SECTION 5. ANNOTATIONS — Internal Revenue Bulletin 2005-34

UNITRUST — TWO LIVES, CONCURRENT AND CONSECUTIVE INTERESTS

.01 Annotations for Introductory Paragraph and Paragraph 1, Funding of Trust, of the Sample Trust .

(1) Factors concerning qualification of trust . A deduction must be allowable under § 170, § 2055, or § 2522 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 neither the grantor nor any other 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), but in no event prior to the time property is first transferred to the trust. Neither the donor nor the donor’s spouse shall be treated as the owner of the trust under subpart E merely because he or she is named as a recipient of the unitrust amount. Section 1.664–1(a)(4). In addition, funding the trust with certain types of assets may disqualify 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 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). See section 5.08 of this revenue procedure for further guidance related to the valuation of unmarketable assets. (3) Income tax deductibility limitations . The amount of the charitable deduction for income tax purposes is affected by a number

of factors, including the type of property contributed to the trust, the type of charity receiving the property, whether the remainder interest is paid outright to charity or held in further trust, and the donor’s adjusted gross income (with certain adjustments). See § 170(b) and (e); § 1.170A–8; Rev. Rul. 80–38, 1980–1 C.B. 56; and Rev. Rul. 79–368, 1979–2 C.B. 109. See section 6.05 of this revenue procedure for an alternate provision that restricts the charitable remainderman to a public charity (as defined therein). (4) Trustee provisions . Alternate or successor trustees may be designated in the trust instrument. In addition, the trust instru ment 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. (5) Identity of donor . For purposes of qualification under this revenue procedure, the donor may be an individual or a husband

and wife. Appropriate adjustments should be made to the introductory paragraph if a husband and wife are the donors. Terms such as “grantor” or “settlor” may be substituted for “donor.”

.02 Annotations for Paragraph 2, Payment of Unitrust Amount, of the Sample Trust .

(1) Permissible recipients . For a CRUT with a unitrust period based on the lives of two individuals, the unitrust 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 unitrust 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 unitrust amount. Section 664(d)(2)(A) and § 1.664–3(a)(3)(i). See section 6.01 of this revenue procedure for an alternate provision that provides for payment of part of the unitrust amount to an organization described in § 170(c).

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(2) Fixed percentage method . Paragraph 2, Payment of Unitrust Amount, of the sample trust calculates the unitrust amount

under the fixed percentage method by using a fixed percentage of the net fair market value of the trust assets valued annually. See section 6.08 of this revenue procedure for an alternate provision that uses the net income method for calculating the unitrust amount. See section 6.09 of this revenue procedure for an alternate provision that uses the net income with make-up method for calculating the unitrust amount. See section 6.10 of this revenue procedure for an alternate provision that uses a combination of methods for calculating the unitrust amount as described in § 1.664–3(a)(1)(i)( c ). (3) Division of unitrust amount between recipients . The sample trust provides that while both recipients are alive they will

share the unitrust amount equally and, upon the death of the predeceasing recipient, the survivor recipient will receive all of the unitrust amount, subject to any proration in paragraph 4. However, the unitrust amount may be divided other than equally during the joint lives of the recipients. In addition, the share of the predeceasing recipient may be made payable to an organization described in § 170(c) for the rest of the survivor recipient’s life. (4) Percentage requirements . The fixed percentage unitrust amount must be at least 5 percent and not more than 50 percent of

the annual net fair market value of the assets in the trust. Section 664(d)(2)(A). In addition, with respect to each contribution of property to the trust, the value of the charitable remainder interest (determined under § 7520) is required to be at least 10 percent of the net fair market value of the contributed property as of the date of its contribution to the trust. Section 664(d)(2)(D). (5) Payment of unitrust amount in installments . Paragraph 2, Payment of Unitrust Amount, of the sample trust specifies that

the unitrust amount is to be paid in equal quarterly installments at the end of each quarter. However, the trust instrument may specify that the unitrust amount is to be paid to the recipients annually or in equal or unequal installments throughout the year. See § 1.664–3(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 § 1.664–3(c) and § 1.664–4. (6) Rules applicable to valuation . Paragraph 2, Payment of Unitrust Amount, of the sample trust specifies that the net fair

