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CHARITABLE REMAINDER TRUSTSThe example commonly given of this abuse was the creation of a charitableremainder unitrust with a required annual payout of 80 percent of the trust’sassets. The trust was then funded with highly appreciated nondividend-payingstock, which the trust sold in a year subsequent to when the required distributionwas includible in the beneficiary’s income. The proceeds from the sale wereused to pay the required distribution attributable to the prior year. The distributionof 80 percent of the trust’s assets attributable to the trust’s first required distributionwas treated as a nontaxable distribution of corpus, because the trusthad not realized any income in its first tax year. 179 This practice was regarded byCongress as abusive and inconsistent with the purpose of the CRT rules.A trust that fails this maximum payout rule cannot constitute a CRT; instead,it is treated as a complex trust, so all its income is taxed either to its beneficiariesor to the trust.(d) Permissible Income RecipientsThe unitrust amount must be payable to or for the use of a named person or persons,at least one of which is not a charitable organization. 180 If the unitrustamount is to be paid to an individual or individuals, all of these individualsmust be living at the time of creation of the trust. A named person or personsmay include members of a named class, except that in the case of a class thatincludes any individual, all of the individuals must be alive and ascertainable atthe time of creation of the trust, unless the period for which the unitrust amountis to be paid to the class consists solely of a term of years. For example, in thecase of a testamentary trust, the testator’s will may provide that the requiredamount is to be paid to his children living at his death. 181The IRS, however, approved an arrangement under which an otherwisequalifying charitable remainder unitrust made distributions to a second trust,when the only function of the second trust was to receive and administer the distributionsfor the benefit of the named individual lifetime beneficiary of thetrust, who was incompetent. 182 The income beneficiary was regarded as receivingthe distributions directly from the first trust. Subsequently, the IRS adoptedthe position that a trust serving in this fashion for any income beneficiary wouldsuffice (that is, irrespective of whether the individual income beneficiary wasincompetent), 183 although this stance was later abandoned. 184 Thus, this use of aCRUT to protect the assets of a mentally incompetent individual and to ensure179 As this illustration shows, sophisticated tax planners in the planned giving context overstepped a line in usingshort-term CRUTs to convert appreciated property into money while avoiding a substantial portion of the taxon the gain. The IRS issued a warning in 1994 that these arrangements will be challenged, notwithstanding thefact that these approaches mechanically and literally adhere to the tax law. Notice 94-78, 1994-2 C.B. 555.Nonetheless, the rules as to the maximum unitrust amount (discussed in this section) and as to the minimumvalue of remainder interests (see § 12.3(i)) are designed to curb this abuse.180 IRC § 664(d)(2)(A).181 Reg. § 1.664-3(a)(3)(i). The payment scheme initially established in connection with these trusts need not alwaysbe followed, as illustrated by a renunciation of an income interest by a surviving spouse (Priv. Ltr. Rul.200324023) and a disclaimer by a child who was a prospective income interest beneficiary of a CRUT of hisor her income interest in the trust (Priv. Ltr. Rul. 200204022).182 Rev. Rul. 76-270, 1976-2 C.B. 194.183 Priv. Ltr. Rul. 9101010.184 Priv. Ltr. Rul. 9718030. 434