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CHARITABLE REMAINDER TRUSTSThe application of the rule permitting the stated dollar amount to beexpressed as a fraction or a percentage of the initial net fair market value of theproperty irrevocably passing in trust as finally determined for federal tax purposesis illustrated in Example 12.8.EXAMPLE 12.8The will of X provided for the transfer of one-half of his residuary estate to a CRAT. The trust isrequired to pay to W, for life, an annuity equal to 5 percent of the initial net fair market value ofthe interest passing in trust as finally determined for federal tax purposes. The annuity is to bepaid on December 31 of each year computed from the date of X’s death. The will also providedthat if this initial net fair market value is incorrectly determined, the trust must pay to W, in thecase of an undervaluation, or be repaid by W, in the case of an overvaluation, an amount equalto the difference between the amount that the trust should have paid if the correct value hadbeen used and the amount that the trust actually paid. X died on March 1, 2004. The executorfiled an estate tax return showing the value of the residuary estate as $250,000 before reductionfor taxes and expenses of $50,000. The executor paid to W $4,192 ([$250,000 – $50,000] × 1/2 × 5% × 306/365) on December 31, 2004. On January 1, 2005, the executor transferred onehalfof the residue of the estate to the trust. The trust adopted the calendar year as its tax year.The value of the residuary estate is finally determined for federal tax purposes to be $240,000($290,000 – $50,000). Accordingly, the amount the executor should have paid to W was$5,030 ([$290,000 - $50,000] × 1/2 × 5% × 306/365). Consequently, an additional amount of$838 ($5,030 – $4,192) had to be paid to W within a reasonable period after the finaldetermination of value for federal tax purposes. aaReg. § 1.664-2(a)(1)(iii).The governing instrument of a CRAT must provide that, in the case of a taxyear which is for a period of less than 12 months (other than the tax year inwhich the end of the trust period occurs), the annuity amount must be theamount otherwise determined, prorated for the trust year. That is, the annuityamount must be multiplied by a fraction the numerator of which is the numberof days in the tax year of the trust and the denominator of which is 365 (366 ifFebruary 29 is a day included in the numerator). 66 The trust will not qualify as aCRAT absent a provision that states a formula for prorating the specified distributionin the tax year when the noncharitable interests terminate. 67The governing instrument of a CRAT must also provide that, in the tax yearin which the end of the trust period occurs, the annuity amount to be distributedmust be the amount otherwise determined, prorated for the trust year. That is,the annuity amount must be multiplied by a fraction, the numerator of which isthe number of days in the period beginning on the first day of that tax year andending on the last day of the period, and the denominator of which is 365 (366 ifFebruary 29 is a day included in the numerator). 68(b) Minimum Annuity AmountThe total amount payable as an annuity amount may not be less than 5 percentof the initial net fair market value of the property placed in a CRAT as finally66 Reg. § 1.664-2(a)(1)(iv)(a).67 Rev. Rul. 79-428, 1979-2 C.B. 253.68 Reg. § 1.664-2(a)(1)(iv)(b). 418