market value of trust assets is to be valued as of the first day of each taxable year of the trust. However, the value of the trust assets may be determined on any one date during the taxable year of the trust, or by taking the average of valuations made on more than one date during the taxable year of the trust, so long as the same valuation date or dates and the same valuation methods are used each year. If the governing instrument does not specify the valuation date or dates, the trustee must select the date or dates and indicate the selection on the first Form 5227, “ Split-Interest Trust Information Return,” that the trust must file. Section 1.664–3(a)(1)(iv). Note that if the valuation date is a date other than the first day of each taxable year of the trust, it may be necessary to modify the provisions in the sample trust regarding: (i) the timing of the payment of the unitrust amount; (ii) the proration of the unitrust amount in a short taxable year and the last taxable year of the unitrust period; and (iii) additional contributions. See § 1.664–3(a)(1)(v) and § 1.664–3(b). See section 5.06(4) for further guidance related to the valuation date and additional contributions. (7) Payment of unitrust amount by close of taxable year . Generally, the unitrust amount for any taxable year, if computed under

the fixed percentage method, must be paid before the close of the taxable year for which it is due. For circumstances under which the unitrust amount computed under the fixed percentage method may be paid within a reasonable time after the close of the taxable year, see § 1.664–3(a)(1)(i)( g ) and ( k ). See section 5.07(2) of this revenue procedure for additional information regarding the deferral of the unitrust payment allocable to a testamentary transfer. (8) Incorrect valuations . Nothing in § 664 or the regulations thereunder requires that interest be paid on the amount of

any underpayment or overpayment of the unitrust amount resulting from the incorrect valuation of trust assets. Section 1.664–3(a)(1)(iii). Notwithstanding the foregoing, state law may require the payment of interest on the amount of any such underpayment or overpayment of the unitrust amount. (9) Early distributions to charity . The trust instrument may provide that an amount other than the unitrust amount 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 1.664–3(a)(4).

.03 Annotation for Paragraph 3, Payment of Federal Estate Taxes and State Death Taxes, of the Sample Trust .

(1) Tax payment clause . If it is possible that all or part of the fair market value of the trust assets will be includible for federal

estate tax purposes in the gross estate of the donor, the trust must contain a tax payment clause. If federal estate taxes and state death taxes are paid from other sources, the tax payment clause will never become operative. Nevertheless, the tax payment clause is necessary because it ensures that the trustee will never be required to pay federal estate taxes or state death taxes from the trust assets. See § 664(d)(2)(B); § 1.664–1(a)(6), Example 3 ; and Rev. Rul. 82–128, 1982–2 C.B. 71.

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.04 Annotations for Paragraph 4, Proration of Unitrust Amount, of the Sample Trust .

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

unitrust period terminates, see § 1.664–3(a)(1)(v)( a ) and ( b ), respectively. (2) Determining unitrust amount payable in year of each recipient’s death . Paragraph 4, Proration of Unitrust Amount, of

the sample trust specifies that, upon the death of the predeceasing recipient, the next regular unitrust payment due shall be prorated on a daily basis between the estate of the predeceasing recipient and the survivor recipient. See section 6.04 of this revenue procedure for an alternate provision that terminates the payment of the predeceasing recipient’s share of the unitrust amount with the last regular payment preceding his or her death and/or terminates the payment of the unitrust amount with the last regular payment preceding the termination of the unitrust period.

.05 Annotations for Paragraph 5, Distribution to Charity, of the Sample Trust .

