Source: http://ashlandlegacy.org/?pageID=39
Timestamp: 2014-12-21 10:38:01
Document Index: 334165703

Matched Legal Cases: ['§ 2055', '§ 664', '§ 2055', '§ 664', '§ 2055', '§ 664', '§ 664', '§ 664', '§ 664', '§ 2055', '§ 664', '§ 664', '§ 664', '§ 2055', '§ 170', '§ 2055', '§ 2055', '§ 2055', '§ 2055', '§ 664', '§ 642', '§ 2055', '§ 2055', '§ 2055', '§ 2055', '§ 20', '§ 2055', '§ 2055', '§ 2055', '§ 2055', '§ 664', '§ 2055']

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Decedent created Trust, a revocable trust. Upon the death of Decedent the trust income is payable equally to two beneficiaries for their lives and upon their deaths the remainder is to be distributed to Charity. Trust does not qualify for the estate tax charitable deduction because it is not a charitable remainder unitrust (CRUT) under Sec. 664(d)(2). To qualify for the deduction, Decedent’s estate and trustees propose to reform Trust under Sec. 2055(e)(3) as a CRUT. The proposed reformation will reform Trust into two separate trusts, a CRUT and an administrative trust. After the reformation, Trust will contain all the necessary requirements to qualify as a CRUT. Several rulings are requested, including that (1) Trust is a reformable interest, (2) the reformation will be a qualified reformation and (3) Trust will meet the requirements of a CRUT.
First, the Service ruled that Trust’s charitable remainder interest was a reformable interest under Sec. 2055(e)(3)(C). Prior to reformation, Trust’s charitable remainder interest was presently ascertainable and thus severable from the non-charitable interests. Though Trust did not provide for a fixed percentage amount to the non-charitable beneficiaries, the judicial proceeding to reform Trust was commenced before the 90th day after the last day for filing Decedent’s estate tax return. Second, the Service ruled the reformation would be a qualified reformation because it satisfied the requirements of Secs. 2055(e)(3)(B)(i), (ii) and (iii). The difference between the actuarial value of the qualified interest and the value of the reformable interest will not exceed 5%, the nonremainder interest terminates at the same time both before and after the reformation, and the reformation is effective as of the date of Decedent’s death. Finally, Trust will otherwise meet the requirements for it to qualify as a CRUT. Therefore, the trust reformation was approved and Decedent’s estate will qualify for an estate tax charitable deduction for the value of the charitable remainder interest.
PLR 201450003	CRUT Reformation is a Qualified Reformation
12/12/2014 (8/20/2014)
On Date 1, Decedent created a revocable trust, Trust. Under Article Third, upon the death of Decedent, the trust income is payable equally to Decedent's mother, if living, and to Beneficiary. Upon the death of the survivor, Decedent's mother or Beneficiary, the trustees are to distribute the remaining trust assets to Charity. Article Third also provides that it is subordinate to Article Sixth. Under Article Sixth, the Decedent's executor or administrator may request funds for: (1) estate, transfer, inheritance, legacy and succession taxes by reason of Decedent's death; (2) debts of the Decedent and funeral expenses; and (3) all legacies payable by the executor under Decedent's will. Decedent's mother predeceased Decedent. Decedent died testate on Date 2.
Under Article First of Decedent's will, Decedent's executor was authorized to exercise, to the extent as he shall deem necessary or desirable, the rights given to him under Article Sixth of Trust. Under Article Eleventh of the Will, Decedent devised and bequeathed the remainder of his estate to Trust.
Trust does not qualify for the estate tax charitable deduction under § 2055(a) because Trust is not a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT) within the meaning of § 664(d)(1) or (d)(2). On Date 3, to qualify Trust for the estate tax charitable deduction, the executor of Decedent's estate and trustees of Trust filed a petition for reformation in Court to reform the Trust under § 2055(e)(3) in order to qualify Trust as a charitable remainder unitrust described in § 664(d)(3). Date 3 is within 90 days after the last date (including extension) for filing Decedent's estate tax return. Upon receipt of a favorable private letter ruling, the executor and trustees propose to amend the original complaint and seek the Court's approval of the reformation.
As proposed, Trust will be reformed to create a charitable remainder unitrust (CRUT) and an administrative trust (A = * * *Trust). Trust, as reformed, provides that the first day of the unitrust period is the date of Decedent's death, and the last day of the unitrust period is the date of death of Beneficiary. During the unitrust period, the trustee is to distribute in quarterly payments X percent of the net fair market value of the trust valued annually on the first day of each taxable year. The unitrust amount is to be distributed A percent to Beneficiary and the balance, B percent, to Charity. Upon expiration of the unitrust term, the trustee is to distribute all of the principal and accrued but undistributed income of Trust, free of trust, to Charity. The unitrust recipients entered into a settlement agreement reflecting the proposed reformation.
1. The interest created in Article Third of the Trust is a "reformable interest" within the meaning of § 2055(e)(3).
Section 664(d)(3) provides that notwithstanding the provisions of § 664(d)(2)(A) and (B), the trust instrument may provide that the trustee shall pay the income beneficiary for any year -- (A) the amount of the trust income, if such amount is less than the amount required to be distributed under § 664(d)(2)(A), and (B) any amount of the trust income which is in excess of the amount required to be distributed under § 664(d)(2)(A), to the extent that (by reason of § 664(d)(3)(A)) the aggregate of the amounts paid in prior years was less than the aggregate of such required amounts.
