Factors concerning qualification of trust. A deduction must be allowable under § 2055 for property contributed to the trust. Section 1.664-1(a)(1)(iii)(a) of the Income Tax Regulations. The trust must meet the definition of and function exclusively as a charitable remainder trust from the creation of the trust. Section 1.664-1(a)(4). Solely for purposes of § 664, a trust is deemed created at the earliest time that no person is treated as the owner of the entire trust under subpart E, part 1, subchapter J, chapter 1, subtitle A of the Code (subpart E). For purposes of § 2055, a charitable remainder trust shall be deemed created at the date of death of the decedent (even though the trust is not funded until the end of a reasonable period of administration or settlement) if the obligation to pay the unitrust amount with respect to the property passing in trust at the death of the decedent begins as of the date of death of the decedent, even though the requirement to pay this amount is deferred in accordance with § 1.664-1(a)(5)(i). In addition, funding the trust with certain types of assets may disqualify a charitable remainder trust. See § 1.664-1(a)(7) and Rev. Rul. 73-610, 1973-2 C.B. 213.

Valuation of unmarketable assets. If the trust is funded with unmarketable assets, the net fair market value of the assets must be determined exclusively by an independent trustee, as defined in § 1.664-1(a)(7)(iii), or must be determined by a current “qualified appraisal” from a “qualified appraiser,” as defined in § 1.170A-13(c)(3) and (c)(5), respectively. Section 1.664-1(a)(7). See section 5.06 of this revenue procedure for further guidance related to the valuation of unmarketable assets.

Trustee provisions. Alternate or successor trustees may be designated in the trust instrument. In addition, the trust instrument may contain other administrative provisions relating to the trustee’s duties and powers, as long as the provisions do not conflict with the rules governing charitable remainder trusts under § 664 and the regulations thereunder. Note that certain powers given to certain persons serving as the trustee may cause the trustee to be treated as the owner of the trust under subpart E and thus disqualify the trust as a charitable remainder trust. See § 1.664-1(a)(4).

Permissible term. The period for which the unitrust amount is payable must not exceed 20 years. Section 1.664-3(a)(5). Thus, for example, the unitrust period of a CRUT for a term of 20 years will end on the day preceding the twentieth anniversary of the date the trust was created.

Permissible recipients. For a CRUT having a term of years unitrust period, the unitrust amount must generally be paid to a named person or persons (within the meaning of § 7701(a)(1)). If the unitrust amount is to be paid to an individual or individuals, all the individuals must be living at the time of the creation of the trust. The unitrust amount may be payable to the estate or heirs of a named recipient who dies prior to the expiration of the term of years. See Rev. Rul. 74-39, 1974-1 C.B. 156. The unitrust amount may be payable to members of a named class and, because the unitrust period is for a term of years, all of the members of the class need not be living or ascertainable at the creation of the trust. An organization described in § 170(c) may receive part, but not all, of the unitrust amount. Section 664(d)(2)(A) and § 1.664-3(a)(3)(i). See section 6.01 of this revenue procedure for an alternate provision that provides for payment of part of the unitrust amount to an organization described in § 170(c).

Multiple noncharitable recipients. Generally, if the unitrust amount is payable to more than one person, the trust instrument should describe the interest of each person. See section 6.02 of this revenue procedure for an alternate provision providing for the apportionment of the unitrust amount among members of a named class in the discretion of the trustee.

Fixed percentage method. Paragraph 1, Payment of Unitrust Amount, of the sample trust calculates the unitrust amount under the fixed percentage method by using a fixed percentage of the net fair market value of the trust assets valued annually. See section 6.05 of this revenue procedure for an alternate provision that uses the net income method for calculating the unitrust amount. See section 6.06 of this revenue procedure for an alternate provision that uses the net income with make-up method for calculating the unitrust amount. See section 6.07 of this revenue procedure for an alternate provision that uses a combination of methods for calculating the unitrust amount as described in § 1.664-3(a)(1)(i)(c).