(1) Minimum value of remainder . As noted in section 5.02(4) of this revenue procedure, with respect to each contribution of

property to the trust, the value of the charitable remainder interest (determined under § 7520) is required to be at least 10 percent of the net fair market value of the property contributed to the trust as of the date of its contribution to the trust. Section 664(d)(2)(D). (2) Distribution to remainderman . The trustee of a charitable remainder trust has a reasonable time after the termination of the

unitrust period to complete the settlement of the trust, including making the required distributions. See § 1.664–3(a)(6)(ii). (3) Designated remainderman . Any named charitable remainderman must be an organization described in § 170(c) at the

time of the transfer to the CRUT. See § 664(d)(2)(C). Any named charitable remainderman must also be an organization described in § 2522(a) to qualify for the gift tax charitable deduction and an organization described in § 2055(a) to qualify for the estate tax charitable deduction. See Rev. Rul. 77–385, 1977–2 C.B. 331. If it is determined that a deduction under § 2055(a) will not be necessary in any event, all references to § 2055(a) in the trust instrument may be deleted. The trust instrument may restrict the charitable remainderman to an organization described in §§ 170(c), 2055(a), and 2522(a), but grant to a trustee or other person the power to designate the actual charitable remainderman. The gift of the remainder interest will be incomplete for gift tax purposes if, for example: (i) the donor retains the power to substitute the charitable remainderman; or (ii) the trust instrument provides the trustee with the power to designate the charitable remainderman and the donor is not prohibited from serving as trustee. See § 25.2511–2(c). Note, however, that an income tax charitable deduction is available even if the donor has the authority to substitute the charitable remainderman or the trustee has the authority to designate the charitable remainderman. Rev. Rul. 68–417, 1968–2 C.B. 103; Rev. Rul. 79–368, 1979–2 C.B. 109. See section 6.06 of this revenue procedure for an alternate provision in which the donor retains the right to substitute the charitable remainderman. See section 6.07 of this revenue procedure for an alternate provision in which a recipient is granted a power of appointment to designate the charitable remainderman. (4) 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 2522(a), and, if needed, § 2055(a). Section 1.664–3(a)(6)(i). (5) Alternative remaindermen . The trust instrument of a CRUT must provide a means for selecting alternative charitable re maindermen in the event any designated organization is not qualified at the time any payments are to be made to it from the trust. Section 1.664–3(a)(6)(iv). This requirement is satisfied in the sample trust by conferring the power upon the trustee to designate an alternative charitable remainderman. Note that the donor may designate one or more alternative charitable remaindermen in the trust instrument; however, the trust instrument must continue to provide a means for selecting an alternative charitable remainderman if any designated organization is not qualified at the time payments are to be made to it from the trust. (6) Continuing trust for charity . Upon the expiration of the unitrust period, the trust may continue in existence for charity. See

§ 1.664–3(a)(6)(ii). See section 5.09(3) of this revenue procedure for certain governing instrument requirements that apply when the trust continues in existence for charity.

.06 Annotations for Paragraph 6, Additional Contributions, of the Sample Trust .

(1) Identity of additional contributors. For purposes of qualification under this revenue procedure, only a donor or a donor’s

estate may make an additional contribution to the trust. See section 5.01(5) of this revenue procedure for examples of who may be a donor of a CRUT for purposes of qualification under this revenue procedure. (2) Proration of additional contributions . Paragraph 6, Additional Contributions, of the sample trust provides a formula for

determining the unitrust amount in each year that an additional contribution is made to the CRUT. If an additional contribution is made in a short taxable year or in the taxable year during which the unitrust period ends, the unitrust amount computed under paragraph 6 of the sample trust must be prorated pursuant to paragraph 4, Proration of Unitrust Amount, of the sample trust.

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(3) Severance of certain additional contributions . If an additional contribution is made to an existing CRUT and the contri bution does not satisfy the 10 percent test described in § 664(d)(2)(D), the contribution shall be treated as a transfer to a separate trust. Section 664(d)(4). (4) Valuation date in year of additional contribution . Paragraph 2, Payment of Unitrust Amount, of the sample trust specifies

a January 1 valuation date for the trust. The formula contained in paragraph 6, Additional Contributions, of the sample trust may be used when January 1 or any other single date during the taxable year is selected as the valuation date for a CRUT. Note, however, that if a single date other than January 1 is selected as the valuation date for a CRUT, the formulas in both paragraphs 2 and 6 of the sample trust for computing the unitrust amount will be deficient unless the trust instrument addresses the possibility that the unitrust period may end before the valuation date, for instance, by providing that in a year in which the unitrust period ends before the valuation date, “the valuation date” for purposes of paragraph 2 and paragraph 6 shall be the last day of the unitrust period. In addition, if the trust instrument is drafted to provide for the valuation of trust assets by averaging the valuations as of multiple specified dates during the trust year, the additional contributions formula will require modification. (5) Option to prohibit additional contributions . Paragraph 6, Additional Contributions, of the sample trust provides rules for

