either to charity or decedent’s
   spouse at the discretion of a trustee.

   FACTS

   Decedent died, survived by Spouse, leaving a portion of his estate to a testamentary
   trust that is a charitable remainder unitrust described in § 664 (“CRUT”). CRUT
   provides for annual unitrust payments of five percent for the term of Spouse’s life.
   CRUT provides that the trustee must distribute 25 percent of the unitrust amount (i.e.,
   1.25 percent of CRUT) to Spouse. The trustee may distribute the remaining 75 percent
POSTN-120392-21                              2

of the unitrust amount (i.e., 3.75 percent of CRUT) to either Charity or Spouse at
Trustee’s complete discretion. Upon Spouse’s death, the trustee must distribute the
remainder of CRUT to Charity.

LAW AND ANALYSIS

Section 2055(a) provides an estate tax charitable deduction where, 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 certain qualifying charitable organizations.

Section 2055(e)(2) restricts the estate tax charitable deduction where an interest in
property (other than an interest described in § 170(f)(3)(B)) passes or has passed from
the decedent to a person, or for a use, described in § 2055(a) and an interest in the
same property passes or has passed (for less than an adequate and full consideration
in money or money’s worth) from the decedent to a person, or for a use, not described
in § 2055(a). In the case of a remainder interest, § 2055(e)(2)(A) provides that no
deduction is allowed for such interest unless the interest is in a trust that is a charitable
remainder annuity trust or a charitable remainder unitrust described in § 664 or a pooled
income fund described in § 642(c)(5). In the case of any other interest, § 2055(e)(2)(B)
provides that no deduction is allowed for such interest unless the interest is in the form
of a guaranteed annuity or is a fixed percentage distributed yearly of the fair market
value of the property (to be determined yearly).

Section 20.2055-2(a) of the Estate Tax Regulations provides that if a trust is created or
property is transferred for both a charitable and a private purpose, deduction may be
taken of the value of the charitable beneficial interest only insofar as that interest is
presently ascertainable, and hence severable from the noncharitable interest.

Section 2056(a) provides an estate tax marital deduction where, 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 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 a limitation in the case of a terminable interest, where, if 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, then no deduction shall be allowed under § 2056 with respect to such interest.

Section 2056(b)(8) provides that if the surviving spouse of the decedent is the only
beneficiary of a qualified charitable remainder trust who is not a charitable beneficiary,
the terminable interest rule of § 2056(b)(1) shall not apply to any interest in such trust
that passes or has passed from the decedent to such surviving spouse.
POSTN-120392-21                                      3

Section 20.2056(b)-8(a)(1) provides that if the surviving spouse of the decedent is the
only noncharitable beneficiary of a charitable remainder unitrust, the value of the
unitrust interest passing to the spouse qualifies for an estate tax marital deduction under
§ 2056(b)(8) and the value of the remainder interest qualifies for an estate tax charitable
deduction under § 2055.

Section 20.2056(c)-2(a) provides, in part, that a property interest is treated as passing
to the surviving spouse only if it passes to the spouse as beneficial owner. For this
purpose, where a property interest passed from the decedent in trust, such interest is
considered to have passed from the decedent to the surviving spouse to the extent of
the surviving spouse’s beneficial interest therein.

In this case, the terms of CRUT create two charitable interests: a discretionary interest
in a portion of the unitrust amount and a remainder interest. Decedent’s estate may
claim an estate tax charitable deduction for the value of the remainder interest under
§ 2055(a), because CRUT is a charitable remainder unitrust described in § 664. See
§ 2055(e)(2)(A). However, Decedent’s estate may not claim an estate tax charitable
deduction under § 2055(a) for the value of any portion of the unitrust interest that may
be distributed to Charity in the discretion of the trustee because Charity’s interest is not
in the form of a fixed unitrust amount to be distributed annually and no part of the
unitrust interest is ascertainable or severable from Spouse’s noncharitable interest. See
§ 2055(e)(2)(B) and § 20.2055-2(a).

With regard to the marital interests in CRUT, because the interest in the 25 percent
portion of the unitrust amount must be distributed to and will be received by Spouse
pursuant to the terms of CRUT, this interest is considered to pass from Decedent to
Spouse as beneficial owner for purposes of § 2056(a). Under § 2056(b)(8), because
Spouse is the only beneficiary of CRUT who is not a charitable beneficiary the interest
in the 25 percent portion of the unitrust amount is not subject to the terminable interest
rule in § 2056(b)(1). Accordingly, Decedent’s estate may claim an estate tax marital
deduction for the value of this interest under § 2056.

In contrast, the extent of Spouse’s interest in the remaining 75 percent portion of the
unitrust amount cannot be established as of Decedent’s date of death and, therefore, is
not considered to pass from Decedent to Spouse as beneficial owner for purposes of
§ 2056(a). The extent of Spouse’s interest cannot be established because the amount
to be distributed to Spouse annually is within the sole and complete discretion of the
trustee. It is not possible to ascertain as of the date of death whether spouse will
receive any of the 75 percent portion of the unitrust amount each year since all of such
portion of the unitrust interest may be distributed to charity. Because the interest is not
treated as passing to Spouse for purposes of § 2056(a), Decedent’s estate may not
claim an estate tax marital deduction for the value of this interest under § 2056(a).1 See
1 The analysis and conclusion would be the same under § 2523 for a completed gift transfer to a CRUT

with similar terms. In PLR 200813006, PLR 200832017, PLR 201117005, and PLR 201845014, this
office ruled that taxpayers were entitled to an estate tax marital deduction under § 2056 or a gift tax
POSTN-120392-21                                       4

§ 20.2056(c)-2(a). See also Estate of Turner v. Commissioner, 138 T.C. 306, 316
(2012) (“property that passed to a person other than a surviving spouse cannot also be
considered as passing to the surviving spouse”).

Section 6110(k)(3) provides that this document may not be used or cited as precedent.

Please call Daniel J. Gespass (202) 317-4632 if you have any further questions.


                                                  Sincerely,

                                                  Associate Chief Counsel
                                                  (Passthroughs & Special Industries)


                                                  _________________________
                                          By:     Karlene M. Lesho
                                                  Senior Technician Reviewer, Branch 4
                                                  Office of the Associate Chief Counsel
                                                  (Passthroughs and Special Industries)




marital deduction under § 2523 for a unitrust interest in a CRUT that can be distributed between charity
and spouse at the trustee’s discretion. The position in these earlier rulings no longer reflects the position
of this office.