§664 — Charitable remainder trusts
39 cases·5 followed·4 distinguished·1 questioned·1 overruled·28 cited—13% support
Statute Text — 26 U.S.C. §664
Notwithstanding any other provision of this subchapter, the provisions of this section shall, in accordance with regulations prescribed by the Secretary, apply in the case of a charitable remainder annuity trust and a charitable remainder unitrust.
Amounts distributed by a charitable remainder annuity trust or by a charitable remainder unitrust shall be considered as having the following characteristics in the hands of a beneficiary to whom is paid the annuity described in subsection (d)(1)(A) or the payment described in subsection (d)(2)(A):
First, as amounts of income (other than gains, and amounts treated as gains, from the sale or other disposition of capital assets) includible in gross income to the extent of such income of the trust for the year and such undistributed income of the trust for prior years;
Second, as a capital gain to the extent of the capital gain of the trust for the year and the undistributed capital gain of the trust for prior years;
Third, as other income to the extent of such income of the trust for the year and such undistributed income of the trust for prior years; and
Fourth, as a distribution of trust corpus.
For purposes of this section, the trust shall determine the amount of its undistributed capital gain on a cumulative net basis.
A charitable remainder annuity trust and a charitable remainder unitrust shall, for any taxable year, not be subject to any tax imposed by this subtitle.
In the case of a charitable remainder annuity trust or a charitable remainder unitrust which has unrelated business taxable income (within the meaning of section 512, determined as if part III of subchapter F applied to such trust) for a taxable year, there is hereby imposed on such trust or unitrust an excise tax equal to the amount of such unrelated business taxable income.
The tax imposed by subparagraph (A) shall be treated as imposed by chapter 42 for purposes of this title other than subchapter E of chapter 42.
For purposes of this paragraph, the references in section 6212(c)(1) to section 4940 shall be deemed to include references to this paragraph.
For purposes of this section, a charitable remainder annuity trust is a trust—
from which a sum certain (which is not less than 5 percent nor more than 50 percent of the initial net fair market value of all property placed in trust) is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c) and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals,
from which no amount other than the payments described in subparagraph (A) and other than qualified gratuitous transfers described in subparagraph (C) may be paid to or for the use of any person other than an organization described in section 170(c),
following the termination of the payments described in subparagraph (A), the remainder interest in the trust is to be transferred to, or for the use of, an organization described in section 170(c) or is to be retained by the trust for such a use or, to the extent the remainder interest is in qualified employer securities (as defined in subsection (g)(4)), all or part of such securities are to be transferred to an employee stock ownership plan (as defined in section 4975(e)(7)) in a qualified gratuitous transfer (as defined by subsection (g)), and
the value (determined under section 7520) of such remainder interest is at least 10 percent of the initial net fair market value of all property placed in the trust.
For purposes of this section, a charitable remainder unitrust is a trust—
from which a fixed percentage (which is not less than 5 percent nor more than 50 percent) of the net fair market value of its assets, valued annually, is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c) and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals,
from which no amount other than the payments described in subparagraph (A) and other than qualified gratuitous transfers described in subparagraph (C) may be paid to or for the use of any person other than an organization described in section 170(c),
following the termination of the payments described in subparagraph (A), the remainder interest in the trust is to be transferred to, or for the use of, an organization described in section 170(c) or is to be retained by the trust for such a use or, to the extent the remainder interest is in qualified employer securities (as defined in subsection (g)(4)), all or part of such securities are to be transferred to an employee stock ownership plan (as defined in section 4975(e)(7)) in a qualified gratuitous transfer (as defined by subsection (g)), and
with respect to each contribution of property to the trust, the value (determined under section 7520) of such remainder interest in such property is at least 10 percent of the net fair market value of such property as of the date such property is contributed to the trust.
Notwithstanding the provisions of paragraphs (2)(A) and (B), the trust instrument may provide that the trustee shall pay the income beneficiary for any year—
the amount of the trust income, if such amount is less than the amount required to be distributed under paragraph (2)(A), and
any amount of the trust income which is in excess of the amount required to be distributed under paragraph (2)(A), to the extent that (by reason of subparagraph (A)) the aggregate of the amounts paid in prior years was less than the aggregate of such required amounts.
If—
any contribution is made to a trust which before the contribution is a charitable remainder unitrust, and
such contribution would (but for this paragraph) result in such trust ceasing to be a charitable unitrust by reason of paragraph (2)(D),
such contribution shall be treated as a transfer to a separate trust under regulations prescribed by the Secretary.