determining the unitrust amount payable in a year during which an additional contribution is made to the trust. However, paragraph 6 of the trust instrument may instead prohibit contributions to the trust after the initial contribution. Section 1.664–3(b). In such an instance, all references to the unitrust amount computed under paragraph 6 must be removed from the sample trust and paragraph 7, Deferral of the Unitrust Payment Allocable to Testamentary Transfer, of the sample trust should be deleted.

.07 Annotations for Paragraph 7, Deferral of the Unitrust Payment Allocable to Testamentary Transfer, of the Sample Trust .

(1) Contribution at death of donor . All property passing to a charitable remainder unitrust by reason of the death of the donor

shall be considered to constitute a single contribution. Section 1.664–3(b). (2) Testamentary additions . If the donor makes an additional contribution at his or her death whereby the obligation to pay

the unitrust amount with respect to any property passing to the trust by reason of the donor’s death begins as of the date of the donor’s death, the requirement to pay the portion of the unitrust amount allocable to that contribution may be deferred pursuant to the provisions of § 1.664–1(a)(5)(i). The deferral provision in paragraph 7 of the sample trust uses the method for computing deferred payments that is provided in § 1.664–1(a)(5)(i). Note that § 1.664–1(a)(5)(ii) provides an alternate method for determining the amount described in § 1.664–1(a)(5)(i)( b ), i.e., the unitrust amounts payable plus interest on those amounts. Rev. Rul. 92–57, 1992–2 C.B. 123, provides sample language to be included in the governing instrument if the alternate method set forth in § 1.664–1(a)(5)(ii) for determining the amount described in § 1.664–1(a)(5)(i)( b ) is selected.

.08 Annotations for Paragraph 8, Unmarketable Assets, of the Sample Trust .

(1) Multiple trustees . Any co-trustee who is an independent trustee, within the meaning of § 1.664–1(a)(7)(iii), may value the

trust’s unmarketable assets. (2) Valuation using qualified appraisal or independent trustee . The trustee may alternately use an independent trustee or a

qualified appraisal by a qualified appraiser to value unmarketable assets. For instance, an unmarketable asset that is valued in one year by an independent trustee may be valued in a successive year by a qualified appraiser in a qualified appraisal. In addition, within a single year, some unmarketable assets may be valued by a qualified appraiser while others are valued by an independent trustee. (3) Appointment of independent trustee . The governing instrument may authorize the trustee of the trust to appoint from time

to time an independent trustee, within the meaning of § 1.664–1(a)(7)(iii), to perform the valuation of unmarketable assets.

.09 Annotations for Paragraph 9, Prohibited Transactions, of the Sample Trust .

(1) Payment of the unitrust amount . Payment of the unitrust 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 within the meaning of § 4944, as modified by § 4947(a)(2)(A), and against retaining any excess business holdings within the meaning of § 4943, as modified by § 4947(a)(2)(A), are required if the trust provides for payment of any part of a unitrust amount to an organization described in § 170(c) and gift and estate tax charitable deductions are sought for the organization’s interest in the unitrust amount. See § 4947(b)(3). See section 6.01 of this

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revenue procedure for an alternate provision that provides for payment of part of the unitrust amount 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 unitrust 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 9 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 unitrust period when the trust continues in existence for the benefit of the charitable remainderman. Note that when the trust provides for the trust corpus to be retained, in whole or in part, in trust for the charitable remainderman, the higher deductibility limitations in § 170(b)(1)(A) for the income tax charitable deduction will not be available (even if the charitable remainderman is restricted to a public charity) because the contribution of the trust corpus is made “for the use of” rather than “to” the charitable remainderman. See § 1.170A–8(a) and (b).