Percentage requirements. The fixed percentage unitrust amount must be at least 5 percent and not more than 50 percent of the annual net fair market value of the assets in the trust. Section 664(d)(2)(A). In addition, with respect to each contribution of property to the trust, the value of the charitable remainder interest (determined under § 7520) is required to be at least 10 percent of the net fair market value of the contributed property as of the date of its contribution to the trust. Section 664(d)(2)(D).

Payment of unitrust amount in installments. Paragraph 1, Payment of Unitrust Amount, of the sample trust specifies that the unitrust amount is to be paid in equal quarterly installments at the end of each quarter. However, the trust instrument may specify that the unitrust amount is to be paid to the recipient annually or in equal or unequal installments throughout the year. See § 1.664-3(a)(1)(i). The amount of the charitable deduction will be affected by the frequency of payment, by whether the installments are equal or unequal, and by whether each installment is payable at the beginning or end of the period. See § 1.664-3(c) and § 1.664-4.

Rules applicable to valuation. Paragraph 1, Payment of Unitrust Amount, of the sample trust specifies that the net fair market value of trust assets is to be valued as of the first day of each taxable year of the trust. However, the value of the trust assets may be determined on any one date during the taxable year of the trust, or by taking the average of valuations made on more than one date during the taxable year of the trust, so long as the same valuation date or dates and the same valuation methods are used each year. If the governing instrument does not specify the valuation date or dates, the trustee must select the date or dates and indicate the selection on the first Form 5227, “Split-Interest Trust Information Return,” that the trust must file. Section 1.664-3(a)(1)(iv). Note that if the valuation date is a date other than the first day of each taxable year of the trust, it may be necessary to modify the provisions in the sample trust regarding: (i) the timing of the payment of the unitrust amount; and (ii) the proration of the unitrust amount in a short taxable year and the last taxable year of the unitrust period. See § 1.664-3(a)(1)(v).

Payment of unitrust amount by close of taxable year. Generally, the unitrust amount for any taxable year, if computed under the fixed percentage method, must be paid before the close of the taxable year for which it is due. For circumstances under which the unitrust amount computed under the fixed percentage method may be paid within a reasonable time after the close of the taxable year, see § 1.664-3(a)(1)(i)(g) and (k). See section 5.03(1) of this revenue procedure for additional information regarding the deferral of the payment of the unitrust amount until the end of the taxable year in which the trust is completely funded.

Incorrect valuations. Nothing in § 664 or the regulations thereunder requires that interest be paid on the amount of any underpayment or overpayment of the unitrust amount resulting from the incorrect valuation of trust assets. Section 1.664-3(a)(1)(iii). Notwithstanding the foregoing, state law may require the payment of interest on the amount of any such underpayment or overpayment of the unitrust amount.

Early distributions to charity. The trust instrument may provide that an amount other than the unitrust amount shall be paid (or may be paid in the discretion of the trustee) to an organization described in § 170(c). If such a distribution is made in kind, the adjusted basis of the property distributed must be fairly representative of the adjusted basis of the property available for distribution on the date of distribution. Section 1.664-3(a)(4).

Deferral of requirement to pay unitrust amount. The deferral provision in paragraph 2 of the sample trust authorizes deferring the payment of the unitrust amount until the end of the taxable year of the trust in which the trust is completely funded. Section 1.664-1(a)(5)(i) provides the operational rule for deferring payment of the unitrust amount in this circumstance. The deferral provision in paragraph 2 of the sample trust uses the method for computing deferred payments that is provided in § 1.664-1(a)(5)(i). Note that § 1.664-1(a)(5)(ii) provides an alternate method for determining the amount described in § 1.664-1(a)(5)(i)(b), i.e., the unitrust amounts payable plus interest on those amounts. Rev. Rul. 92-57, 1992-2 C.B. 123, provides sample language to be included in the governing instrument if the alternate method set forth in § 1.664-1(a)(5)(ii) for determining the amount described in § 1.664-1(a)(5)(i)(b) is selected.

