SECTION 6. ALTERNATE — Internal Revenue Bulletin 2003-31

REMAINDER ANNUITY TRUST — ONE LIFE

.01 Annuity Amount Stated as a Specific Dollar Amount.

(1) Explanation . As an alternative to stating the annuity amount as a fraction or percentage of the initial net fair market value

of the assets transferred to the trust, the annuity amount may be stated as a specific dollar amount. Section 1.664–2(a)(1)(ii) and (iii). In either case, the annuity amount must be not less than 5 percent nor more than 50 percent of the initial net fair market value of all property placed in trust. Section 664(d)(1)(A). (2) Instructions for use .

August 4, 2003 233 2003-31 I.R.B.

(a) Replace the first sentence of paragraph 2, Payment of Annuity Amount, of the sample trust with the following sentence:

In each taxable year of the trust during the annuity period, the Trustee shall pay to [ permissible recipient ] (hereinafter “the Recipient”) an annuity amount equal to [ the stated dollar amount ]. (b) Delete the last sentence of paragraph 2, Payment of Annuity Amount, of the sample trust concerning the incorrect valu ation of trust assets.

.02 Payment of Part of the Annuity to an Organization Described in § 170(c).

(1) Explanation . An organization described in § 170(c) may receive part, but not all, of any annuity amount. Section 664(d)(1)(A). If a gift tax charitable deduction and, if needed, an estate tax charitable deduction are sought for the present value of the annuity interest passing to a charitable organization, the trust instrument must contain additional provisions. First, the trust instrument must specify the portion of each annuity payment that is payable to the noncharitable recipient and to the charitable organization described in §§ 170(c), 2522(a), and, if needed, § 2055(a). Second, the trust instrument must contain a means for selecting an alternative qualified charitable organization if the designated organization is not a qualified organization at the time when any annuity amount is to be paid to it. Third, the trust instrument must contain 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). (2) Instructions for use .

(a) Replace paragraph 2, Payment of Annuity Amount, of the sample trust with the following paragraph:

Payment of Annuity Amount . The annuity amount is equal to [ a number no less than 5 and no more than 50 ] percent of the initial net fair market value of all property transferred to the trust, valued as of the above date (that is, the date of the transfer). In each taxable year of the trust during the annuity period, the Trustee shall pay [ the percentage of the annuity amount payable to the noncharitable recipient ] percent of the annuity amount to [ permissible recipient ] (hereinafter “the Recipient”) and [ the percentage of the annuity amount payable to the charitable recipient ] percent of the annuity amount to [ an organization described in §§ 170(c), 2055(a), and 2522(a) of the Code ] (hereinafter “the Charitable Recipient”). The first day of the annuity period shall be the date the property is transferred to the trust and the last day of the annuity period shall be the date of the Recipient’s death. If the Charitable Recipient is not an organization described in §§ 170(c), 2055(a), and 2522(a) of the Code at the time when any annuity payment is to be distributed to it, then the Trustee shall distribute that annuity payment to one or more organizations described in §§ 170(c), 2055(a), and 2522(a) of the Code as the Trustee shall select, and in the proportions as the Trustee shall decide, in the Trustee’s sole discretion. The annuity amount shall be paid in equal quarterly installments at the end of each calendar quarter from income, and to the extent income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the annuity amount shall be added to principal. If the initial net fair market value of the trust assets is incorrectly determined, then within a reasonable period after the value is finally determined for federal tax purposes, the Trustee shall pay to the Recipient and the Charitable Recipient (in the case of an undervaluation) or receive from the Recipient and the Charitable Recipient (in the case of an overvaluation) an amount equal to the difference between the annuity amount(s) properly payable and the annuity amount(s) actually paid. (b) Replace the first parenthetical in paragraph 4, Distribution to Charity, of the sample trust with the following parenthetical:

(other than any amount due the Recipient or the Recipient’s estate and the Charitable Recipient under the provisions above). (c) Add the following sentence after the first and only sentence in paragraph 6, Prohibited Transactions, of the sample trust:

The Trustee shall not make any investments that jeopardize the exempt purpose of the trust for purposes of § 4944 of the Code, as modified by § 4947(a)(2)(A) of the Code, or retain any excess business holdings for purposes of § 4943 of the Code, as modified by § 4947(a)(2)(A) of the Code.

.03 Qualified Contingency.

