SECTION 6. ALTERNATE — Internal Revenue Bulletin 2003-31

REMAINDER ANNUITY TRUST — TERM OF YEARS

.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 1, 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 1, 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 an estate tax charitable deduction is 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) and 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 1, 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 passing to this trust as finally determined for federal estate tax purposes. 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) and 2055(a) of the Code ] (hereinafter “the Charitable Recipient”).

2003-31 I.R.B. 266 August 4, 2003

The annuity period is a term of [ not more than 20 ] years. The first day of the annuity period shall be the date of my death and the last day of the annuity period shall be the day preceding the [ ordinal number corresponding to the length of the annuity period ] anniversary of that date. If the Charitable Recipient is not an organization described in §§ 170(c) and 2055(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) and 2055(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 estate 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) In paragraph 2, Deferral Provision, and paragraph 4, Distribution to Charity, of the sample trust, replace each reference

to “the Recipient” with a reference to “the Recipient and the Charitable Recipient.” (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 Apportionment of the Annuity Amount among Members of a Named Class in the Discretion of the Trustee.

(1) Explanation . A trust is not a CRAT if any person has the power to alter the amount to be paid to any named person other than an organization described in § 170(c) if the power would cause any person to be treated as the owner of the trust, or any portion thereof, if subpart E were applicable to the trust. Section 1.664–2(a)(3)(ii). See Rev. Rul. 77–73, 1977–1 C.B. 175. A trustee’s discretionary power, exercisable solely by that trustee, to allocate the annuity amount among the members of a class would cause the trustee to be treated as the owner of all or a portion of the trust under § 678(a) if the trustee is a member of the class, if the trustee may apply trust income or corpus to satisfy the trustee’s own legal obligation, or if the trustee actually exercises the power to satisfy a support obligation owed by the trustee. Therefore, if any trustee is given the discretionary power exercisable solely by that trustee to allocate the annuity amount among members of a class, the trust instrument must provide that such trustee must be: (i) not a member of the recipient class; and (ii) prohibited from applying any part of the annuity payment in satisfaction of the trustee’s own legal obligation. (2) Instructions for use.

(a) Add the following sentence to the sample trust:

Any trustee who is authorized in the trustee’s sole discretion to allocate the annuity amount among members of a Recipient class must not be a member of the Recipient class. (b) Replace the first sentence of paragraph 1, Payment of Annuity Amount, of the sample trust with the following three

sentences:

In each taxable year of the trust during the annuity period, the Trustee shall pay to a member or members of a class of persons comprised of [ designated members of class ] (hereinafter “the Recipient”) an annuity amount equal to [ a number no less than 5 and no more than 50 ] percent of the initial net fair market value of all property passing to this trust as finally determined for federal estate tax purposes. The Trustee may pay the annuity amount to one or more members of the class, in equal or unequal shares, as the Trustee, in the Trustee’s sole discretion, may from time to time deem advisable. The Trustee may not, however, apply the payment for the Trustee’s own benefit, or in satisfaction of any support or other legal obligation of the Trustee.

.04 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 expiration of the term of years. 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 and third sentences of paragraph 1, Payment of Annuity Amount, of the sample

trust with the following two sentences, respectively:

The annuity period is a term of [ not more than 20 ] years, unless earlier terminated by the occurrence of [ qualified contingency ]. The first day of the annuity period shall be the date of my death and the last day of the annuity period shall be the day preceding the [ ordinal number corresponding to the length of the annuity period ] anniversary of that date or, if earlier, the date on which occurs the [ qualified contingency ].

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.05 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 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 under the provisions above) to one or more charitable organizations described in §§ 170(c) and 2055(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) and 2055(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) and 2055(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) and 2055(a) of the Code as the Trustee shall select, and in the proportions as the Trustee shall decide, in the Trustee’s sole discretion.

DRAFTING INFORMATION

The principal authors of this revenue procedure are Karlene M. Lesho and Stephanie N. Bland of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure, contact Karlene M. Lesho or Stephanie N. Bland at (202) 622–7830 (not a toll-free call).

26 CFR 601.201: Rulings and determination letters. (Also Part I, §§ 170, 664, 2055; 1.644–2, 20.2055–2.)

Rev. Proc. 2003–59