SECTION 5. ANNOTATIONS REGARDING SAMPLE TESTAMENTARY CHARITABLE

REMAINDER ANNUITY TRUST — TWO LIVES, CONSECUTIVE INTERESTS

.01 Annotations for Introductory Paragraph of the Sample Trust.

(1) Factors concerning qualification of trust . A deduction must be allowable under § 2055 for property contributed to the trust.

Section 1.664–1(a)(1)(iii)(a) of the Income Tax Regulations. The trust must meet the definition of and function exclusively as a charitable remainder trust from the creation of the trust. Section 1.664–1(a)(4). Solely for purposes of § 664, a trust is deemed created at the earliest time that no person is treated as the owner of the entire trust under subpart E, part 1, subchapter J, chapter 1, subtitle A of the Code (subpart E). Section 1.664–1(a)(4). For purposes of § 2055, a charitable remainder trust shall be deemed created at the date of death of the decedent (even though the trust is not funded until the end of a reasonable period of administration or settlement) if the obligation to pay the annuity amount with respect to the property passing in trust at the death of the decedent begins as of the date of death of the decedent, even though the requirement to pay this amount is deferred in accordance with § 1.664–1(a)(5)(i). Section 1.664–1(a)(5)(i). In addition, funding the trust with certain types of assets may disqualify it as a charitable remainder trust. See § 1.664–1(a)(7) and Rev. Rul. 73–610, 1973–2 C.B. 213. (2) Valuation of unmarketable assets . If the trust is funded with unmarketable assets, the initial net fair market value of the assets must be determined exclusively by an independent trustee, as defined in § 1.664–1(a)(7)(iii), or must be determined by a current “qualified appraisal” from a “qualified appraiser,” as defined in § 1.170A–13(c)(3) and (c)(5), respectively. Section 1.664–1(a)(7). (3) Trustee provisions . Alternate or successor trustees may be designated in the trust instrument. In addition, the trust instrument may contain other administrative provisions relating to the trustee’s duties and powers, as long as the provisions do not conflict with the rules governing charitable remainder trusts under § 664 and the regulations thereunder.

.02 Annotations for Paragraph 1, Payment of Annuity Amount, of the Sample Trust.

(1) Permissible recipients . For a CRAT with an annuity period based on the lives of two individuals, the annuity amount must

generally be paid to those individuals and both must be living at the time of the creation of the trust. See Rev. Rul. 2002–20, 2002–1 C.B. 794, for situations in which the annuity amount may be paid to a trust for the benefit of an individual who is financially disabled. An organization described in § 170(c) may receive part, but not all, of the annuity amount. Section 664(d)(1)(A) and § 1.664–2(a)(3)(i). See section 6.02 of this revenue procedure for an alternate provision that provides for payment of part of the annuity to an organization described in § 170(c). (2) Percentage requirements . The sum certain annuity amount must be at least 5 percent and not more than 50 percent of the initial net fair market value of the assets placed in trust. Section 664(d)(1)(A). Even if the sum certain annuity amount is at least 5 percent and not more than 50 percent of the initial net fair market value of the assets placed in trust, no deduction will be allowable under § 2055 if the probability that the trust corpus will be exhausted before the death of the survivor of the recipients exceeds 5 percent. Rev. Rul. 77–374, 1977–2 C.B. 329. See § 20.7520–3(b) for special rules that may be applicable in valuing interests transferred to CRATs. In addition, the value (determined under § 7520) of the charitable remainder interest must be at least 10 percent of the initial net fair market value of all property placed in the trust. Section 664(d)(1)(D). (3) Payment of annuity amount in installments . Paragraph 1, Payment of Annuity Amount, of the sample trust specifies that

the annuity amount is to be paid in equal quarterly installments at the end of each quarter. However, the trust instrument

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may specify that the annuity amount is to be paid to the recipient annually or in equal or unequal installments throughout the year. See § 1.664–2(a)(1)(i). The amount of the charitable deduction will be affected by the frequency of payment, by whether the installments are equal or unequal, and by whether each installment is payable at the beginning or end of the period. See § 1.664–2(c) and § 20.2031–7(d)(2)(iv). (4) Payment of annuity amount by close of taxable year . Generally, the annuity amount for any taxable year must be paid before

the close of the taxable year for which it is due. For circumstances under which the annuity amount may be paid within a reasonable time after the close of the taxable year, see § 1.664–2(a)(1)(i)( a ). In addition, § 1.664–1(a)(5)(i) provides a special rule applicable to charitable remainder trusts created by testamentary transfer that may defer the requirement to pay the annuity amount until the end of the taxable year in which the trust is completely funded. See section 5.03(1) of this revenue procedure for additional information regarding the deferral of the payment of the annuity amount until the end of the taxable year in which the trust is completely funded. (5) Early distributions to charity . The trust instrument may provide that an amount other than the annuity shall be paid (or

may be paid in the discretion of the trustee) to an organization described in § 170(c). If such a distribution is made in kind, the adjusted basis of the property distributed must be fairly representative of the adjusted basis of the property available for distribution on the date of distribution. Section 1.664–2(a)(4).

