Contents

CHARITABLE REMAINDER TRUSTSThere are no statutory limitations on the type of property that can be transferredto a CRT. 26 The transfer of property encumbered by an indebtedness to a CRTmay, however, cause the trust to have unrelated debt-financed income, whichwould result in income taxation of the trust. 27 Income from the distribution of theproceeds from a retirement plan contributed to a CRT is income in respect of adecedent, 28 although the income is not taxable unless the trust has unrelatedbusiness taxable income for the year. 29A trust is a CRT only if it is either a CRAT in every respect or a CRUT inevery respect. For example, a trust that provides for the payment each year to anoncharitable beneficiary of the greater of a sum certain or a fixed percentage ofthe annual value of the trust assets is not a CRT, inasmuch as the trust is neithera CRAT (because the payment for the year may be a fixed percentage of theannual value of the trust assets, which is not a sum certain) nor a CRUT (becausethe payment for the year may be a sum certain, which is not a fixed percentage ofthe annual value of the trust assets). 30The IRS assessed the governing instrument of an otherwise qualifying CRT,which provided that the annual payment of the specified distribution (a 5 percentannuity or unitrust amount, as the case may be) to the income beneficiarieswould be as follows: A is to receive $25x, B is to receive $15x, and C is to receivethe balance. Upon the death of any income beneficiary, the amount of incomethat the beneficiary would have been entitled to receive will be retained by thetrust until the death of the last income beneficiary. Upon the death of the lastincome beneficiary, the assets of the trust are to be distributed to the charitableorganization that is the remainder interest beneficiary under the trust.The IRS held that this trust could not qualify as a CRT. 31 The agencyobserved that if C dies before either A or B, the total of the designated amountspayable annually would be less than the annuity amount that must be paid outannually, in the case of a CRAT; it was also possible that the total of the designatedamounts payable annually would be different from the unitrust amountthat must be paid out annually, in the case of a CRUT. The IRS further noted that,even if C did not die before A or B, the designated amounts payable annuallymight exceed the unitrust amount in the case of a CRUT. For example, if, in aparticular tax year, 5 percent of the net fair market value of the trust assets on thevaluation date equaled an amount that is less than $40x, the designated paymentsto A and B would exceed the unitrust amount for that tax year.26 For example, CRTs may be funded with securities or interests in partnerships (e.g., Priv. Ltr. Rul. 9633007).Nonetheless, the IRS ruled that, when it would be inappropriate to transfer an item of property to a charitableremainder trust, it would also be inappropriate to transfer to such a trust an option to purchase the property.See § 12.4(a); see also Priv. Ltr. Rul. 9417005, withdrawing Priv. Ltr. Rul. 9240017.There can, of course, be other tax consequences in this area. For example, a CRT is not an eligible holder ofstock in an S corporation, and thus transfer of this type of stock to a CRT can result in termination of the Scorporation election. Rev. Rul. 92-48, 1992-1 C.B. 301.27 See § 12.7.28 IRC § 691.29 Priv. Ltr. Rul. 9633006. A like ruling pertains to distributions from an individual retirement account. Priv. Ltr.Rul. 9341008.30 Reg. § 1.664-1(a)(2).31 Rev. Rul. 76-280, 1976-2 C.B. 195. 410