In the recent Private Letter Ruling 202448002, the Internal Revenue Service ruled that a trust’s proposed modifications won’t disqualify it as a charitable remainder unitrust (CRUT) under Internal Revenue Code Section 664(d)(2).
CRUT Basics
A CRUT is an irrevocable trust designed to make payments of a percentage of the value of the trust each year to one or more people (at least one of which is a noncharitable beneficiary). The payments generally must: (1) be for the life or lives of the individual beneficiaries (all of whom must be living at the time the CRUT is created) or for a term of years not exceeding 20, and (2) equal at least 5% and no more than 50% of the fair market value (FMV) of the CRUT assets, valued annually. A CRUT is exempt from income tax, and the grantor is entitled to an income, gift and estate tax deduction based on the present value of the remainder interest ultimately passing to the charitable organization.
Modifications of the CRUT
In the facts of the PLR, two individuals created a CRUT with themselves as noncharitable beneficiaries. The CRUT required the trustees to pay the individual beneficiaries each year during their lifetimes an amount (the unitrust amount) equal to 5% of the net FMV of the CRUT’s assets, valued as of the first day of each taxable year of the CRUT. On the death of the first of these beneficiaries, the trustees are required to pay the unitrust amount to the surviving beneficiary for their lifetime. One of the individual beneficiaries died, and the surviving beneficiary currently receives the entire unitrust amount. On the death of the second of these beneficiaries, the CRUT terminates, and the trustees are required to distribute the trust property to one or more permitted charitable organizations.
With the consent of the surviving individual beneficiary, the CRUT trustees proposed to modify the terms of the trust agreement to add that the trustees may distribute currently or on the death of the surviving individual beneficiary, all or a portion of the trust assets to permissible remainder beneficiaries (that is, qualifying charitable organizations). In addition, if a charitable organization isn’t a permissible remainder beneficiary, the distribution to that organization would lapse, and the assets to be distributed to it would remain in the CRUT instead. Further, after any distribution to a permissible remainder beneficiary during the lifetime of the surviving individual beneficiary, the sum of the unitrust amount plus any deficiency payable would thereafter be calculated based on the remaining net FMV of the CRUT assets on the first day of the CRUT’s succeeding tax year. The proposed modifications didn’t convert the CRUT into a grantor trust for federal income tax purposes.
Based on the information submitted and the Treasury Regulations under IRC Section 664, the IRS concluded that the proposed modifications to the CRUT wouldn’t disqualify the CRUT as one under IRC Section 664(d)(2).
Win for the Taxpayer
Charitable remainder trusts can offer many benefits, including:
- Help the grantor plan major donations to charitable organizations they support;
- Provide a predictable income for life or over a specific time period;
- Allow the grantor to defer income taxes on the sale of assets transferred to the trust; and
- Allow the grantor a charitable deduction based on the value of the charitable interest in the trust.
Based on the IRS’ conclusion in PLR 202448002, the incorporation of one or more of the modifications described in the ruling to the original terms of a CRUT may allow the CRUT to better reflect the current objectives and intentions of the grantor and both the noncharitable and charitable beneficiaries without changing the treatment of the CRUT as one for federal tax purposes.
