Early termination of a charitable lead annuity trust, paying the undiscounted remaining annuities to a donor-advised fund, triggers no foundation excise taxes

Plain-English summary

A charitable lead annuity trust (CLAT) pays a fixed amount to charity each
year for a set term, and whatever is left at the end goes to a private
beneficiary. This CLAT pays its annuity to a donor-advised fund (DAF) run by
a public charity, with the trustee also being the person entitled to the
leftover remainder. Because the trust's investments did much better than
expected, the DAF asked to be paid the full remaining annuities now (with no
present-value discount) so it could put the money to charitable use sooner,
after which the trust would terminate early under a court order. A CLAT like
this is treated as a private foundation for certain rules, so the taxpayer
asked the IRS to confirm the early payoff would not trigger the foundation
excise taxes. The IRS ruled favorably on all three questions: paying the DAF
is not self-dealing under § 4941 (because a § 501(c)(3) organization is not a
"disqualified person" for that purpose), it is not a taxable expenditure
under § 4945 (the payment is for a charitable purpose), and it is not subject
to the private-foundation termination tax under § 507(c) (the payment is
required by the trust instrument, not discretionary). In short, the trust can
accelerate its charitable payout and wind up without a foundation-tax
penalty.

Ruling snapshot

• Question: Does accelerating a CLAT's remaining annuity payments (paid
  undiscounted to a donor-advised fund) and terminating the trust early
  trigger the private-foundation excise taxes under §§ 4941, 4945, or 507(c)?
• Outcome: Approved (all three rulings favorable: no self-dealing, no
  taxable expenditure, no § 507(c) tax)
• Key authorities: IRC §§ 4941, 4945, 507; IRC § 4947(a)(2); Treas.
  Reg. §§ 53.4946-1(a)(8) and 53.4947-1(e)

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury Washington,
                                                                DC 20224

 Number: 202614004                                              Third Party Communication: None Date of
 Release Date: 4/3/2026                                         Communication: Not Applicable
 Index Number: 4941.00-00, 4943.00-00,
 507.00-00                                                      Person To Contact:
 --------------------                                           --------------------, ID No. ------------------
 ------------------------------------------------------------   Telephone Number:
 ------------------------------------------------------------   ---------------------
 ----------------------------------                             Refer Reply To:
                                                                CC:EEE:EOET:EO3
                                                                PLR-111080-25
                                                                Date:
                                                                January 06, 2026




LEGEND

 CLAT                                         = -------------------------------------------------------------
                                                ------------------
 Grantor                                      = --------------------
 Date 1                                       = ---------------------------
 State                                        = --------
 Trustee                                      = --------------------
 DAF                                          = -------------------------------------------------------------
                                                ------------
 Sponsoring Organization                      = ------------------------------------------------------------


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

This letter ruling is in response to a request from your authorized representative, dated
May 28, 2025, and subsequent documentation requesting rulings under sections 4941,
4945, and 507 of the Internal Revenue Code relating to the proposed early termination
of a split-interest trust. Taxpayer represents the facts as follows.

FACTS

CLAT was established by Grantor on Date 1 in State as an irrevocable charitable lead
annuity trust and is governed by State law. Under section 4947(a)(2), CLAT is a split-
interest trust that is treated as a private foundation for certain purposes. Under the
terms of the CLAT’s trust agreement, Trustee is required to distribute fixed annual
annuity payments to DAF in each taxable year of CLAT’s twenty-year term. After the
final annuity payment is made under CLAT’s trust agreement, the remainder interest in
the trust estate is to pass to Trustee, who is also the sole remainder beneficiary. DAF
consists of a donor-advised fund administered and maintained by Sponsoring
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Organization. Sponsoring Organization operates as a tax-exempt entity pursuant to
section 501(c)(3).

As of the date of the ruling request, there remain ten annuity payments due under the
terms of CLAT’s trust agreement. CLAT represents that the investments held in CLAT
have materially outperformed original expectations when CLAT was funded, and that
the fair market value of the assets of CLAT significantly exceed the present value
(computed under the applicable section 7520 rate) of the remaining annuity payments.

