SECTION 6. ALTERNATE — Internal Revenue Bulletin 2003-31

REMAINDER ANNUITY TRUST — TWO LIVES, 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 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 Initial Recipient”) until the Initial Recipient’s death and thereafter to [ permissible recipient ] (hereinafter “the Successor Recipient”) (subject to any proration in paragraph 3), 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 recipients ] percent of the annuity amount to [ permissible recipient ] (hereinafter “the Initial Recipient”) until the Initial Recipient’s death, and thereafter to [ permissible recipient ] (hereinafter “the Successor Recipient”) (subject to any proration in paragraph 3). 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) and 2055(a) of the Code ] (hereinafter “the Charitable Recipient”). 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 date of the death of the survivor of the Initial Recipient and the Successor Recipient. 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

2003-31 I.R.B. 272 August 4, 2003

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 Initial Recipient and/or the Successor Recipient and the Charitable Recipient (in the case of an undervaluation) or receive from the Initial Recipient and/or the Successor 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, of the sample trust, replace each reference to “the Initial Recipient and/or the Succes sor Recipient” with a reference to “the Initial Recipient and/or the Successor Recipient and the Charitable Recipient.” (c) Replace the first parenthetical in paragraph 4, Distribution to Charity, of the sample trust with the following parenthetical:

(other than any amount due the Initial Recipient, the Successor Recipient, or their estates and the Charitable Recipient under the provisions above). (d) 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 survivor of the initial recipient and the successor recipient. The amount of the charitable deduction, however, will be determined without regard to a qualified contingency. See § 664(f)(2). (2) Instructions for use. Replace the second sentence of paragraph 1, Payment of Annuity Amount, of the sample trust with

the following sentence:

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 date of the death of the survivor of the Initial Recipient and the Successor Recipient or, if earlier, the date on which occurs the [ qualified contingency ].

.04 Last Annuity Payments to the Recipients.

(1) Explanation . As an alternative to prorating the annuity amount in the taxable year of the initial recipient’s death, payment of the initial recipient’s share of the annuity amount may terminate with the last regular payment preceding the initial 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) Instruction for use .

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

regular payment preceding his or her death, replace paragraph 3, 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 the annuity amount to the Initial Recipient shall terminate with the regular quarterly installment next preceding the Initial 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 3, 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. If the Successor Recipient survives the Initial Recipient, the Trustee shall prorate on a daily basis the next regular annuity payment due after the death of the Initial Recipient between the estate of the Initial Recipient and the Successor 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. (c) To add an alternate provision terminating the payment of the initial 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 3, Proration of Annuity Amount, of the sample trust with the following paragraph:

August 4, 2003 273 2003-31 I.R.B.

terminate with the regular quarterly installment next preceding the Initial 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.

.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 Recipients or their estates under the provisions above) to one or more charitable organizations described in §§ 170(c) and 2055(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) 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.