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The IRS has done yeoman’s service in publishing specimen safe-harbor charitable remainder unitrust agreements for inter vivos and testamentary trusts. The specimens update, improve and greatly expand on those previously issued by the IRS. The Service gives copious annotations on the underlying law and supplies alternative provisions.

It’s been said that a footnote is equivalent to going downstairs on one’s wedding night to answer the doorbell. When it comes to the footnotes to IRS’s specimens (the annotations and alternative provisions) you ignore the doorbell at your peril because some of the alternative provisions should be in the vast majority of CRUTs.

Before producing the specimens, IRS asked for suggestions from the public. Mirable dictu, IRS followed most of the suggestions and it has done a most thorough job. IRS says that a CRUT will qualify for "safe-harbor" treatment (be qualified) if a CRUT is "substantially similar" to IRS’s specimen and other requirements are met. More about that later.

As I wrote back in 2003 when IRS issued helpful charitable remainder annuity trust specimens, the trust forms are extremely helpful but you can’t just tell your golden retriever to fetch a specimen and fill in the blanks. He must first determine: the type of property ownership (e.g., separate property, jointly held); whether the donor or donors will also be beneficiaries, who the donors are; whether the funding asset is marketable; the nature of the charitable remainder organization (e.g., publicly supported or private foundation); that the payout is not less than 5% nor more than 50%; compliance with the 10%-minimum-remainder-interest (10% MRI) requirement; and when to add or substitute an alternative provision. Of course, this is just a partial listing so Rover still has his work cut out for him.

To get the whole ball of tax (all the specimens, alternative provisions and annotations), see Rev. Proc. 2005-52 through Rev. Proc. 2005-59. Go to and click on IRS’s Specimen Charitable Remainder Unitrusts.

Glaring Omission: Rev. Proc. 2005-24—Spousal "Right of Election" Isn’t Even Mentioned

In the eight revenue procedures (discussed in this issue) detailing the numerous requirements for a CRT’s qualification there’s not a peep from IRS about Rev. Proc. 2005-24 which if not complied with will disqualify all trusts that meet the requirements of IRS’s safe-harbor specimens.

Rev. Proc. 2005-24 dictates that unless sometimes impossible-to-meet requirements are met, inter vivos charitable remainder unitrusts and annuity trusts are disqualified—retroactively to the date of creation—if a spousal right of election now exists under state law, exists in the future and can exist if the grantor (donor) of a CRUT or CRAT, moves, marries or remarries. For a trust created on or after June 28, 2005 disqualification can be avoided—under a "safe harbor" rule—if the spouse’s waiver of a right of election is timely obtained and kept with the CRT’s records. The mere existence of a right of election—even though it isn’t exercised—will cause a CRT’s disqualification as of the date of its creation if a waiver hasn’t been obtained. Back reference. Inter Vivos CRUTs and CRATs—Spousal "Right of Election", Taxwise Giving, April ‘05, page 1.

To satisfy the requirements of Rev. Proc. 2005-24, donors will often have to jump through more hoops than a circus dog. So it’s surprising that IRS doesn’t even mention the spousal right of election waiver requirement in its specimen forms. The American Council on Gift Annuities and a few other groups have written to Treasury and the IRS asking them to withdraw Rev. Proc. 2005-24 for further study—or at the very least announce that waivers won’t be required whatever date a CRT was created or will be created.

ACGA maintains that waivers shouldn’t be required for CRUTs or CRATs—whether created before June 28, 2005 or on or after that date. It tells how the government can be protected in the very rare case that a right of election is actually exercised. Back reference: Revenue Procedure 2005-24, Taxwise Giving, May ‘05, page 1; and Ask IRS to Modify or Withdraw the Spousal Right of Election Requirement for CRUTs and CRATs, Taxwise Giving, July ‘05, page 1.