Treatment of distributions. For the proper treatment of distributions to a charitable remainder trust or to the recipient during the period of administration of an estate or settlement of a trust that is not a charitable remainder trust, see § 1.664-1(a)(5)(iii).

Prorating unitrust amount. To compute the unitrust amount in a short taxable year and in the taxable year in which the unitrust period terminates, see § 1.664-3(a)(1)(v)(a) and (b), respectively.

Minimum value of remainder. As noted in section 5.02(5) of this revenue procedure the value of the charitable remainder interest (determined under § 7520) is required to be at least 10 percent of the net fair market value of the property contributed to the trust as of the date of its contribution to the trust as finally determined for federal estate tax purposes. Section 664(d)(2)(D).

Distribution to remainderman. The trustee of a charitable remainder trust has a reasonable time after the termination of the unitrust period to complete the settlement of the trust, including making the required distributions. See § 1.664-3(a)(6)(ii).

Designated remainderman. Any named charitable remainderman must be an organization described in §§ 170(c) and 2055(a) at the time of the transfer to the CRUT. See § 664(d)(2)(C). The trust instrument may restrict the charitable remainderman to an organization described in §§ 170(c) and 2055(a), but grant to a trustee or other person the power to designate the actual charitable remainderman. See section 6.04 of this revenue procedure for an alternate provision in which the recipient is granted a power of appointment to designate the charitable remainderman.

Multiple remaindermen. The remainder interest may pass to more than one charitable organization as long as each organization is described in §§ 170(c) and 2055(a). Section 1.664-3(a)(6)(i).

Alternative remaindermen. The trust instrument of a CRUT must provide a means for selecting alternative charitable remaindermen in the event any designated organization is not qualified at the time any payments are to be made to it from the trust. Section 1.664-3(a)(6)(iv). This requirement is satisfied in the sample trust by conferring the power upon the trustee to designate an alternative charitable remainderman. Note that the donor may designate one or more alternative charitable remaindermen in the trust instrument; however, the trust instrument must continue to provide a means for selecting an alternative charitable remainderman if any designated organization is not qualified at the time payments are to be made to it from the trust.

Continuing trust for charity. Upon the expiration of the unitrust period, the trust may continue in existence for charity. See § 1.664-3(a)(6)(ii). See section 5.07(3) of this revenue procedure for certain governing instrument requirements that apply when the trust continues in existence for charity.

Multiple trustees. Any co-trustee who is an independent trustee, within the meaning of § 1.664-1(a)(7)(iii), may value the trust’s unmarketable assets.

Valuation using qualified appraisal or independent trustee. The trustee may alternately use an independent trustee or a qualified appraisal by a qualified appraiser to value unmarketable assets. For instance, an unmarketable asset that is valued in one year by an independent trustee may be valued in a successive year by a qualified appraiser in a qualified appraisal. In addition, within a single year, some unmarketable assets may be valued by a qualified appraiser while others are valued by an independent trustee.

Appointment of independent trustee. The governing instrument may authorize the trustee of the trust to appoint from time to time an independent trustee, within the meaning of § 1.664-1(a)(7)(iii), to perform the valuation of unmarketable assets.

Payment of the unitrust amount. Payment of the unitrust amount to the recipient is not considered an act of self dealing within the meaning of § 4941(d), as modified by § 4947(a)(2)(A), or a taxable expenditure within the meaning of § 4945(d), as modified by § 4947(a)(2)(A). Section 53.4947-1(c)(2) of the Foundation and Similar Excise Taxes Regulations.

Prohibitions against certain investments and excess business holdings. Prohibitions against investments that jeopardize the exempt purpose of the trust within the meaning of § 4944, as modified by § 4947(a)(2)(A), and against retaining any excess business holdings within the meaning of § 4943, as modified by § 4947(a)(2)(A), are required if the trust provides for payment of any part of a unitrust amount to an organization described in § 170(c) and an estate tax charitable deduction is sought for the organization’s interest in the unitrust amount. See § 4947(b)(3). See section 6.01 of this revenue procedure for an alternate provision that provides for payment of part of the unitrust amount to an organization described in § 170(c).

