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CHARITABLE REMAINDER TRUSTSEXAMPLE 12.5In 2004, H died intestate, leaving the net residue of his estate (after payment by the estate ofall debts and administrative expenses) to a trust that met the definition of a CRUT. Forpurposes of the estate tax charitable deduction, the trust was deemed created at H’s death ifthe requirement to pay the unitrust amount began on H’s death; thus, it is a CRT, even thoughthe estate was obligated to pay debts and administrative expenses. For purposes of the CRTrules, the trust became a CRT as soon as it was partially or completely funded. Consequently,unless the trust has unrelated business income, the income of the trust is exempt from federaltax, and any distributions by the trust, even before it is completely funded, are governed by theCRT rules. Any distributions made by H’s estate, including distributions to a recipient inrespect of unitrust amounts, are governed by general trust rules rather than the CRT rules. aaReg. § 1.664-1(a)(6), example (5).EXAMPLE 12.6X is 50 years of age and is contemplating retiring in 10 years. X owns A, a parcel ofappreciating real estate. X places this property in a NIMCRUT. The trust does not make acurrent payment to X, as it does not have any income. This continues for 10 years. In year 10, Xretires and the trustee sells the property. The trust now pays X the unitrust percentage, which is7 percent. The trust is earning 11 percent. The make-up provision of the NIMCRUT can now beused to pay X additional payments to make up the payments that were not received in theearlier years. X now has additional retirement income at a time when X may be in a lowerincome tax bracket. aaIRS Exempt Organizations Continuing Professional Education Program Textbook for Fiscal Year 2001, at 87.EXAMPLE 12.7A and B, husband and wife, want to be able to help fund the college expenses of theirgranddaughter, C. C is 10 years of age. A and B own property that currently is appreciating invalue without producing income. They are advised to establish a FLIPCRUT. The unitrustamount is set at 10 percent. For the first eight years, the trust will be a NIMCRUT. C is thebeneficiary, but she does not receive any income during the eight-year NIMCRUT period. Thetriggering event to flip the trust is C’s 18th birthday. The property has significantly appreciated invalue. It is sold and the proceeds are invested in income-producing assets. Any trust accountingincome received during the year of C’s 18th birthday that is in excess of the 10 percentunitrust amount may be paid to C under the make-up provision upon the flip to a SCRUT; anyunpaid make-up amount is forfeited. The trust assets have greatly appreciated in value, so the10 percent payout amount received by C should be sufficient to fund her college expenses.Even if the trust income is inadequate for this purpose, inasmuch as the trust is now a SCRUT,corpus can be invaded to pay the unitrust amount. A and B will obtain a charitable contributiondeduction based on the present value of the remainder interest upon creating the trust, but thepresent value of C’s unitrust interest will be subject to gift and generation-skipping transfer tax. aA and B will not have to pay capital gains taxes on the sale of the property. Income from thetrust will be taxed at C’s lower tax rate. The property will be removed from the estate of A andB, thereby lowering their estate tax. baSee Chapter 8.bIRS Exempt Organizations Continuing Professional Education Program Textbook for Fiscal Year 2001, at 88.If a trust would, but for a qualified contingency, meet the requirements ofthe rules concerning CRATs or CRUTs, it is considered as having met therequirements. 46 A qualified contingency is not taken into account in determining46 IRC § 664(f)(1). 414