Now for a discussion of the eight revenue procedures:


Fixed percentage unitrust. For each of the four situations (below), IRS’s specimen form is for the fixed percentage method of computing the payments (so-called standard unitrust or STAN-CRUT)—the Recipient (Beneficiary) is paid a fixed percentage x the net fair market value of assets valued annually.

Alternative Provisions Are Given For:

The Four Situations:

Alert: To avoid making a gift to the survivor that could subject the donor to gift tax (or unnecessarily reduce any remaining $1 million gift tax exemption), the donor should keep the right—exercisable only by will—to revoke the survivor’s payments. A clause to accomplish this isn’t in IRS’s specimen, but is an alternative provision.

IRS’s specimen can also be used when the donor doesn’t wish to be a CRUT beneficiary but wants to provide payments to two other individuals, with one individual to receive the entire payment for life and then the entire payment is to be made to a survivor beneficiary.

In this situation, the donor shouldn’t keep the right to revoke. Doing so would result in the value of the trust assets being includable in the donor’s gross estate. Although keeping the right to revoke when the donor is a beneficiary will result in inclusion of the trust assets in her gross estate, the assets would have been included even without the revocation provision because the donor kept the right to life income. Of course, the donor’s estate will get a 100% estate tax charitable deduction for the value of the charity’s remainder interest at her death if the second beneficiary doesn’t survive—resulting in a wash. The estate tax charitable deduction will be smaller if the second beneficiary does survive. An estate tax marital deduction is allowable if the survivor beneficiary is a U.S. citizen spouse. For a non-citizen (alien) spouse, the marital deduction will be available if the Qualified Domestic Trust (QDOT) requirements are met.

Multiple grantors (donors)—heads up. To qualify for the safe-harbor, IRS states in the annotations that the donor must be an individual. If there are two donors, they must be husband and wife. In Letter Ruling 9547004, IRS ruled that a charitable remainder unitrust wasn’t qualified because it had multiple grantors as beneficiaries —grandma, grandpa and their six grandchildren. Responding to numerous requests that the ruling be withdrawn and that IRS affirmatively announce that multiple grantor unitrusts are okay, the letter ruling’s author said that the IRS held to its position.

Now the IRS imposes the non-spouse-multiple-grantor restriction on CRUTs by an annotation in a revenue procedure: "For purposes of qualification under this revenue procedure, the donor may be an individual or a husband and wife." Thus a brother and sister (or domestic partners) who own property jointly can’t create a CRUT and qualify for safe-harbor protection.

Why does IRS have a problem with multiple grantor trusts? Apparently Letter Ruling 9547004 was IRS’s attempt to thwart the so-called near-zero-net-income-with-makeup charitable remainder unitrust.

Some donors apparently had created NIM-CRUTs to pass assets to family members at no or reduced gift tax. Yet, what the family member received down the line could have great value. A donor could, according to an IRS example, create a NIM-CRUT paying a unitrust amount to the donor for 15 years or his life, whichever is shorter, and then to the donor’s daughter for her life. The donor’s gift to his daughter was relatively small (discounted for the period she had to wait) compared to the amount the daughter would actually receive. She typically, said IRS, would receive something worth much more then the discounted value because the trustee could invest the NIM-CRUT assets in a way to produce little or no income while the donor was entitled to receive the income, creating substantial makeup amounts.

When the donor’s interest ended, the trustee would switch to a high-income-producing investment. The trustee would then pay the daughter the makeup amount. That created an opportunity, said IRS, to transfer property to a family member free of or at greatly reduced gift tax. Note: This ploy couldn’t have worked with a charitable remainder annuity trust (because there is no net-income-with-makeup annuity trust).

An IRS regulation—Reg. §25.2702-1(c)(3)—issued after the 1995 letter ruling, eliminates the near-zero-NIM-CRUT strategy by valuing the donor’s retained interest at zero, making the value of the daughter’s interest, in the example, equal to the full fair market value of the assets used to fund the trust.

Suggestion to IRS: In light of the just cited regulation, announce that multiple-grantor CRUTs and CRATs are allowable in all cases.


