In a recent Private Letter Ruling, (PLR 201845014 (released Nov. 9, 2018)), the Internal Revenue Service ruled that you can’t get around the rule that payments from a charitable unitrust can’t go exclusively to the charity by paying a de minimis amount to the non-charity beneficiaries.
To avoid identifying PLR recipients, the IRS substitutes letters for the parties’ names, dollar and value amounts and percentages. Not knowing those items makes it difficult to determine whether the de minimus test discussed in the PLR is met. For the heck of it, I’ve given names (instead of letters) to the husband and wife—and one charity.
Two CRUTs Formed
Scott intends to form two b percent charitable remainder unitrusts (CRUTs), CRUT #1 and CRUT #2, and fund each with property. He intends both trusts to qualify as valid CRUTs under Internal Revenue Code Section 664(d)(2) and the regulations.
CRUT #1. Until Scott’s death, the trustee is to distribute to Scott annually: (1) a percent of the unitrust amount, and (2) such additional portion of the unitrust amount, if any, as the independent trustee determines is necessary to ensure the total portion of the unitrust amount distributed to Scott annually shall not be de minimis under the facts and circumstances.
After providing for distribution of the minimum amount to Scott (the aggregate of amounts described in (1) and (2) above), the trustee shall distribute the balance of the unitrust amount (the net unitrust amount) to such one or more of Scott and one or more charitable organizations included in the charitable class as the independent trustee selects in the independent trustee’s sole discretion without the approval or consent of any other person, and in such equal or unequal portions as the independent trustee determines in the independent trustee’s sole discretion without the approval or consent of any other person.
The charitable class means one or more charitable organizations that Scott, as an individual and not in any fiduciary capacity, designates as potential recipients of the charitable portion by signed written instrument delivered to the independent trustee, which shall remain revocable until the payment date such that Scott retains the power to designate the charitable class until such power lapses on the payment date, or if Scott doesn’t provide such designation on or before the payment date, such one or more charitable organizations as the independent trustee, in the independent trustee’s sole discretion, shall determine. (Ah, a plethora of suches.)
As of the term ending date, the trustee shall distribute the trust property remaining after providing for the payment of all unitrust amounts to one or more charitable organizations in such proportion among them as Scott may appoint by will, or to the extent he doesn’t exercise the power of appointment, to unnamed Hard-To-Get-Into College.
CRUT #2. Except as stated below, the provisions of CRUT #2 are identical to the provisions of CRUT #1. While CRUT #1 proposes an inter vivos CRUT with one measuring life, Scott, CRUT #2 proposes an inter vivos CRUT with consecutive interests with two measuring lives, Scott and his wife, Zelda, subject to Scott’s right to revoke Zelda’s unitrust interest by his will.
- The provisions in CRUT #1 and CRUT #2 giving the independent trustee the power to allocate a portion of the unitrust amount between noncharitable and charitable beneficiaries won’t prevent CRUT #1 or CRUT #2 from qualifying as a CRUT under IRC §664(d)(2).
- Scott and Zelda haven’t retained a power to remove the independent trustee that would allow either of them to substitute any person, including themselves, as independent trustee or that would subordinate the independent trustee to Scott or Zelda.
- Scott’s power to designate the charitable class of CRUT #1 and CRUT #2 won’t prevent CRUT #1 or CRUT #2 from qualifying as a CRUT under IRC Section 664(d)(2).
- Scott’s testamentary power to revoke by a provision in his will all interests in the survivor unitrust for Zelda in CRUT #2 won’t prevent CRUT #2 from qualifying as a CRUT under Section 664(d)(2).
- IRC Section 2501 imposes a tax for each calendar year on the transfer of property by gift by any individual. IRC Section 2511(a) provides, in part, that subject to limitations contained in Chapter 12, the tax imposed by Section 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible.
- Treasury Regulations Section 25.2511-2(a) provides that the gift tax isn’t imposed on the receipt of the property by the donee, nor is it necessarily determined by the measure of enrichment resulting to the donee from the transfer. The tax is a primary and personal liability of the donor, is measured by the value of the property passing from the donor and attaches at the time the property passes, regardless of the fact that the identity of the donee may not then be known or ascertainable.
- Treas. Regs. Section 25.2511-2(b) provides, in relevant part, that a gift is complete and subject to the gift tax when the donor has so parted with dominion and control over the property transferred as to leave in the donor no power to change its disposition, whether for the donor’s own benefit or for the benefit of another.
- Scott’s power to designate the charitable class will prevent completion of the gift of the net unitrust amount of CRUT #1 and the net unitrust amount of CRUT #2 during his lifetime until such power lapses. Furthermore, on the annual lapse of Scott’s power to designate the charitable class during Scott’s lifetime and to the extent each year the net unitrust amount is distributed to one or more charitable organizations of each of CRUT #1 and CRUT #2, the distributions will be completed gifts and will qualify for the gift tax charitable deduction under IRC Section 2522(a).
- Scott’s testamentary power to revoke by a provision in his will all interests in Zelda’s unitrust interest of CRUT #2 (to include both the minimum unitrust amount and the net unitrust amount) will cause Scott’s gift of the survivor unitrust interest to remain incomplete until his death. See Treas. Regs Section 25.2511-2.
What’s the IRS Getting at Here?
Remainder unitrusts and annuity trusts can’t provide that the entire annual payments go exclusively to charities. And at least one beneficiary of the income interest must be a non-charity. Sections 664(d)(1), (2). If the trustee could sprinkle all—or most of—the payments to the charity (and not pay any—or little—to the non-charity beneficiary), that provision would be violated. The IRS said, you can’t get around the requirement by paying a de minimis amount to the non-charity beneficiaries.
This is a Minnie Mouse ruling because it gives poor guidance. The IRS says de minimis depends on the “facts and circumstances” of each case. Black's Law Dictionary defines “de minimis” as very small or trifling. That, I believe, is certainly bigger than a hadron or a quark. And probably also bigger than a soupçon, scintilla and iota.
Is de minimis a teensy percentage or a teensy dollar amount? Suppose a 5 percent unitrust funded with $10,000 pays the non-charity income beneficiary $100 (or 20 percent) of the $500 unitrust amount for the year. Now suppose another 5 percent unitrust funded with $10 million pays the non-charity income beneficiary $2,500. That’s only ½ of 1 percent of the $500,000 unitrust amount. There’ s no denying that $2,500 is greater than $100. But arguably, the $2,500 under the facts and circumstances test is de minimis, and the $100 isn’t.
Pointer: Sprinkling provisions aren’t authorized in pooled income fund agreements.
© Conrad Teitell 2018. This is not intended as legal, tax, financial or other advice. So check with your adviser on how the rules apply to you.