For purposes of determining the amount of any charitable contribution, the remainder interest of a charitable remainder annuity trust or charitable remainder unitrust shall be computed on the basis that an amount equal to 5 percent of the net fair market value of its assets (or a greater amount, if required under the terms of the trust instrument) is to be distributed each year. In the case of the early termination of a trust which is a charitable remainder unitrust by reason of subsection (d)(3), the valuation of interests in such trust for purposes of this section shall be made under rules similar to the rules of the preceding sentence.
If a trust would, but for a qualified contingency, meet the requirements of paragraph (1)(A) or (2)(A) of subsection (d), such trust shall be treated as meeting such requirements.
For purposes of determining the amount of any charitable contribution (or the actuarial value of any interest), a qualified contingency shall not be taken into account.
For purposes of this subsection, the term “qualified contingency” means any provision of a trust which provides that, upon the happening of a contingency, the payments described in paragraph (1)(A) or (2)(A) of subsection (d) (as the case may be) will terminate not later than such payments would otherwise terminate under the trust.
For purposes of this section, the term “qualified gratuitous transfer” means a transfer of qualified employer securities to an employee stock ownership plan (as defined in section 4975(e)(7)) but only to the extent that—
the securities transferred previously passed from a decedent dying before
January 1, 1999
, to a trust described in paragraph (1) or (2) of subsection (d),
no deduction under section 404 is allowable with respect to such transfer,
such plan contains the provisions required by paragraph (3),
such plan treats such securities as being attributable to employer contributions but without regard to the limitations otherwise applicable to such contributions under section 404, and
the employer whose employees are covered by the plan described in this paragraph files with the Secretary a verified written statement consenting to the application of sections 4978 and 4979A with respect to such employer.
The term “qualified gratuitous transfer” shall not include a transfer of qualified employer securities to an employee stock ownership plan unless—
such plan was in existence on
August 1, 1996
,
at the time of the transfer, the decedent and members of the decedent’s family (within the meaning of section 2032A(e)(2)) own (directly or through the application of section 318(a)) no more than 10 percent of the value of the stock of the corporation referred to in paragraph (4), and
immediately after the transfer, such plan owns (after the application of section 318(a)(4)) at least 60 percent of the value of the outstanding stock of the corporation.
A plan contains the provisions required by this paragraph if such plan provides that—
the qualified employer securities so transferred are allocated to plan participants in a manner consistent with section 401(a)(4),
plan participants are entitled to direct the plan as to the manner in which such securities which are entitled to vote and are allocated to the account of such participant are to be voted,
an independent trustee votes the securities so transferred which are not allocated to plan participants,
each participant who is entitled to a distribution from the plan has the rights described in subparagraphs (A) and (B) of section 409(h)(1),
such securities are held in a suspense account under the plan to be allocated each year, up to the applicable limitation under paragraph (7) (determined on the basis of fair market value of securities when allocated to participants), after first allocating all other annual additions for the limitation year, up to the limitation under section 415(c), and
on termination of the plan, all securities so transferred which are not allocated to plan participants as of such termination are to be transferred to, or for the use of, an organization described in section 170(c).
For purposes of the preceding sentence, the term “independent trustee” means any trustee who is not a member of the family (within the meaning of section 2032A(e)(2)) of the decedent or a 5-percent shareholder. A plan shall not fail to be treated as meeting the requirements of section 401(a) by reason of meeting the requirements of this subsection.
For purposes of this section, the term “qualified employer securities” means employer securities (as defined in section 409(
l
)) which are issued by a domestic corporation—
which has no outstanding stock which is readily tradable on an established securities market, and
which has only 1 class of stock.
If any portion of the assets of the plan attributable to securities acquired by the plan in a qualified gratuitous transfer are allocated to the account of—
any person who is related to the decedent (within the meaning of section 267(b)) or a member of the decedent’s family (within the meaning of section 2032A(e)(2)), or
any person who, at the time of such allocation or at any time during the 1-year period ending on the date of the acquisition of qualified employer securities by the plan, is a 5-percent shareholder of the employer maintaining the plan,
the plan shall be treated as having distributed (at the time of such allocation) to such person or shareholder the amount so allocated.
For purposes of subparagraph (A), the term “5-percent shareholder” means any person who owns (directly or through the application of section 318(a)) more than 5 percent of the outstanding stock of the corporation which issued such qualified employer securities or of any corporation which is a member of the same controlled group of corporations (within the meaning of section 409(l)(4)) as such corporation. For purposes of the preceding sentence, section 318(a) shall be applied without regard to the exception in paragraph (2)(B)(i) thereof.
For excise tax on allocations described in subparagraph (A), see section 4979A.
