SECTION 8. ANNOTATIONS — Internal Revenue Bulletin 2008-30

UNITRUST

.01 Annotations for Introductory Paragraph and Paragraph 1, Funding of Trust, of the Sample Trust in Section 7 .

(1) Types of charitable lead trusts . An inter vivos charitable lead trust may be established as either a grantor charitable lead

trust or a nongrantor charitable lead trust. The sample trust in section 7 is an example of a grantor charitable lead trust. The sample trust in section 4 is an example of a nongrantor charitable lead trust. In order for the donor to a charitable lead trust to claim an income tax charitable deduction under § 170(a) for the year of the donor’s contribution to the trust, the trust must be structured as a grantor charitable lead trust. See § 170(f)(2)(B). The rules governing grantor charitable lead trusts are similar to those relating to nongrantor charitable lead trusts. The most significant difference is the income tax treatment of the trust income. A charitable lead trust is a grantor charitable lead trust if the donor to the trust is treated as the owner of the entire trust for income tax purposes. See section 8.09 for a discussion of the types of powers that may be used to create a grantor charitable lead trust. (2) Income taxation of grantor charitable lead trusts . The donor to a grantor charitable lead unitrust may claim a federal

income tax charitable deduction under § 170(a) for the year in which assets are irrevocably transferred to the trust. During the charitable lead unitrust period, the donor is taxed on all income earned by the trust and does not receive any charitable deduction under § 170 for the unitrust payments to the charitable beneficiary as they are made. In addition, the trust does

July 28, 2008 232 2008–30 I.R.B.

not receive a charitable deduction under § 642(c)(1). See § 1.671–4 for the income tax reporting requirements for a grantor charitable lead unitrust. (3) Income tax deductibility limitations . The donor to a grantor charitable lead trust may claim an income tax charitable de duction under § 170(a) equal to the present value of all future payments that are to be made to the charitable beneficiary. Section 1.170A–6(c). However, a contribution of a charitable income interest in property for which a deduction is allowable under § 170(a) is considered to be made “for the use of” rather than “to” a charitable organization. Section 1.170A–8(a)(2). Because the charitable lead interest of a grantor charitable lead trust is considered to be made “for the use of” the charitable beneficiary, the income tax charitable deduction available to an individual taxpayer is generally limited as set forth in § 170(b)(1)(B) to 30 percent of the taxpayer’s contribution base as defined in § 170(b)(1)(G). However, if the property contributed to the CLUT is capital gain property as defined in § 170(b)(1)(C)(iv), the individual taxpayer’s income tax charitable deduction generally is limited as set forth in § 170(b)(1)(D) to 20 percent of the taxpayer’s contribution base. Section 170(b)(1)(D). See §§ 1.170A–8(c) and (d). In addition, the amount of a charitable contribution of certain types of property may be reduced under § 170(e). See § 1.170A–4. (4) Charitable lead beneficiary requirements . A deduction is allowed under § 170(a) for contributions to a grantor CLUT only

if the charitable lead beneficiary is an organization described in § 170(c). Note that the class of permissible charitable recipients for obtaining a deduction under § 170(a) differs from the class of permissible charitable recipients for obtaining a deduction under § 642(c)(1). Compare § 170(c) and § 1.642(c)–(1)(a)(2). (5) Computation of charitable deduction . In general, the income, estate, and gift tax charitable deductions available under