Trust to continue in existence for benefit of charity. The governing instrument requirements of § 508(e) must be included in the trust instrument if, after the termination of the unitrust period: (i) the trust instrument provides that the trust shall continue in existence for the benefit of the charitable remainderman and, as a result, the trust will become subject to the provisions of § 4947(a)(1); and (ii) the trust will be treated as a private foundation within the meaning of § 509(a), as modified by § 4947(a)(1). Except as provided in paragraph 7 of the sample trust, the trust instrument may limit the application of the provisions of § 508(e) to the period after the termination of the unitrust period when the trust continues in existence for the benefit of the charitable remainderman.

Explanation. An organization described in § 170(c) may receive part, but not all, of any unitrust amount. Section 664(d)(2)(A). If an estate tax charitable deduction is sought for the present value of the unitrust interest passing to a charitable organization, the trust instrument must contain additional provisions. First, the trust instrument must specify the portion of each unitrust payment that is payable to the noncharitable recipient and to the charitable organization described in §§ 170(c) and 2055(a). Second, the trust instrument must contain a means for selecting an alternative qualified charitable organization if the designated organization is not a qualified organization at the time when any unitrust amount is to be paid to it. Third, the trust instrument must contain prohibitions against investments that jeopardize the exempt purpose of the trust within the meaning of § 4944, as modified by § 4947(a)(2)(A), and against retaining any excess business holdings within the meaning of § 4943, as modified by § 4947(a)(2)(A).

Instructions for use.

Explanation. A trust is not a CRUT if any person has the power to alter the amount to be paid to any named person other than an organization described in § 170(c) if the power would cause any person to be treated as the owner of the trust, or any portion thereof, if subpart E were applicable to the trust. Section 1.664-3(a)(3)(ii). See Rev. Rul. 77-73, 1977-1 C.B. 175. A trustee’s discretionary power, exercisable solely by that trustee, to allocate the unitrust amount among the members of a class would cause the trustee to be treated as the owner of all or a portion of the trust under § 678(a) if the trustee is a member of the class, if the trustee may apply trust income or corpus to satisfy the trustee’s own legal obligation, or if the trustee actually exercises the power to satisfy a support obligation owed by the trustee. Therefore, if any trustee is given the discretionary power exercisable solely by that trustee to allocate the unitrust amount among members of a class, the trust instrument must provide that such trustee must be: (i) not a member of the recipient class; and (ii) prohibited from applying any part of the unitrust payment in satisfaction of the trustee’s own legal obligation.

Instructions for use.

Explanation. Under § 664(f), payment of the unitrust amount may terminate upon the earlier of the occurrence of a qualified contingency (as defined in § 664(f)(3)) or the expiration of the term of years unitrust period. The amount of the charitable deduction, however, will be determined without regard to a qualified contingency. See § 664(f)(2).

Instructions for use. Replace the second and third sentences of paragraph 1, Payment of Unitrust Amount, of the sample trust with the following two sentences:

Explanation. The trust instrument may grant the recipient a power of appointment to designate the charitable remainderman. See Rev. Rul. 76-7, 1976-1 C.B. 179.

Instructions for use. Replace paragraph 4, Distribution to Charity, of the sample trust with the following paragraph:

Explanation. As an alternative to using the fixed percentage method of calculating the unitrust amount in paragraph 1 of the sample trust, a CRUT may use the net income method for calculating the unitrust amount. Under the net income method, the unitrust amount is the lesser of a fixed percentage of the net fair market value of the trust assets valued annually or the amount of trust income for that year. Section 664(d)(3)(A) and § 1.664-3(a)(1)(i)(b)(1). For purposes of determining the amount of the charitable contribution, the remainder interest is computed on the basis that an amount equal to the fixed percentage unitrust amount is to be distributed each year, without regard to the possibility that a smaller amount of trust income may be the amount distributed. Section 664(e).

