SECTION 6. ALTERNATE — Internal Revenue Bulletin 2003-31

ANNUITY TRUST — TWO LIVES, CONCURRENT AND CONSECUTIVE INTERESTS

.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 .

(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 ] and to

[ permissible recipient ] (hereinafter “the Recipients”) in equal shares during their lifetimes an annuity amount equal to [ the stated dollar amount ], and upon the death of one (hereinafter “the Predeceasing Recipient”), the Trustee shall pay the entire annuity amount (subject to any proration in paragraph 4) to the survivor (hereinafter “the Survivor Recipient”). (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 recipients 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 recipients ] percent of the annuity amount to [ permissible recipient ] and [permissible recipient] (hereinafter “the Recipients”) in equal shares during their joint lives, and upon the death of one (hereinafter “the Predeceasing Recipient”), the Trustee shall pay that entire percentage of the annuity amount (subject to any proration in paragraph 4) to the survivor (hereinafter “the Survivor Recipient”). In each taxable year of the trust during the annuity period, the Trustee shall pay [ 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 Survivor 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 Recipients and the Charitable Recipient (in the case of an undervaluation) or receive from the Recipients 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 5, Distribution to Charity, of the sample trust with the following parenthetical:

(other than any amount due the Recipients or their estates and the Charitable Recipient under the provisions above). (c) Add the following sentence after the first and only sentence in paragraph 7, Prohibited Transactions, of the sample trust:

2003-31 I.R.B. 254 August 4, 2003

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 survivor 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 Survivor Recipient’s death or, if earlier, the date on which occurs the [ qualified contin- gency ].

.04 Retaining the Right to Revoke the Interest of the Survivor Recipient.

(1) Explanation . The donor may retain the right to revoke or terminate the interest of the other noncharitable recipient. This

right is exercisable only by the donor’s last will and testament. Section 1.664–2(a)(4). The retention of this right may have gift and estate tax consequences. It will affect the value of the annuity interests transferred. It may also cause a portion of the trust to be included in the donor’s gross estate for federal estate tax purposes, even if it would otherwise not be includible. The following alternate provision provides for the donor’s retention of the right to revoke when the donor is also a recipient. (2) Instructions for use . To retain the right to revoke the other noncharitable recipient’s interest by the donor’s last will and

testament: (a) Designate the donor as a recipient in paragraph 2, Payment of Annuity Amount, of the sample trust. (b) Replace the second sentence of paragraph 2, Payment of Annuity Amount, of the sample trust with the following two

sentences:

The Donor hereby expressly reserves the power, exercisable only by the Donor’s last will and testament, to revoke and terminate the interest of [ the name of permissible recipient who is not the Donor ] under this trust. 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 death of the Survivor Recipient, or on the earlier death of the Donor if the power to revoke [ the name of permissible recipient who is not the Donor ]’s interest is exercised.

.05 Last Annuity Payments to the Recipients.

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

payment of the predeceasing recipient’s share of the annuity amount may terminate with the last regular payment preceding the predeceasing recipient’s death. Similarly, as an alternative to prorating the annuity amount in the taxable year of the termination of the annuity period, payment of the annuity amount may terminate with the last regular payment preceding the termination of the annuity period. However, the fact that a 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) Instructions for use .

(a) To add an alternate provision to terminate the payment of the predeceasing recipient’s share of the annuity amount with

the last regular payment preceding his or her death, replace paragraph 4, Proration of Annuity Amount, of the sample trust with the following paragraph:

Proration of Annuity Amount . Except as provided below, the Trustee shall prorate the annuity amount on a daily basis for any short taxable year. The obligation of the Trustee to pay a share of the annuity amount to the Predeceasing Recipient shall terminate with the regular quarterly installment next preceding the Predeceasing Recipient’s death. In the taxable year of the trust during which the annuity period ends, the Trustee shall prorate the annuity amount on a daily basis for the number of days of the annuity period in that taxable year. (b) To add an alternate provision to terminate the payment of the annuity amount with the last regular payment preceding

the termination of the annuity period, replace paragraph 4, Proration of Annuity Amount, of the sample trust with the following paragraph:

Proration of Annuity Amount . Except as provided below, the Trustee shall prorate the annuity amount on a daily basis for any short taxable year. Upon the death of the Predeceasing Recipient, the Trustee shall prorate on a daily basis the Predeceasing Recipient’s share of the next regular annuity payment between the estate of the Predeceasing Recipient and the Survivor Recipient. 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 termination of the annuity period.

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(c) To add an alternate provision terminating the payment of the predeceasing recipient’s share of the annuity amount with

the last regular payment preceding his or her death, and terminating the payment of the annuity amount with the last regular payment preceding the termination of the annuity period, replace paragraph 4, Proration of Annuity Amount, of the sample trust with the following paragraph:

Proration of Annuity Amount . Except as provided below, the Trustee shall prorate the annuity amount on a daily basis for any short taxable year. The obligation of the Trustee to pay a share of the annuity amount to the Predeceasing Recipient shall terminate with the regular quarterly installment next preceding the Predeceasing Recipient’s death. 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 termination of the annuity period.

.06 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) Instructions 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.”

.07 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 5, 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.

.08 Power of Appointment to Designate the Charitable Remainderman.

(1) Explanation . The trust instrument may grant a 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 5, 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 Recipients or their estates under the provisions above) to one or more charitable organizations described in §§ 170(c), 2055(a), and 2522(a) of the Code as [ one of the named permissible recipients ] shall appoint and direct by specific reference to this power of appointment by inter vivos or testamentary instrument. To the extent this power of appointment is not effectively exercised, 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.