§§ 170(a), 2055(e)(2)(B), and 2522(c)(2)(B) with respect to contributions to a CLUT are equal to the present value of the unitrust interest. Sections 1.170A–6(c)(3)(ii), 20.2055–2(f)(1), and 25.2522(c)–3(d)(1). Section 7520 generally requires that a unitrust interest must be valued using tables published by the Service. The method for valuing a charitable lead unitrust interest is set forth in the regulations. See §§ 1.7520–2, 20.7520–2, and 25.7520–2. If, however, the circumstances surrounding the transfer to a charitable lead trust suggest that the charitable beneficiary might not receive the beneficial enjoyment of the unitrust interest, an income tax deduction will be allowed only for the minimum possible amount that the charity will receive. Section 1.170A–6(c)(3)(iii). If at any time the donor ceases to be treated as the owner of the trust under subpart E, part I, subchapter J, chapter 1, subtitle A of the Code, the donor shall be considered to have received an amount of income equal to the amount of any deduction the donor received under § 170(a) for the contribution to the trust, reduced by the discounted value (as of the date of the contribution to the trust) of all amounts of income earned by the trust and taxable to the donor before the time that the donor ceased to be treated as the owner of the trust under subpart E, part I, subchapter J, chapter 1, subtitle A of the Code. Section 170(f)(2)(B). (6) Trustee provisions . The trust instrument may name alternate or successor trustees and/or may include a process for the

appointment of unnamed alternate or successor trustees. In addition, the trust instrument may contain certain other administrative provisions relating to the trustee’s duties and powers. (7) Identity of donor . For purposes of qualification under this revenue procedure, the donor to a charitable lead unitrust 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 in Section 7 .

(1) Unitrust interest . To qualify for the applicable charitable deductions, a grantor CLUT must provide for the payment of

a unitrust amount at least annually to a qualified charitable organization for each year during the unitrust period. See §§ 170(c), 2055(e)(2)(B), and 2522(c)(2)(B). A unitrust interest is the right pursuant to the instrument of transfer to receive payment, not less often than annually, of a fixed percentage of the net fair market value, determined annually, of the property that funds the unitrust interest. Payments of a unitrust interest may be paid for a specified term or for the life or lives of certain individuals, each of whom must be living at the date of the transfer and can be ascertained as of such date. Sections 20.2055–2(e)(2)(vii)( a ) and 25.2522(c)–3(c)(2)(vii)( a ). See section 8.02(4) for a discussion of the permissible term of a grantor CLUT. An interest is a unitrust interest only if it is a unitrust interest in every respect. For example, if an interest is expressed as the right to receive an annual payment from a trust equal to the lesser of a sum certain or a fixed percentage of the net fair market value of the trust assets (determined annually), the interest is not a unitrust interest. See §§ 1.170A–6(c)(2)(ii)(B), 20.2055–2(e)(2)(vii)( b ), and 25.2522(c)–3(c)(2)(vii)( b ). See Rev. Rul. 77–300, 1977–2 C.B. 352. In addition, an interest is not a unitrust interest if the trustee has the discretion to commute and prepay the interest prior to the termination of the unitrust period. Rev. Rul. 88–27, 1988–1 C.B. 331. If a charitable interest in the form of a unitrust interest is in trust and the present value of the charitable interest on the date of gift exceeds 60 percent of the aggregate value of all amounts in the trust, the charitable interest will not be considered a unitrust interest unless the governing instrument of the trust prohibits the acquisition and retention of assets that would give rise to a tax under § 4943 or 4944, as modified by §§ 4947(a)(2) and 4947(b)(3). Section 4947(b)(3)(A) and § 53.4947–2(b)(1)(i). See §§ 1.170A–6(c)(2)(ii)(E), 20.2055–2(e)(2)(vii)( f ), and 25.2522(c)–3(c)(2)(vii)( f ). These prohibitions are contained in the sample trust in section 7. See section 8.06 for a further discussion of the 60 percent test.

