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FUNDAMENTALS OF PLANNED GIVINGexcept that the recipient can first offset long-term capital gain with longtermcapital loss and short-term capital gain with short-term capital loss. 153. The payments are other income—principally, tax-exempt income, such asinterest on municipal bonds (see below)—to the extent the trust has anyother income for the current year and any undistributed other incomefrom prior years.4. Finally, the payments are characterized as a nontaxable distribution of corpus.The determination of the character of amounts distributed is made as of theend of the appropriate tax year of the trust. (This tax structure is different fromthat normally used to characterize distributions from trusts, which causes the paymentsto proportionately reflect the types of revenue experienced by the trust.)Thus, the charitable remainder trust rules first force upon the noncharitablebeneficiaries the least favorable tax treatment of their payments. This result can,however, be alleviated in the early years by the charitable deduction occasionedby the gift (assuming the donor is the income beneficiary).(e) Tax Treatment of Charitable Remainder TrustsCharitable remainder trusts are generally exempt from federal income taxation.This tax exemption is lost, however, for any year in which the trust had incomederived from an activity that is unrelated to the exempt purposes of the charitableorganization that has the remainder interest in the gift property. 16 Thisincludes unrelated debt-financed income.(f) Remainder Trust AgreementsA charitable remainder trust, like any trust, is established upon the execution ofa trust agreement. The law contains a battery of stringent requirements thatmust be strictly adhered to if the trust is to qualify as a charitable remaindertrust. When these requirements are not satisfied, there generally cannot be anycharitable deduction for a gift to the trust. There are, however, special rules pursuantto which a charitable remainder trust can be reformed and thus qualify forthe charitable deduction. Further, a defective trust cannot be exempt as a charitableremainder trust.Certain provisions of the private foundation rules are applicable to charitableremainder trusts. 17 A qualified charitable remainder trust must name a specificcharitable organization as the (or a) remainder beneficiary. Under appropriate circumstances,a substitute remainder beneficiary may be designated by the donor,a noncharitable beneficiary, or the trustee. The trust instrument must also makeprovision for an alternative charitable organization remainder beneficiary.Nearly all of the foregoing requirements of law must be reflected in the trustagreement, if the trust is to constitute a qualified charitable remainder trust.The IRS has developed prototype charitable remainder trust forms.15 There are varying rates of taxation of capital gains; thus, distributions of capital gain property from a charitableremainder trust may entail more than one rate of taxation. See § 12.5.16 See § 3.5.17 See § 3.4. 154