Limited Power of Amendment Given to Trustee in All Specimens

"This trust is irrevocable. However, the Trustee shall have the power, acting alone, to amend the trust from time to time in any manner required for the sole purpose of ensuring that the trust qualifies and continues to qualify as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Code."

This is an important provision. In many cases it can save a trip to the courthouse. Note, however, the provision doesn’t enable a trustee to correct major muck-ups. For those, a court reformation (not always successful) based on a scrivener’s error is often required.

No IRS Alternative Provision for Important Situation: Unitrust’s realized post-contribution capital gains allocable to trust income.

It is often important to have such a provision in NIM-CRUTs and NI-CRUTs. And it can be especially important for FLIP-CRUTs. When the trigger is pulled, the trust becomes a STAN-CRUT on the following January 1. Any deficit in the makeup account on December 31 of the year of the triggering event is forfeited. By having a capital-gains-as-income provision in a FLIP-CRUT and with proper timing of pulling the trigger, the deficit can be reduced or eliminated before the trust flips. The trustee waits to pull the trigger until there is enough post-transfer-to-the-trust appreciation so that on pulling the trigger the accounting income will reduce or eliminate the amount in the makeup (forfeiture) account. IRS doesn’t supply a specimen capital-gains-as-income provision in its specimen. Query. Will your trust "substantially follow"

IRS’s specimens—and thus give you safe-harbor protection—if your trust has such a provision? It is an important provision in many cases and just because you are not in the safe harbor doesn’t mean that your unitrust isn’t qualified. It means, however, that you don’t have a guarantee in your back pocket.


IRS provides sample alternative provisions for a number of situations. You’ll want to look at all of them, but here are the ones that I believe merit attention:

Caution. IRS’s specimens don’t recite IRC §170(b)(1)(A). That’s one of the alternative provisions.

For a two-life trust, IRS specimen provides that the payment immediately following the first beneficiary’s death is to be prorated between the first beneficiary’s estate and the survivor beneficiary. An alternative provision provides that the payments to the first beneficiary shall terminate on his death and the survivor shall receive the entire payment subsequent to the first beneficiary’s death (with no pro rata payment to the first beneficiary’s estate).

Note: When the trust provides for the trust corpus to be retained in trust for the charitable remainderman, the higher deductibility limitations in IRC §170(b)(1)(A) for the income tax charitable deduction won’t 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 Reg. §1.170A-8(b).

Translating the above, an independent trustee could be given the power to "sprinkle the unitrust amount among my nephews, Huey, Duey and Louie." A different annotation states that a charitable organization can be one of the unitrust Recipients (Beneficiaries). The annotation, however, doesn’t alert you to Letter Ruling 9423020 that holds that if a charitable organization is one of the recipients of a sprinkling charitable remainder unitrust, the amounts sprinkled to the noncharitable beneficiaries cannot be de minimus.

Alternative Provisions are Also Provided for:

Unmarketable assets. Whenever the value of a trust asset must be determined, the Trustee shall determine the value of any assets that are not cash, cash equivalents, or other assets that can be readily sold or exchanged for cash or cash equivalents (hereinafter "unmarketable assets"), by either (a) obtaining a current "qualified appraisal" from a "qualified appraiser," as defined in section 1.170A-13(c)(3) and section 1.170A-13(c)(5) of the Income Tax Regulations, respectively, or (b) ensuring the valuation of these unmarketable assets is performed exclusively by an "independent trustee," within the meaning of section 1.664-1(a)(7)(iii) of the Income Tax Regulations.

Point of interest regarding interest. In an annotation, IRS notes that nothing in IRC §664 or the regulations requires that interest be paid on the amount of any underpayment or overpayment. IRS goes on to say notwithstanding that, state law may require the payment of interest on the amount of underpayments or overpayments. Apparently, that won’t disqualify the trust.

