CRTs--using a trust beneficiary.

• Author: Spillman, Jennifer S.
• Position: Charitable remainder trusts

The IRS recently amplified an earlier decision that annuity or unitrust amounts paid to a trust by a charitable remainder trust (CRT) for the life of a "financially disabled" individual will not disqualify the CRT. According to Rev. Rul. 2002-20, superseding Rev. Rul. 76-270, a trust will qualify as a CRT if:

1 The separate trust's sole function is to receive and administer the annuity or unitrust amounts for the disabled beneficiary's benefit; and

2. On the beneficiary's death, the separate trust's remaining assets will be distributed to the beneficiary's estate or, after reimbursing the state for any Medicaid benefits provided to the beneficiary, will be subject to the beneficiary's general power of appointment.

By meeting these requirements, the trust mirrors the beneficiary's actions (i.e., its assets are controlled by the beneficiary). Thus, the IRS position is that the annuity or unitrust amounts are deemed to go directly to the beneficiary for Sec. 664(d)(2)(A) purposes, because the trust's only function is to receive and administer the payments received from the CRT for the beneficiary's benefit. The Service also concluded that the CRT's term under these circumstances "can be for the life of the beneficiary and is not limited to a term of years."

Under Regs. Sec. 1.664-3(a)(5)(i), a beneficiary of annuity or unitrust amounts must be either an individual or a charity. To qualify as a CRT with other types of beneficiaries under Rev. Rul. 2002-20, the beneficiary who receives the annuity or unitrust amount must qualify as a "financially disabled" individual under Sec. 6511(h)(2)(A). This requires the individual to be unable to manage his or her financial affairs due to a "medically determinable physical or mental impairment" that will result in his or her death or which has lasted or is...