.03 Annotations for Paragraph 2, Deferral Provision, of the Sample Trust.

(1) Deferral of requirement to pay annuity amount . The deferral provision in paragraph 2 of the sample trust authorizes defer ring the payment of the annuity amount until the end of the taxable year of the trust in which the trust is completely funded. Section 1.664–1(a)(5)(i) provides the operational rule for deferring payment of the annuity amount in this circumstance. (2) Treatment of distributions . For the proper treatment of distributions to a charitable remainder trust or to the recipient

during the period of administration of an estate or settlement of a trust that is not a charitable remainder trust, see § 1.664–1(a)(5)(iii).

.04 Annotations for Paragraph 3, Proration of Annuity Amount, of the Sample Trust.

(1) Prorating annuity amount . To compute the annuity amount in a short taxable year and in the taxable year in which the

annuity period terminates, see § 1.664–2(a)(1)(iv)( a ) and ( b ), respectively. (2) Determining annuity amount payable in year of a recipient’s death . Paragraph 3, Proration of Annuity Amount, of the sample trust specifies that the annuity amount shall be prorated on a daily basis. See section 6.04 of this revenue procedure for alternate provisions that provide for termination of the annuity amount with the last regular payment preceding the death of each recipient.

.05 Annotations for Paragraph 4, Distribution to Charity, of the Sample Trust.

(1) Minimum value of remainder . As noted in section 5.02(2) of this revenue procedure, the value (determined under § 7520)

of the charitable remainder interest is required to be at least 10 percent of the initial net fair market value of all property placed in the trust. Section 664(d)(1)(D). (2) Designated remainderman . Any named charitable remainderman must be an organization described in §§ 170(c) and 2055(a) at the time of the transfer to the charitable remainder annuity trust. See § 664(d)(1)(C) and Rev. Rul. 77–385, 1977–2 C.B. 331. The trust instrument may restrict the charitable remainderman to an organization described in §§ 170(c) and 2055(a), but grant to a trustee or other person the power to designate the actual charitable remainderman. See section 6.05 of this revenue procedure for an alternate provision in which a recipient is granted a power of appointment to designate the charitable remainderman. (3) Multiple remaindermen . The remainder interest may pass to more than one charitable organization as long as each organi zation is described in §§ 170(c) and 2055(a). Section 1.664–2(a)(6)(i). (4) Alternative remaindermen . The trust instrument of a CRAT must provide a means for selecting alternative charitable re maindermen in the event the designated organization is not qualified at the time any payments are to be made to it from the trust. Section 1.664–2(a)(6)(iv).

.06 Annotations for Paragraph 6, Prohibited Transactions, of the Sample Trust.

(1) Payment of the annuity amount . Payment of the annuity amount to the recipients is not considered an act of self-dealing

within the meaning of § 4941(d), as modified by § 4947(a)(2)(A), or a taxable expenditure within the meaning of § 4945(d), as modified by § 4947(a)(2)(A). Section 53.4947–1(c)(2) of the Foundation and Similar Excise Taxes Regulations. (2) Prohibitions against certain investments and excess business holdings . Prohibitions against investments that jeopardize

the exempt purpose of the trust for purposes of § 4944, as modified by § 4947(a)(2)(A), and against retaining any excess business holdings for purposes of § 4943, as modified by § 4947(a)(2)(A), are required if the trust provides for payment of

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part of an annuity amount to an organization described in § 170(c) and an estate tax charitable deduction is sought for this interest. See § 4947(b)(3). See section 6.02 of this revenue procedure for an alternate provision that provides for payment of part of the annuity to an organization described in § 170(c). (3) Trust to continue in existence for benefit of charity . The governing instrument requirements of § 508(e) must be included

in the trust instrument if, after the termination of the annuity period: (i) the trust instrument provides that the trust shall continue in existence for the benefit of the charitable remainderman and, as a result, the trust will become subject to the provisions of § 4947(a)(1); and (ii) the trust will be treated as a private foundation within the meaning of § 509(a), as modified by § 4947(a)(1). Except as provided in paragraph 6 of the sample trust, the trust instrument may limit the application of the provisions of § 508(e) to the period after the termination of the annuity period when the trust continues in existence for the benefit of the charitable remainderman.