If the requirements of paragraph (3)(F) are not met with respect to any securities, there is hereby imposed a tax on the employer maintaining the plan in an amount equal to the sum of—
the amount of the increase in the tax which would be imposed by chapter 11 if such securities were not transferred as described in paragraph (1), and
interest on such amount at the underpayment rate under section 6621 (and compounded daily) from the due date for filing the return of the tax imposed by chapter 11.
For purposes of paragraph (3)(E), the applicable limitation under this paragraph with respect to a participant is an amount equal to the lesser of—
$30,000, or
25 percent of the participant’s compensation (as defined in section 415(c)(3)).
The Secretary shall adjust annually the $30,000 amount under subparagraph (A)(i) at the same time and in the same manner as under section 415(d), except that the base period shall be the calendar quarter beginning October 1, 1993, and any increase under this subparagraph which is not a multiple of $5,000 shall be rounded to the next lowest multiple of $5,000.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.664-1 Charitable remainder trusts
- Treas. Reg. §Treas. Reg. §1.664-1(a) §1.664-1(a)
- Treas. Reg. §Treas. Reg. §1.664-1(b) Where the amount of distributions made to the recipient prior to the amendment of the trust exceeds the amount of the distributions which would have been made by such trust if the amended provisions of such trust had been in effect from the time of creation of such trust, such excess is repaid to the trust by the recipient.
- Treas. Reg. §Treas. Reg. §1.664-1(c) Excise tax on charitable remainder trusts—(1) In general.
- Treas. Reg. §Treas. Reg. §1.664-1(d) Treatment of annual distributions to recipients—(1) Character of distributions—(i) Assignment of income to categories and classes at the trust level.
- Treas. Reg. §Treas. Reg. §1.664-1(e) Other distributions—(1) Character of distributions.
- Treas. Reg. §Treas. Reg. §1.664-1(f) Effective date—(1) General rule.
- Treas. Reg. §Treas. Reg. §1.664-1(g) Transitional effective date.
- Treas. Reg. §Treas. Reg. §1.664-1(i) §1.664-1(i)
- Treas. Reg. §Treas. Reg. §1.664-1(v) Carry forward of net capital gain or loss by the trust.
- Treas. Reg. §Treas. Reg. §1.664-2 Charitable remainder annuity trust
- Treas. Reg. §Treas. Reg. §1.664-2(a) §1.664-2(a)
- Treas. Reg. §Treas. Reg. §1.664-2(b) Additional contributions.
- Treas. Reg. §Treas. Reg. §1.664-2(c) Calculation of the fair market value of the remainder interest of a charitable remainder annuity trust.
- Treas. Reg. §Treas. Reg. §1.664-2(d) Deduction for transfers to a charitable remainder annuity trust.
- Treas. Reg. §Treas. Reg. §1.664-2(e) Applicability date.
- Treas. Reg. §Treas. Reg. §1.664-3 Charitable remainder unitrust
- Treas. Reg. §Treas. Reg. §1.664-3(a) §1.664-3(a)
- Treas. Reg. §Treas. Reg. §1.664-3(b) Additional contributions.
- Treas. Reg. §Treas. Reg. §1.664-3(c) Calculation of the fair market value of the remainder interest of a charitable remainder unitrust.
- Treas. Reg. §Treas. Reg. §1.664-3(d) Deduction for transfers to a charitable remainder unitrust.
- Treas. Reg. §Treas. Reg. §1.664-3(e) A fixed percentage to A for his life and concurrently an equal percentage to B for his life, and at the death of the first to die, the trust to distribute one-half of the then value of its assets to an organization described in section 170(c) if the total of the percentages is not less than 5 percent for the entire period described in this subparagraph.
- Treas. Reg. §Treas. Reg. §1.664-3(f) Effective date—(1) General rule.
- Treas. Reg. §Treas. Reg. §1.664-3(g) Payment under general rule for fixed percentage trusts.
- Treas. Reg. §Treas. Reg. §1.664-3(h) Special rule for fixed percentage trusts created before December 10, 1998.
39 Citing Cases
The Commissioner does distinguish all the similar clause s used elsewhere in the tax regulations as involving situations where money passing under those formulas will not escape taxation ; money passing through a,gift tax-free by reason of the marital deduction, for instance, will probably be taxed when the surviving spouse dies . But this is not always true . Consider section 664, governing charitable remainder trusts, in which the remaining corpus of the trust will pass to charity tax-free, as
We need not decide whether the memorandum is excluded under this regulation because we conclude for other reasons that it does not constitute substantial authority for petitioners' position.
We hold that the parties must calculate the value ofthe remainder interest for each trust using a distribution amount equal to the fixed percentage.
Five-Percent Distribution Requirement Section 664 provides for a narrow exception to the general disallowance of deductions for charitable remainder interests under section 2055(e)(2)(A).