(1) Explanation . Under § 664(f), payment of the annuity amount may terminate upon the earlier of the occurrence of a qualified

contingency (as defined in § 664(f)(3)) or the death of the recipient. The amount of the charitable deduction, however, will be determined without regard to a qualified contingency. See § 664(f)(2). (2) Instruction for use . Replace the second sentence of paragraph 2, Payment of Annuity Amount, of the sample trust with the

following sentence:

The first day of the annuity period shall be the date the property is transferred to the trust and the last day of the annuity period shall be the date of the Recipient’s death or, if earlier, the date on which occurs the [ qualified contingency ].

2003-31 I.R.B. 234 August 4, 2003

.04 Last Annuity Payment to the Recipient.

(1) Explanation . As an alternative to prorating the annuity amount in the taxable year of the recipient’s death, payment of the

annuity amount may terminate with the last regular payment preceding the recipient’s death. However, the fact that the recipient may not receive the last payment shall not be taken into account for purposes of determining the present value of the remainder interest. Section 1.664–2(a)(5)(i). (2) Instruction for use . Replace the second sentence of paragraph 3, Proration of Annuity Amount, of the sample trust with the

following sentence:

In the taxable year of the trust during which the annuity period ends, the obligation of the Trustee to pay the annuity amount shall terminate with the regular quarterly installment next preceding the death of the Recipient.

.05 Restricting the Charitable Remainderman to a Public Charity.

(1) Explanation . The amount of the donor’s income tax charitable deduction is more limited for gifts to certain private foun dations than for other charitable organizations. Specifically, charitable organizations described in § 170(c) include private foundations that are not described in § 170(b)(1)(E). See § 170(b) and Rev. Rul. 79–368, 1979–2 C.B. 109. To avoid these more restrictive limitations, a donor of an inter vivos CRAT may wish to restrict the charitable remainderman to an organization that is described in § 170(b)(1)(A) as well as §§ 170(c), 2055(a), and 2522(a) (referred to herein as a “public charity”). (2) Instruction for use . To restrict the charitable remainderman to a public charity, each and every time the phrase “an organi zation described in §§ 170(c), 2055(a), and 2522(a) of the Code” appears in the sample trust, replace it with the phrase “an organization described in §§ 170(b)(1)(A), 170(c), 2055(a), and 2522(a) of the Code.”

.06 Retaining the Right to Substitute the Charitable Remainderman.

(1) Explanation . The donor may retain the right to substitute another charitable remainderman for the charitable remainderman

named in the trust instrument. See Rev. Rul. 76–8, 1976–1 C.B. 179. Note, however, that the retention of this right will cause the gift of the remainder interest to be incomplete for gift tax purposes. See § 25.2511–2(c) and Rev. Rul. 77–275, 1977–2 C.B. 346. (2) Instruction for use . Insert the following sentence between the first and last sentences of paragraph 4, Distribution to Charity,

of the sample trust:

The Donor reserves the right to designate, at any time and from time to time, in lieu of the Charitable Organization identified above, one or more organizations described in §§ 170(c), 2055(a), and 2522(a) of the Code as the charitable remainderman and shall make any such designation by giving written notice to the Trustee.

.07 Power of Appointment to Designate the Charitable Remainderman.

(1) Explanation . The trust instrument may grant the recipient a power of appointment to designate the charitable remainderman.

See Rev. Rul. 76–7, 1976–1 C.B. 179. (2) Instruction for use . Replace paragraph 4, Distribution to Charity, of the sample trust with the following paragraph:

Distribution to Charity . At the termination of the annuity period, the Trustee shall distribute all of the then principal and income of the trust (other than any amount due the Recipient or the Recipient’s estate under the provisions above) to one or more charitable organizations described in §§ 170(c), 2055(a), and 2522(a) of the Code as the Recipient shall appoint and direct by specific reference to this power of appointment by inter vivos or testamentary instrument. To the extent the Recipient fails to effectively exercise the power of appointment, the principal and income not effectively appointed shall be distributed to one or more organizations described in §§ 170(c), 2055(a), and 2522(a) of the Code as the Trustee shall select, and in the proportions as the Trustee shall decide, in the Trustee’s sole discretion. If an organization fails to qualify as an organization described in §§ 170(c), 2055(a), and 2522(a) of the Code at the time when any principal or income of the trust is to be distributed to it, then the Trustee shall distribute the then principal and income to one or more organizations described in §§ 170(c), 2055(a), and 2522(a) of the Code as the Trustee shall select, and in the proportions as the Trustee shall decide, in the Trustee’s sole discretion.