New CRT regs.

• Author: Turnipseed, Terry
• Position: IRS charitable remainder trust regulations

On Dec. 10, 1998, the Treasury published final regulations on several aspects of charitable remainder trusts (CRTs) and the special valuation rules for transfers of interests to these trusts, including income beneficiary payment timing, appraising unmarketable assets, application of Sec. 2702 to certain CRTs and allocation of precontribution gain. The most important part of the new regulations is the pro-taxpayer expansion of flip unitrust use.

Background

A CRT provides for a specified periodic distribution to one or more beneficiaries (at least one of whom is a noncharitable beneficiary) for life or for a term of years (not in excess of 20), with an irrevocable remainder interest held for the benefit of charity. There are two basic types of CRTs--charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). A CRAT pays a sum certain at least annually to the beneficiaries (i.e., the annuity amount); a CRUT pays a unitrust amount at least annually to the beneficiaries.

Generally, the unitrust amount is a fixed percentage of the net fair market value (FMV) of the CRUT's assets valued annually (fixed-percentage CRUT). The unitrust amount can instead be calculated under one of two income exception methods (income exception CRUT). Under the first method, the unitrust amount is the lesser of the fixed percentage amount or the trust's annual net income (net income method). Under the second method, the unitrust amount is determined under the net income method plus any amount of income that exceeds the current year's fixed percentage amount, to make up for any shortfall in payments from prior years when trust income was less than the fixed percentage amount (NIMCRUT method). The shortfall in payments from prior years is commonly referred to as the "make-up amount."

Payment Provisions: Tax Years Ending after April 18, 1997

In the mid-1990s, the IRS became concerned with perceived abuses associated with the use of accelerated CRTs. In response, on April 18, 1997, it proposed regulations under Secs. 664 and 2702. These proposed regulations provided that the payment of the annuity or unitrust amount determined under the fixed-percentage method must be made by the close of the tax year in which it is due. Since the proposed regulations were issued, the Service issued Notice 97-68, providing guidance on complying with the proposed rules for the 1997 tax year. The new regulations supersede Notice 97-68.

The final regulations adopt...