2008–30 I.R.B. 233 July 28, 2008

(2) Payment requirements . CLUTs are not subject to any minimum or maximum payout requirements. The governing instru ment of a CLUT must provide for the payment to a charitable organization, not less often than annually, of a fixed percentage of the net fair market value of the assets of the trust, valued annually. Alternatively, the governing instrument of a CLUT may provide for a unitrust amount that is initially stated as a fixed percentage amount but increases or decreases during the unitrust period, provided that the value of the unitrust interest is ascertainable at the time the trust is funded. The unitrust payments may be made in cash or in kind. If the trustee distributes appreciated property in satisfaction of the required unitrust payment, the donor will realize capital gain on the assets distributed to satisfy part or all of the unitrust payment. (3) Rule against perpetuities . An interest payable for a specified term of years may qualify as a unitrust interest even if the

governing instrument contains a savings clause intended to ensure compliance with a rule against perpetuities. However, any such savings clause must utilize a period of vesting of not more than 21 years after the deaths of measuring lives who are selected to maximize, rather than limit, the term of the trust. Sections 1.170A–6(c)(2)(ii)(A), 20.2055–2(e)(2)(vii)( a ), and 25.2522(c)–3(c)(2)(vii)( a ). (4) Permissible term . Paragraph 2, Payment of Unitrust Amount, of the sample trust in section 7 provides for payment of the

unitrust amount for a specified term of years. Alternatively, the trust instrument may provide for payment of the unitrust amount for the life or lives of one or more measuring lives or for the life or lives of one or more measuring lives plus a term of years. Rev. Rul. 85–49, 1985–1 C.B. 330. Only one or more of the following individuals may be used as measuring lives: the donor, the donor’s spouse, and an individual who, with respect to all remainder beneficiaries (other than charitable organizations described in § 170, 2055, or 2522), is either a lineal ancestor or the spouse of a lineal ancestor of those beneficiaries. Each person used as a measuring life for the unitrust period must be living on the date assets are transferred to the trust. Sections 1.170A–6(c)(2)(ii)(A), 20.2055–2(e)(2)(vii)( a ) and 25.2522(c)–3(c)(2)(vii)( a ). See section 9.01 for an alternate provision that provides for a unitrust period based on the life of an individual. (5) Permissible recipients . A CLUT must have one or more charitable lead beneficiaries. The failure to designate a specific

charitable beneficiary will not preclude the donor from receiving a charitable deduction if the trust instrument provides for the selection by the trustee of a charitable beneficiary described in §§ 170(c), 2055(a), and 2522(a). Rev. Rul. 78–101, 1978–1 C.B. 301. 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. Note that if the donor is serving as trustee of the trust, the trustee’s power to select the charitable beneficiaries will cause the gift of the unitrust interest to be incomplete for gift tax purposes and will cause some or all of the trust property (depending on the date of the donor’s death) to be included in the donor’s gross estate. See §§ 2035(a), 2036(a)(2), and 2038(a)(1), and § 25.2511–2(c). Further note that if the charitable beneficiary is a private foundation and the donor is an officer or director of the private foundation or possesses certain decision making authority in the private foundation, some or all of the trust property may be included in the donor’s gross estate. See § 2036(a)(2). See section 9.02 for an alternate provision that provides for a donor’s retained right to substitute the charitable beneficiary. See section 9.03 for an alternate provision that provides the trustee with the power to apportion the unitrust amount among charitable beneficiaries. See section 9.04 for an alternate provision that provides for the designation of an alternate charitable beneficiary in the trust instrument. (6) Payment of unitrust amount in installments . Paragraph 2, Payment of Unitrust Amount, of the sample trust in section 7

specifies that the unitrust amount is to be paid in equal quarterly installments at the end of each calendar quarter. Alternatively, the trust instrument may specify that the unitrust amount is to be paid in annual or other equal or unequal installments throughout the year. See §§ 1.170A–6(c)(2)(ii)(A), 20.2055–2(e)(2)(vii)( a ), and 25.2522(c)–3(c)(2)(vii)( a ). The amount of the charitable deduction will be affected by the frequency of the 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 §§ 1.170A–6, 25.2512–5, and 20.2031–7. (7) Excess income . Trust income in excess of the amount required to pay the unitrust amount may be retained by the trust or

