SECTION 5. ANNOTATIONS REGARDING SAMPLE TESTAMENTARY CHARITABLE REMAINDER

UNITRUST — TERM OF YEARS

.01 Annotations for Introductory Paragraph of the Sample Trust .

(1) Factors concerning qualification of trust . A deduction must be allowable under § 2055 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 no 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). For purposes of § 2055, a charitable remainder trust shall be deemed created at the date of death of the decedent (even though the trust is not funded until the end of a reasonable period of administration or settlement) if the obligation to pay the unitrust amount with respect to the property passing in trust at the death of the decedent begins as of the date of death of the decedent, even though the requirement to pay this amount is deferred in accordance with § 1.664–1(a)(5)(i). 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 5.06 of this revenue procedure for further guidance related to the valuation of unmarketable assets. (3) 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. Note that certain powers given to certain persons serving as the trustee may cause the trustee to be treated as the owner of the trust under subpart E and thus disqualify the trust as a charitable remainder trust. See § 1.664–1(a)(4).

.02 Annotations for Paragraph 1, Payment of Unitrust Amount, of the Sample Trust .

(1) Permissible term . The period for which the unitrust amount is payable must not exceed 20 years. Section 1.664–3(a)(5).

Thus, for example, the unitrust period of a CRUT for a term of 20 years will end on the day preceding the twentieth anniversary of the date the trust was created. (2) Permissible recipients . For a CRUT having a term of years unitrust period, the unitrust amount must generally be paid to

a named person or persons (within the meaning of § 7701(a)(1)). If the unitrust amount is to be paid to an individual or individuals, all the individuals must be living at the time of the creation of the trust. The unitrust amount may be payable to the estate or heirs of a named recipient who dies prior to the expiration of the term of years. See Rev. Rul. 74–39, 1974–1 C.B. 156. The unitrust amount may be payable to members of a named class and, because the unitrust period is for a term of years, all of the members of the class need not be living or ascertainable at the creation of the trust. 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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(3) Multiple noncharitable recipients . Generally, if the unitrust amount is payable to more than one person, the trust instrument

should describe the interest of each person. See section 6.02 of this revenue procedure for an alternate provision providing for the apportionment of the unitrust amount among members of a named class in the discretion of the trustee. (4) Fixed percentage method . Paragraph 1, 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 6.05 of this revenue procedure for an alternate provision that uses the net income method for calculating the unitrust amount. See section 6.06 of this revenue procedure for an alternate provision that uses the net income with make-up method for calculating the unitrust amount. See section 6.07 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 ). (5) 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). (6) Payment of unitrust amount in installments . Paragraph 1, 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 recipient 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. (7) Rules applicable to valuation . Paragraph 1, 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; and (ii) the proration of the unitrust amount in a short taxable year and the last taxable year of the unitrust period. See § 1.664–3(a)(1)(v). (8) 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 5.03(1) of this revenue procedure for additional information regarding the deferral of the payment of the unitrust amount until the end of the taxable year in which the trust is completely funded. (9) 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. (10) 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 Annotations for Paragraph 2, Deferral Provision, of the Sample Trust .

(1) Deferral of requirement to pay unitrust amount . The deferral provision in paragraph 2 of the sample trust authorizes defer ring the payment of the unitrust amount until the end of the taxable year of the trust in which the trust is completely funded. Section 1.664–1(a)(5)(i) provides the operational rule for deferring payment of the unitrust amount in this circumstance. The deferral provision in paragraph 2 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. (2) Treatment of distributions . For the proper treatment of distributions to a charitable remainder trust or to the recipient

during the period of administration of an estate or settlement of a trust that is not a charitable remainder trust, see § 1.664–1(a)(5)(iii).

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.04 Annotations for Paragraph 3, 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.

.05 Annotations for Paragraph 4, Distribution to Charity, of the Sample Trust .

(1) Minimum value of remainder . As noted in section 5.02(5) of this revenue procedure 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 as finally determined for federal estate tax purposes. 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) and

2055(a) at the time of the transfer to the CRUT. See § 664(d)(2)(C). The trust instrument may restrict the charitable remainderman to an organization described in §§ 170(c) and 2055(a), but grant to a trustee or other person the power to designate the actual charitable remainderman. See section 6.04 of this revenue procedure for an alternate provision in which the 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 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 5.07(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, 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.

.07 Annotations for Paragraph 7, Prohibited Transactions, of the Sample Trust .

(1) Payment of the unitrust amount . Payment of the unitrust amount to the recipient 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 an estate tax charitable deduction is sought for the organization’s interest in the unitrust amount. See § 4947(b)(3). 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). (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 7 of the sample trust, the trust instrument may limit the application

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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.