In short, unlike an immediate gift to charity, a contribution to a CRAT “blends the philanthropic intentions of a donor with his or her financial needs or the financial needs of others.” Id. As a rule, the grantor recognizes no gain when transferring appreciated property to a CRAT. See Buehner v. Commissioner, 65 T.C. 723, 740 (1976) (“A gift of appreciated property [to a CRAT] does not result in income to the donor . . . .” (quoting Humacid Co. v. Commissioner, 42 T.C. 894, 913 (1964))); see al
Five-Percent Distribution Requirement Section 664 provides for a narrow exception to the general disallowance of deductions for charitable remainder interests under section 2055(e)(2)(A).
an “annuity amount equal to the greater of: (a) all net income, or (b) the sum of Fifty Thousand Dollars ($50,000), at least annually.” This provision is not limited to a specific stated dollar amount and therefore violates the requirement of section 664 that the annuity of a CRAT be a “sum certain.” Consequently, the Katz Trust did not qualify as a CRAT at the time of Ms.
§ 1.664-1(a). A trust is a CRT only if it is a CRAT or a charitable unitrust. See Treas. Reg. § 1.664-1(a)(2). As a rule, no gain is recognized by the donor upon transfer of ap- preciated property to a CRT. See Buehner v. Commissioner, 65 T.C. 723, 740 (1976) (“A gift of appreciated property [to a CRT] does not result in income t
2 Section 664 ofthe Code (unless otherwise indicated, all section references (continued...) - 3 - Mohameds intended that whateverwas left in the Trust after their deaths would go to the Shriners Hospitals for Children, the Sacramento Food Bank & Family Services, and the Pacific Legal Foundation. In 2003 the Mohameds donated five properties worth mil
2 Section 664 ofthe Code (unless otherwise indicated, all section references (continued...) - 3 - Mohameds intended that whateverwas left in the Trust after their deaths would go to the Shriners Hospitals for Children, the Sacramento Food Bank & Family Services, and the Pacific Legal Foundation. In 2003 the Mohameds donated five properties worth mil
ance that is residue following 10 year term certain charitable remainder unitrust at 5% quarterly payments to two grand nieces Erica and Melissa Rodgerson, where during the term, the Trustee holds and operates pursuant to the terms and conditions of I.R.C. Sec. 664 and related provisions with balance at end of 10 year term to the Roman Catholic Diocese of Fall River, Mass. a 501(c)3 organization See attached calculations of Charitable Remainder Deductible. 4 The estate states on brief that John
or. Item Two G.2 of the testator's will, as amended by the second codicil, directs that one-half of the residue of the testator's estate is to be transferred in trust with the intention that the trust qualify as a charitable remainder unitrust under section 664. As amended by the second codicil, the will directs that 5 percent of the net fair market value of the principal of the trust is to be paid in monthly installments to Ms. Cuddeback's niece, Ms. Vivian B. Nelson, during her life. Thereafte
Petitioners rely on the legislative history of section 2702, which states that qualified interests under section 2702 “are similar to those permitted in charitable split interest trusts under section 664." 136 Cong.
t, the creation of a trust the only interests in which are an annuity for a term of years and a noncontingent remainder interest is valued under present law. 3° These interests are similar to those permitted in charitable split-interest trusts under Section 664. Id. at 30540 & n.30. Based on these statements, it is clear that the principal objective of section 2702 was to prevent undervaluation of gifted - 18 - interests. Moreover, the foregoing language reflects that the statute was designed pr
Because all payments flowing from the sale of the Little Rascals business were made directly to the trust, and because respondent does not contend that the trust failed to satisfy the requirements set forth in section 664 for the creation of a valid charitable remainder unitrust, resolution of this question turns on whether petitioners can be said to have actually earned income, which they anticipatorily assigned to the trust, by reason of a promise not to compete.
We base our conclusions on the statutory text, on the above-quoted policy concerns, and on the comparable situation in the section 664 context (dealing with valuation of split-interest gifts to charity), to which the legislative history alludes.
In that connection, Marta points to section 664 of the California Code of Civil Procedure (West 1987), which provides that "In no case is a judgment effectual for any purpose until entered." Marta also relies on rule 232, California Court Rules (West 1996), which states that a tentative decision is not a judgment, and "shall not be binding on the court." Since the Judgment was not en
On May 10, 1989, he was sentenced to consecutive sentences totaling 30 years. He also was ordered to make restitution in the amount of - 17 - $12,903,250, less any recoveries made by the bankruptcy trustee. See infra. The Federal Bureau of Investigation agent who investigated the embezzlement believed that approximately $3 million of the