Section 1.664-1(a)(6), Example 3, provides as follows: The facts are the same as in Example (1), except that the residue of H's estate is to be paid to the trust and the trust is required to pay H's debts. The trust is not a charitable remainder trust at H's death because it does not function exclusively as a charitable remainder trust from the date of its creation which, in this case, is the date it becomes irrevocable.
Section 1.664-1(a)(6), Example 4, provides as follows: (i) In 1971, H transfers property to Trust A over which he retains an inter vivos power of revocation. Trust A, which is not a charitable remainder trust, is to provide income or corpus to W until the death of H. Upon H's death the trust is required by its governing instrument to pay the debts and administration expenses of H's estate, and then to terminate and distribute all the remaining assets to a separate Trust B which meets the definition of a charitable remainder annuity trust. (ii) Trust B will be a charitable remainder trust from the date of its funding because it will function exclusively as a charitable remainder trust from its creation. For purposes of § 2055, Trust B will be deemed created at H's death if the obligation to pay the annuity amount begins on the date of H's death. For purposes of § 664, Trust B becomes a charitable remainder trust as soon as it is partially or completely funded. Consequently, unless Trust B has unrelated business taxable income, the income of the trust is exempt from all taxes imposed by subtitle A of the Code, and any distributions by the trust, even before it is completely funded, are governed by the rules of § 664. Any distributions made by Trust A, including distributions to a recipient in respect of annuity amounts, are governed by the rules of subchapter J, chapter 1, subtitle A of the Code other than § 664.
Section 2055(a) provides that, in part, for purposes of the federal estate tax, the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises, and transfers to or for the use of religious, charitable, scientific, literary, or educational organizations described in § 2055(a)(1) through 2055(a)(4).
Section 2055(e)(2) provides that where an interest in property (other than an interest described in § 170(f)(3)(B)) passes or has passed from the decedent to a person, or for a use, described in § 2055(a), and an interest (other than an interest which is extinguished upon the decedent's death) in the same property passes or has passed (for less than an adequate and full consideration in money or money's worth) from the decedent to a person, or for a use, not described in § 2055(a), no deduction shall be allowed under § 2055 for the interest that passes or has passed to the person, or for a use, described in § 2055(a), unless -- (A) in the case of a remainder interest, such interest is in a trust which is a charitable remainder annuity trust or a charitable remainder unitrust (described in § 664) or a pooled income fund (described in § 642(c)(5)), or (B) in the case of any other interest other than a remainder interest, such interest is in the form of a guaranteed annuity, or is a fixed percentage distributed yearly of the fair market value of the property (to be determined yearly).
Section 2055(e)(3)(B) defines the term "qualified reformation" to mean a change of a governing instrument by reformation, amendment, construction, or otherwise that changes a "reformable interest" into a "qualified interest," but only if -- (i) any difference between (I) the actuarial value (determined as of the date of the decedent's death) of the qualified interest, and (II) the actuarial value (as so determined) of the reformable interest does not exceed 5 percent of the actuarial value (as so determined) of the reformable interest; (ii) in the case of (I) a charitable remainder interest, the nonremainder interest (before and after the qualified reformation) terminated at the same time, or (II) any other interest, the reformable interest and the qualified interest are for the same period; and (iii) the change is effective as of the date of the decedent's death.
Section 2055(e)(3)(C)(ii) provides that the term "reformable interest" does not include any interest unless, before the remainder vests in possession, all payments to persons other than an organization described in § 2055(a) are expressed either in specified dollar amounts or a fixed percentage of the fair market value of the property.
In this case, the charitable remainder interest constitutes a reformable interest under § 2055(e)(3)(C)(i) because as originally drafted, Trust provides for a charitable remainder interest that is presently ascertainable and, hence, severable from the noncharitable interests. Prior to the enactment of § 2055(e)(2), such interests would have been deductible under § 2055(a). See § 20.2055-2(a) of the Estate Tax Regulations. Although the payments to Beneficiary were not expressed in specified dollar amounts or a fixed percentage of the fair market value of the property as required by § 2055(e)(3)(C)(ii), a judicial proceeding was commenced, as provided under § 2055(e)(3)(C)(iii), before the 90th day after the last date (including extensions) for filing Decedent's estate tax return.
Further, the reformation satisfies the requirements of § 2055(e)(3)(B)(i), (ii) and (iii) because: (1) the difference between the actuarial value (determined as of the date of the Decedent's death) of the qualified interest and the actuarial value (as so determined) of the reformable interest does not exceed 5 percent of the actuarial value (as so determined) of the reformable interest; (2) the nonremainder interest terminates at the same time both before and after the reformation; and (3) the reformation is effective as of the date of Decedent's death.
Accordingly, based on the information submitted and representations made, we conclude that the reformation of Trust, as described above, will be a qualified reformation within the meaning of § 2055(e)(3), provided the reformation is effective under local law, and provided the trust, as reformed, meets the requirements for a charitable remainder unitrust under § 664(d)(2) and (3) and the applicable regulations. Assuming the CRUT otherwise qualifies as a charitable remainder unitrust, Decedent's estate will be allowed a federal estate tax charitable deduction under § 2055(a) for the present value of the charitable remainder interest of the CRUT and the B percent payable to Charity.
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