distributed to the charitable beneficiary. The sample trust in section 7 provides for the retention of excess income by the trust. If, instead, the governing instrument of a grantor charitable lead trust provides for the payment of excess income to or for the use of the charitable beneficiary, the donor will receive an income tax charitable deduction each year for amounts paid to a charitable beneficiary to the extent that such amounts exceed the unitrust amount. Section 1.170A–6(d)(2)(ii). However, the donor is not entitled to any additional estate or gift tax charitable deductions for the excess amounts of income distributed to the charitable beneficiary. See §§ 20.2055–2(e)(2)(vii)( d ) and 25.2522(c)–3(c)(2)(vii)( d ). See Situation 2 of Rev. Rul. 88–82, 1988–2 C.B. 336, for the gift tax consequences of the payment of excess income to a noncharitable beneficiary. See section 8.06 for the private foundation rules applicable to charitable lead trusts. (8) Payment of part of unitrust for private purposes . In general, no part of a charitable lead unitrust interest may be payable

for a private purpose before the expiration of all charitable lead unitrust interests. However, there are two exceptions to this rule. The first exception arises when the amount payable for a private purpose is in the form of a unitrust interest and the trust’s governing instrument does not provide for any preference or priority in the payment of the private unitrust as opposed to the charitable unitrust. The second exception arises when, under the trust’s governing instrument, the amount that may be paid for a private purpose is payable only from a group of assets that is devoted exclusively to private purposes and to which § 4947(a)(2) is inapplicable by reason of § 4947(a)(2)(B). Note that an amount is not deemed to have

July 28, 2008 234 2008–30 I.R.B.

been paid for a private purpose if it was paid for full and adequate consideration in money or money’s worth. Sections 1.170A–6(c)(2)(ii)(E), 20.2055–2(e)(2)(vii)( e ), and 25.2522(c)–3(c)(2)(vii)( e ). See section 8.06 for the private foundation rules applicable to charitable lead trusts. (9) Valuation date . Paragraph 2, Payment of Unitrust Amount, of the sample trust in section 7 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 1041, U.S. Income Tax Return for Estates and Trusts, that the trust must file. Sections 1.170A–6(c)(2)(ii)(A), 20.2055–2(e)(2)(vii)( a ), and 25.2522(c)–3(c)(2)(vii)( a ). 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.

.03 Annotation for Paragraph 3, Proration of Unitrust Amount, of the Sample Trust in Section 7 .

(1) Prorating the unitrust amount . Paragraph 3, Proration of Unitrust Amount, of the sample trust in section 7 provides for the

proration of the unitrust amount in any short taxable year, including the last year of the unitrust period.

.04 Annotation for Paragraph 4, Distribution Upon Termination of Unitrust Period, of the Sample Trust in Section 7 .

(1) Generation-skipping transfer tax . The GST tax may apply if a CLUT has or may have a skip person, as defined in § 2613(a),

as a remainder beneficiary. Under § 2651(f)(3), a charitable organization is deemed to be in the same generation as the donor of a charitable lead trust. Therefore, the GST potential of a charitable lead trust is dependent upon whether any noncharitable beneficiary is a skip person. GST tax liability is determined by multiplying the taxable amount by the applicable rate. The applicable rate is the inclusion ratio multiplied by the maximum federal estate tax rate. Section 2641(a). Note that the rules set forth in § 2642(e) for determining the inclusion ratio of certain charitable lead trusts do not apply to CLUTs.

.05 Annotation for Paragraph 5, Additional Contributions, of the Sample Trust in Section 7 .

(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 8.01(7) of this revenue procedure for examples of who may be a donor of a CLUT. (2) Option to prohibit additional contributions . Paragraph 5, Additional Contributions, of the sample trust in section 7 provides

rules for determining the unitrust amount payable in a year during which an additional contribution is made to the trust. However, paragraph 5 of the trust instrument may instead be drafted to prohibit contributions to the trust after the initial contribution. (3) Proration of additional contributions . Paragraph 5, Additional Contributions, of the sample trust in section 7 provides a

formula for determining the unitrust amount in each year that an additional contribution is made to the CLUT. The formula incorporates a proration provision for additions made in a short taxable year. (4) Valuation date in year of additional contribution . Paragraph 2, Payment of Unitrust Amount, of the sample trust in section

7 specifies a January 1 valuation date for the trust. The formula contained in paragraph 5, 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 CLUT. Note, however, that if a single date other than January 1 is selected as the valuation date for a CLUT, the formulas in both paragraphs 2 and 5 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 5 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 must be modified.

