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§ 12.3 CHARITABLE REMAINDER UNITRUST RULESDefinition of Income. For purposes of the charitable remainder unitrust rules,trust income generally means income as defined under the basic federal tax lawrules. 171 Trust income may not, however, be determined by reference to a fixedpercentage of the annual fair market value of the trust property, any state lawnotwithstanding.Proceeds from the sale or exchange of any assets contributed to the trust mustbe allocated to principal and not to trust income, at least to the extent of the fairmarket value of those assets on the date of their contribution to the trust. Proceedsfrom the sale or exchange of assets purchased by the trust must also be allocatedto principal, at least to the extent of the trust’s purchase price of those assets.Otherwise, proceeds from the sale or exchange of any assets contributed to orpurchased by the trust may be allocated to income, pursuant to the terms of thegoverning instrument, if not prohibited by local law. A discretionary power tomake this allocation may be granted to the trustee under the terms of the governinginstrument, but only to the extent that the state statute permits the trustee to makeadjustments between income and principal so as to impartially treat beneficiaries. 172(b) Minimum Unitrust AmountThe fixed percentage (see above) with respect to all income beneficiaries takentogether may not be less than 5 percent. 173 However, a trust will not fail to meetthe minimum unitrust amount requirement by reason of the fact that it providesfor a reduction of the fixed percentage payable upon the death of an income beneficiaryor the expiration of a term of years, provided that:• a distribution is made to a charitable organization at the death of theincome beneficiary or the expiration of the term of years, and• the total of the percentage after the distribution is not less than 5 percent. 174(c) Maximum Unitrust AmountA trust cannot qualify as a CRUT if the unitrust amount for a year is greater than50 percent of the fair market value of the trust’s assets determined annually. 175This rule was added to the law out of concern that the interplay between therules governing the timing of income from distributions out of CRTs 176 and therules governing the character of distributions 177 had created opportunities forabuse when the required annual payments are a large portion of the trust andrealization of income and gain can be postponed until a year later than theaccrual of the large payments. 178171 See § 10.13.172 Reg. § 1.664-3(a)(1)(i)(b)(3) (revised), portions of which are applicable as of 1997, with other rules that areeffective for tax years ending after, or with respect to trusts created after, January 2, 2004. Reg. § 1.664-3(a)(1)(i)(b)(4).173 IRC § 664(d)(2)(A); Reg. § 1.664-3(a)(2)(i).174 Reg. § 1.664-3(a)(2)(ii).175 IRC § 664(d)(2)(A).176 See text accompanied by note 322.177 See § 12.5.178 S. Rep. No. 105-33, 105th Cong., 1st Sess. 201 (1997). 433