Guidance issued on dividing CRTs, assisting divorcing couples.
Author | Sherr, Eileen Reichenberg |
Position | Charitable remainder trusts |
The IRS recently issued Rev. Rul. 2008-41, confirming that charitable remainder trusts (CRTs) can be divided into separate but equal trusts for each recipient without adverse tax consequences. If properly effected, the separate trusts will continue to qualify as CRTs, no private foundation termination excise taxes will arise under Sec. 507(c), and the division will not be treated as a sale, will not constitute an act of self-dealing under Sec. 4941, and will not constitute a taxable expenditure under Sec. 4945.
Specifically, the ruling addressed two situations in which a CRT is divided pro rata into two or more separate trusts. Such divisions are common when the income recipients want to separate their interests and when joint income recipients divorce.
The ruling clarified that a trust's division into separate trusts does not disqualify the separate trusts as CRTs under Sec. 664(d) as long as the division is pro rata and the separate trusts have the same governing provisions, recipients, remainder beneficiaries, and assets as the original trust, with some exceptions. The Service also ruled that the division is not a sale, exchange, or other disposition producing gain or loss.
This provides greater assurance that in the case of a divorcing couple with concurrent present interests, each party will be able to relinquish its successor interests after the other's death. The ruling consolidates issues that have been the subject of many previous letter rulings and is similar to Rev. Rul. 2002-28 and Letter Ruling 200616008.
Note that the applicability of this ruling may be a bit limited because many taxpayers do not want pro-rata distribution, and the parties might have different investment strategies. In the ruling, a pro-rata division appears to mean a division in proportion to each annuitant's share of the individual assets rather than the share of the total assets.
Thus, a CRT that divides in half with two stock holdings must split each...
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