Contents

§ 12.3 CHARITABLE REMAINDER UNITRUST RULESheld not to constitute a fixed percentage, and the trust did not qualify as aSCRUT for that reason. 149 A similar situation, in which the trust also failed, wasthis: The trustee was to pay A 7 percent of the property’s value until A’s deathand 9 percent thereafter to B until B’s death. 150As is discussed next, there are three other types of charitable remainder unitrusts.Generally, the governing instrument of a CRUT must contain only languagesuitable for its particular type. Mistakes in this regard can be made,however, and a judicial reformation to correct a drafting error will not alone disqualifya trust. 151Net-Income Charitable Remainder Unitrust. There are two types of CRUTsthat are known as income-exception CRUTs. This means that the payout rules forSCRUTs need not be followed. One of these types of CRUTs enables income to bepaid to the income interest beneficiary or beneficiaries once any income has beengenerated in the trust. 152 This amount may be less than the 5 percent amount.With this type of CRUT, the unitrust amount is the lesser of the fixed percentageamount or the trust’s annual net income. The income payments begin once asuitable amount of income has begun to flow into the trust. That is, the incomepayments may begin at a future point in time and are only prospective. Thisform of CRUT is the net-income CRUT (NICRUT). 153On one occasion, the IRS ruled that a trust did not satisfy the requirementsof a NICRUT. The governing instrument of the trust, which otherwise qualifiedas a charitable remainder unitrust, provided that the trustee was to pay incometo the grantor for the grantor’s lifetime, with income to be paid to his spouseshould she survive the grantor. The trust instrument also provided that, uponthe death of the grantor’s spouse, or upon the grantor’s death if his spouse predeceasedhim, the trustee was to divide the then-remaining trust assets into twoequal parts. Each part was to be operated separately for the respective benefit ofA and B, the children of the grantor and his spouse. The trustee was to pay to Athe lesser of 5 percent of the net fair market value of one equal part of the totaltrust assets valued annually or the annual income of this equal part. Upon thedeath of A, the trustee must make the payments to B. Likewise, the trustee wasto pay to B the lesser of 5 percent of the net fair market value of the other equalpart of the total trust assets valued annually or the annual income of this equalpart. Upon the death of B, the trustee must make the payments to A. Thereafter,the trust assets were destined for a charitable remainder beneficiary.The IRS held that the income exception was not satisfied in this situation. TheIRS said that the provisions of the trust agreement directing the separate operationof these parts might cause the trustee, in some tax years, to fail to distribute149 Rev. Rul. 80-104, 1980-1 C.B. 135.150 Id.151 In one instance, a trust was intended to be a SCRUT. The governing instrument of the trust, however, inadvertentlycontained a provision reflecting operation of the trust as a NIMCRUT. The trust was always administeredas a SCRUT. A court ordered the trust reformed, ab initio, to constitute a SCRUT. The IRS ruled thatthis judicial reformation did not adversely affect the qualification of the trust. Priv. Ltr. Rul. 9804036. In general,see § 12.4(i).152 IRC § 664 (d)(3)(A).153 Reg. § 1.664-3(a)(1)(i)(b)(1). 429