CLAT represents that DAF has requested that Trustee pay the undiscounted sum of all
remaining annuity amounts now so that DAF may immediately devote those funds to its
charitable purpose. CLAT further represents that under State law, early termination or
modification of a charitable lead annuity trust is permitted when continuation under
existing terms is unnecessary to accomplish the trust’s purposes or when termination
would allow for more efficient administration, and that early termination in this case
would advance those objectives by accelerating the availability of funds to DAF for
qualified charitable distributions. CLAT states that upon receiving the required court
order authorizing the modification and early termination of CLAT, Trustee would
distribute the undiscounted remaining annuity amount to the DAF and thereafter wind
up the trust.

Upon termination, the remaining trust corpus would pass to Trustee in Trustee’s
capacity as sole remainder beneficiary. CLAT represents that no other remainder
beneficiaries or contingent remainder beneficiaries exist, and that there are no parties
whose interests would be adversely affected by early termination under the terms of the
trust.

Based on the documentation submitted and the facts and representations described
above, Taxpayer requests the following rulings.

RULINGS REQUESTED

   1. The distribution and payment by CLAT of the undiscounted remaining annuity
      amounts to DAF is not an act of self-dealing under section 4941.
   2. The payment by CLAT of the undiscounted remaining annuity amounts to DAF is
      not a taxable expenditure under section 4945.
   3. The payment by CLAT of the undiscounted remaining annuity amounts to DAF is
      not subject to tax under section 507(c).

LAW

Section 507(a) provides, in part, that the status of any organization as a private
foundation shall be terminated only if such organization notifies the Secretary of its
intent to accomplish such termination.
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Section 507(c) imposes a tax upon a private foundation's termination of its status as a
private foundation.

Section 4941 imposes an excise tax on each act of self-dealing between a disqualified
person and a private foundation.

Section 4945(a)(1) imposes a tax upon a private foundation's making of any taxable
expenditure as defined in section 4945(d). Section 4945(d)(5) provides that the term
“taxable expenditure” means any amount paid or incurred by a private foundation for
any purpose other than one specified in section 170(c)(2)(B).

Section 4946(a) defines “disqualified person,” including substantial contributors,
foundation managers, and certain family members.

Section 4947(a)(2) provides, in part, that in the case of a trust which is not exempt from
tax under section 501(a), not all of the unexpired interests in which are devoted to one
or more of the purposes described in section 170(c)(2)(B), and which has amounts in
trust for which a deduction was allowed under certain specified sections of the Internal
Revenue Code, including section 2522, section 507 (relating to termination of private
foundation status), section 4941 (relating to taxes on self-dealing), section 4945
(relating to taxes on taxable expenditures), as well as certain other specified Internal
Revenue Code provisions relating to private foundations, shall apply as if such trust
were a private foundation.

Treas. Reg. section 53.4946-1(a)(8) provides that for purposes of section 4941 only, the
term “disqualified person” shall not include any organization which is described in
section 501(c)(3) (other than an organization described in section 509(a)(4)).

Treas. Reg. section 53.4947-1(e)(1) provides that the provisions of section 507(a) shall
not apply to a trust described in section 4947(a)(1) or (2) by reason of any payment to a
beneficiary that is directed by the terms of the governing instrument of the trust and is
not discretionary with the trustee or, in the case of a discretionary payment, by reason
of, or following, the expiration of the last remaining charitable interest in the trust.

Treas. Reg. section 53.4947-1(e)(2), Example 2, describes a scenario in which H
creates a trust under which X, a section 501(c)(3) organization, receives $20,000 per
year for a period of 20 years, remainder to S, H's son. H is allowed a deduction under
section 2522 for the present value of X's interest. Example 2 provides that when the
final payment to X has been made at the end of the 20-year period in accordance with
the terms of the trust, the provisions of section 4947(a)(2) will cease to apply to the trust
because the trust no longer retains any amounts for which the deduction under section
2522 was allowed. The example notes that the final payment to X will not be
considered a termination of the trust's private foundation status within the meaning of
section 507(a).
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ANALYSIS

Under section 4947(a)(2), CLAT, as a split-interest trust, is treated as a private
foundation for certain purposes, including those in sections 4941, 4945, and 507. CLAT
proposes to accelerate all remaining unpaid annuity payments to DAF, computed
without applying any present value discount, and then terminate.