Definition of trust income. For purposes of the methods described in § 664(d)(3), trust income generally means income as defined under § 643(b) and the applicable regulations. Section 1.664-3(a)(1)(i)(b)(3). Even if permitted by applicable state law, however, trust income of a CRUT that uses the net income method, the net income with make-up method, or a combination of methods of determining the unitrust amount may not be determined by reference to a fixed percentage of the net fair market value of the trust property. In addition, although certain proceeds from the sale or exchange of assets must be allocated to principal and not to trust income, other such proceeds may be allocated to trust income pursuant to the terms of the governing instrument, if not prohibited by applicable local law. A discretionary power to make this allocation may be granted to the trustee under the terms of the governing instrument, but only to the extent that the applicable state statute permits the trustee to make adjustments between income and principal to treat beneficiaries impartially. Section 1.664-3(a)(1)(i)(b)(3). A definition of trust income that is consistent with these requirements may, but need not, be included in the trust instrument.

Instructions for use.

Explanation. As an alternative to using the fixed percentage method of calculating the unitrust amount in paragraph 1 of the sample trust, a CRUT may use the net income with make-up method for calculating the unitrust amount. Under the net income with make-up method, the unitrust amount consists of two components: (i) the amount determined under the net income method (as described in section 6.05 of this revenue procedure); and (ii) the amount of trust income that is in excess of the fixed percentage amount for that year, but only to the extent that the aggregate of the unitrust amounts paid to the recipient in prior years was less than the amounts that would have been paid to the recipient if the unitrust amount had been computed using the fixed percentage method. Section 664(d)(3)(B) and § 1.664-3(a)(1)(i)(b)(2). For purposes of determining the amount of the charitable contribution, the remainder interest is computed on the basis that an amount equal to the fixed percentage unitrust amount is to be distributed each year, without regard to the possibility that a smaller or larger amount of trust income may be the amount distributed. Section 664(e). See section 6.05(2) of this revenue procedure for rules relating to the definition of trust income.

Instructions for use.

Explanation. The net income method (described in section 6.05 of this revenue procedure) or the net income with make-up method (described in section 6.06 of this revenue procedure) may be combined with the fixed percentage method for calculating the unitrust amount. Section 1.664-3(a)(1)(i)(c). More specifically, the governing instrument may provide for payment of the unitrust amount not less often than annually using the net income or the net income with make-up method of calculation, and then, in the years following a permissible triggering event (as described in § 1.664-3(a)(1)(i)(c) and (d)), for payment of the unitrust amount using the fixed percentage method of calculation. To provide for a one-time conversion from the net income or the net income with make-up method to the fixed percentage method of calculation, the governing instrument must provide that: (i) the change in method is triggered on a specific date or by a single event whose occurrence is not discretionary with, or within the control of, the trustees or any other persons; (ii) the change in method occurs at the beginning of the taxable year that immediately follows the taxable year during which the permissible triggering event occurs; and (iii) following the trust’s conversion to the fixed percentage method, the trust will pay at least annually to the recipient the amount described in § 1.664-3(a)(1)(i)(a) and no amount described in § 1.664-3(a)(1)(i)(b). Section 1.664-3(a)(1)(i)(c). Thus, any make-up amount described in § 1.664-3(a)(1)(i)(b)(2) that is not paid by the beginning of the taxable year immediately following the taxable year during which the permissible triggering event occurs shall be forfeited by the recipient and added to principal.

Instructions for use to combine the net income and fixed percentage methods. To convert from the net income method for calculating the unitrust amount to the fixed percentage method after a permissible triggering event:

Instructions for use to combine the net income with make-up and fixed percentage methods. To convert from the net income with make-up method for calculating the unitrust amount to the fixed percentage method after a permissible triggering event: