Final regs. issued on ordering rules for estates and trusts.

• Author: Nevius, Alistair M.

The IRS issued final regulations (T.D.9582) requiring that a provision in a trust, will, or local law that specifically indicates the source out of which amounts are to be paid, permanently set aside, or used for a charitable purpose must have an independent economic effect aside from income tax consequences if the allocation is to be respected for federal tax purposes. If the applicable provision does not have economic effect independent of income tax consequences, income distributed for a purpose specified in Sec. 642(c) will consist of the same proportion of each class of the items of income as the total of each class bears to the total of all classes. T.D.9582 amends Regs. Secs. 1.642(c)-3(b)(2) and 1.643(a)-5(b).

The primary target of the final regulations is charitable lead trusts (CLTs, trusts that first pay amounts to charitable beneficiaries and later to noncharitable beneficiaries) and the ordering rules generally contained in CLTs' governing instruments, which often provide for the following ordering of classes of annuity or unitrust payments, until the class has been exhausted: (1) ordinary income, (2) capital gain, (3) other income (including tax-exempt income), and (4)...