Requested Ruling 1

Section 4941 imposes an excise tax on each act of self-dealing between a disqualified
person and a private foundation. Section 4941 applies to CLAT by virtue of section
4947(a)(2). However, Treas. Reg. section 53.4946-1(a)(8) provides that for purposes of
section 4941 only, the term “disqualified person” shall not include any organization
which is described in section 501(c)(3) (other than an organization described in section
509(a)(4)). Because DAF is administered and maintained by Sponsoring Organization
which is recognized as an organization described in section 501(c)(3), DAF is not a
disqualified person for purposes of section 4941. Accordingly, the accelerated payment
of the undiscounted remaining annuity amounts to DAF is not an act of self-dealing
under section 4941.

Requested Ruling 2

Section 4945(a)(1) imposes a tax upon a private foundation's making of any taxable
expenditure as defined in section 4945(d). Section 4945(d)(5) provides that the term
“taxable expenditure” means any amount paid or incurred by a private foundation for
any purpose other than one specified in section 170(c)(2)(B). Pursuant to its trust
agreement, CLAT is making annuity payments to DAF, which is administered and
maintained by Sponsoring Organization, and organization recognized as exempt under
section 501(c)(3). Consequently, these payments are for a charitable purpose specified
in section 170(c)(2)(B). Therefore, the accelerated payment of the undiscounted
annuity amount from CLAT to DAF is not a taxable expenditure under section 4945.

Requested Ruling 3

Section 507(a) provides, in part, that the status of any organization as a private
foundation shall be terminated only if such organization notifies the Secretary of its
intent to accomplish such termination. Section 507(c) imposes a tax upon a private
foundation's termination of its status as a private foundation. Treas. Reg. section
53.4947-1(e)(1) provides that the provisions of section 507(a) shall not apply to a trust
described in section 4947(a)(2) by reason of any payment to a beneficiary that is
directed by the terms of the governing instrument of the trust and is not discretionary
with the trustee. Here, CLAT’s governing instrument requires annuity payments to DAF
and Trustee does not have discretion over whether to pay the annuity amounts.
Accordingly, section 507 does not apply, and the accelerated payment and termination
are not subject to tax under section 507(c).
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RULINGS

Based on the facts and representations submitted by CLAT, we rule as follows:

   1. The distribution and payment by CLAT of the undiscounted remaining annuity
      amounts to DAF is not an act of self-dealing under section 4941.
   2. The payment by CLAT of the undiscounted remaining annuity amounts to DAF is
      not a taxable expenditure under section 4945.
   3. The payment by CLAT of the undiscounted remaining annuity amounts to DAF is
      not subject to tax under section 507(c).

The rulings contained in this letter are based upon information and representations
submitted by or on behalf of Taxpayer and accompanied by penalty of perjury
statements executed by an individual with authority to bind Taxpayer and upon the
understanding that there will be no material changes in the facts. While this office has
not verified any of the material submitted in support of the request for these rulings, it is
subject to verification on examination. The Associate Chief Counsel (Employee
Benefits, Exempt Organizations, and Employment Taxes) will revoke or modify a letter
ruling and apply the revocation retroactively if there has been a misstatement or
omission of controlling facts; the facts at the time of the transaction are materially
different from the controlling facts on which the ruling was based; or, in the case of a
transaction involving a continuing action or series of actions, the controlling facts
change during the course of the transaction. See Rev. Proc. 2025-1, 2025-1 I.R.B. 1,
section 11.05.

This letter does not address the applicability of any section of the Code or Regulations
to the facts submitted, other than those sections specifically described. 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 taxpayer 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 Taxpayer’s authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

If you have any questions about this ruling, please contact the person whose name and
telephone number are shown in the heading of this letter.
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                                                     Sincerely,



                                                     _______________________________
                                                     Seth Groman
                                                     Senior Counsel
                                                     Exempt Organizations Branch 3
                                                     (Employee Benefits, Exempt Organizations,
                                                     and Employment Taxes)


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