Testamentary additions. If an inter vivos CRUT has a provision allowing testamentary additions, the specimens provide that although the obligation to make the payments begins as of the date of the donor’s death, the requirement to pay the portion of the unitrust amount allocable to that testamentary contribution may be deferred under the provisions of Reg. §1.664-1(a)(5)(i). An alternative way of computing the amount to be paid under the deferral provision is provided for in Reg. §1.664-1(a)(5)(ii). The alternate way may be preferable in some cases. Although IRS gives no specimen language for that alternative provision, the annotation refers you to Rev. Rul. 92-57, 1992-2 C.B. 123 for sample language for that method.


IRS warns that trust income generally means income as defined under IRC §643(b). Reg. §1.664-3(a)(1)(i)(b)(3). Even if permitted by applicable state law, the trust income of NIM-CRUTs and NI-CRUTs and combination-of-method CRUTs (FLIP-CRUTs) may not be determined by reference to a fixed percentage of the net fair market value of the trust property.

This can be confusing, so here’s my example. Harold’s NIM-CRUT provides that the income beneficiary is to receive 5% of this year’s $100,000 net fair market value of the trust’s assets or the actual income, whichever is lower. The trust earns no income this year and he gets zip. Suppose state law provides, contrary to the ordinary definition of income, that if the trust assets earn no income, the income beneficiary shall nevertheless receive 3% of the trust’s fair market value—or $3,000 in our example. IRS says that to follow state law would disqualify the NIM-CRUT.

Another provision in the annotations dealing with NIM-CRUTs and NI-CRUTs provides that a discretionary power to make adjustments between principal and income can be granted to the trustee under the terms of the governing instrument, but only to the extent that the applicable state statute permits the trustee to make those adjustments to treat beneficiaries impartially. Reg. §1.664-3(a)(1)(i)(b)(3). The annotation goes on to provide "a definition of trust income that is consistent with these requirements may, but need not, be included in the trust instrument."


Parthian shot—the Atkinson case. It’s not enough to have all the bells and whistles—the required governing instrument provisions. Even if a trust is exactly the same as an IRS safe-harbor specimen, it must actually operate as a charitable remainder trust and do what the trust instrument specifies.

Penalties for violating that requirement: Income, gift and estate tax charitable deductions will be denied; all capital gains will be taxable; and the gift and estate tax marital deductions will be lost.

The U.S. Court of Appeals for the Eleventh Circuit held that a inter vivos charitable remainder annuity trust’s failure to comply with the required-annual-payment regulations during the donor’s lifetime resulted in complete loss of the estate tax charitable deduction. And that’s so even though substantial sums would go to charity. The loss of the charitable deduction cost the estate $2,654,976. Atkinson, 309 F.3d 1290 (11th Cir. 2002), cert. denied, 124 S. Ct. 388 (2003). Al- though the case dealt with a CRAT, the same rule applies to CRUTs.

Beneficiary’s non-payment of death tax. In a footnote, the appellate court in Atkinson skipped the issue of the estate’s payment of death taxes attributable to a caregiver’s life interest: "...since we decide that the trust was not a CRAT because of its failure to pay Atkinson a lifetime annuity, we do not reach the issue of whether the trust additionally failed due to its exposure to estate tax liability."

Back reference. For a discussion of the Tax Court decision (affirmed by the Eleventh Circuit), and the law of extended consequences that could have far-reaching and unpleasant tax consequences for CRTs and lead trusts having only minor operational infractions, see Perfectly Drawn Charitable Remainder Annuity Trust Disqualified Because Imperfectly Operated, Taxwise Giving, August ‘02, entire issue. For a discussion of the Eleventh Circuit’s opinion see Improperly Operated CRAT Disqualified–$2,654,976 Estate Tax Cost, Taxwise Giving, November ‘02, page 7.

Jam satis—enough already.

Taxwise Giving & Philanthropy Tax Institute
PO Box 299, Old Greenwich, CT 06870-0299
e-mail: Conrad@taxwisegiving.com