.06 Annotation for Paragraph 6, Prohibited Transactions, of the Sample Trust in Section 7 .

(1) Prohibitions against certain investments and excess business holdings . Prohibitions against retaining any excess business

holdings within the meaning of § 4943, as modified by §§ 4947(a)(2) and 4947(b)(3), and against investments that jeopardize the exempt purpose of the trust within the meaning of § 4944, as modified by §§ 4947(a)(2) and 4947(b)(3) are generally required. The sample trust in section 7 contains prohibitions against §§ 4943 and 4944 transactions. If the present

2008–30 I.R.B. 235 July 28, 2008

value of the charitable interest does not exceed 60 percent of the aggregate value of all amounts in the trust, the trust instrument does not provide for the payment of any of the income interest to a noncharitable beneficiary, and the trust instrument does not provide for the payment of excess income to a noncharitable beneficiary, the references to §§ 4943 and 4944 may be removed from the trust instrument. Section 4947(b)(3)(A) and § 53.4947–2(b)(1)(i). See §§ 1.170A–6(c)(2)(ii)(E), 20.2055–2(e)(2)(vii)( f ), and 25.2522(c)–3(c)(2)(vii)( f ). See section 8.02(7) for a discussion of the payment of excess trust income to a noncharitable beneficiary. See section 8.02(8) for a discussion of the payment of part of the unitrust for a private purpose.

.07 Annotation for paragraph 7, Taxable Year, of the Sample Trust in Section 7 .

(1) Calendar year . The taxable year of a charitable lead trust must be a calendar year. Section 644(a).

.08 Annotation for paragraph 10, Investment of Trust Assets, of the Sample Trust in Section 7 .

(1) Capital gains . Gains from the sale or exchange of capital assets may be allocated to the income or the principal of the trust.

If the governing instrument is silent, capital gains are allocated in accordance with local law.

.09 Annotation for Paragraph 11, Retained Powers and Interests, of the Sample Trust in Section 7 .

(1) Power to substitute trust assets . The donor to a CLUT may claim an income tax charitable deduction under § 170(a) if the

donor is treated as the owner of the entire CLUT under the provisions of subpart E, part I, subchapter J, chapter 1, subtitle A of the Code. Paragraph 11, Retained Powers and Interests, of the sample trust in section 7 creates a grantor CLUT through the use of a power to substitute trust assets under § 675(4) that is held by a person other than the donor, the trustee, or a disqualified person as defined in § 4946(a)(1), and is exercisable only in a nonfiduciary capacity. The circumstances surrounding the administration of a CLUT will determine whether a § 675(4) substitution power is exercised in a fiduciary or nonfiduciary capacity. This is a question of fact. Note, that the exercise of a § 675(4) power may result in an act of self-dealing under § 4941. (2) Other powers or provisions to create a grantor trust . As noted above, the sample trust in section 7 includes a § 675(4)

power that is held by someone other than donor, the trustee, or a disqualified person as defined in § 4946(a)(1), and that may be exercised only in a nonfiduciary capacity. The CLUT instrument may instead incorporate a power or provision, other than the one provided in the sample trust in section 7, that will cause the donor to be treated as the owner of the entire CLUT under the provisions of subpart E, part I, subchapter J, chapter 1, subtitle A of the Code. See § 671 et seq . However, practitioners should exercise caution when choosing a particular power or provision because certain methods of creating a grantor trust may have unforeseen tax consequences.