Attorney Seeks Further Clarification of Guidance on Treatment of Transfers in Trust

I am writing to express my concern, and that of several other attorneys whose names are listed below, about yet another problem with Section 2511(c) -- its effects on qualified charitable remainder trusts.

Section 2511(c), of course, states that "a transfer in trust shall be treated as a transfer of property by gift, unless the trust is treated as wholly owned by the donor or the donor's spouse under" the grantor trust rules. A charitable remainder trust cannot be a grantor trust, so Section 2511(c) appears to preclude the use of incomplete transfers in a charitable remainder trust.

As you know, it is common for a donor to make a gift to a charitable remainder trust, reserving a unitrust or annuity interest and giving a similar interest to a successor noncharitable beneficiary. The donor typically reserves the right to revoke the successor's interest, to substitute a future estate tax on the date-of-death value of the successor interest for a current gift tax on the date-of-gift value of that interest.

Read literally, Section 2511(c) appears to render complete the donor's gift to the successor noncharitable beneficiary, because a charitable remainder trust cannot be a grantor trust. Treas. Reg. § 1.664-1(a)(4).

We do not believe that Congress contemplated applying Section 2511(c) to charitable remainder trusts. Certainly, there is nothing in the legislative history that evidences any consideration of the application of this section to charitable remainder trusts. The legislative history¹ of the 2002 amendment to Section 2511(c), in fact, states that the result of that amendment was "that the gift tax annual exclusion and the marital and charitable deductions may apply to such transfers." Staff of the Joint Committee on Taxation, 107^th Cong., 2^nd Sess., "General Explanation of Tax Legislation Enacted in the 107th Congress," p. 249 (2003) (Committee Print). This suggests that Section 2511(c) was not intended to diminish the availability of the income and gift tax charitable deductions, and that it should not, therefore, apply with to qualified charitable remainder trusts.

This right to revoke the successor annuity or unitrust interest is included in the IRS sample charitable remainder trust forms. See Rev. Proc. 2005-54, § 6.03, 2005-2 C.B. 353; Rev. Proc. 2005-55, § 6.03, 2005-2 C.B. 367; Rev. Proc. 2003-55, § 6.07, 2003-2 C.B. 242; Rev. Proc. 2003-56, § 6.07, 2003-2 C.B. 249. If the Treasury and IRS cannot or will not issue a notice or other declaration that Section 2511(c) does not apply to qualified charitable remainder trusts, it should at least caution practitioners to avoid using this provision of the sample forms in trusts created in 2010.

Of greater concern is the possibility that Section 2511(c) could apply to a single- life charitable remainder trust in which the donor reserves the unitrust or annuity interest. The Joint Committee on Taxation, in its report on the 2002 amendment to Section 2511(c) from which I have already quoted, also stated that:

I am unaware of any situation in which a reserved interest is deemed to be a gift.³ Section 2511(c), furthermore, refers to a transfer in trust. The interest reserved by the donor is not transferred; it is reserved.⁴ Furthermore, when the legislative history is read together with the intended result of the 2002 amendment, mentioned above, it becomes clear that Section 2511(c) should not be allowed to render inoperative the extensive rules already developed for charitable remainder trusts.

On a related issue, I would also like to point out that testamentary charitable remainder trusts may be impossible in 2010, because they would not qualify for an income, estate, or gift tax charitable deduction. Treas. Reg. § 1.664-1(a)(1)(iii)(a). I am not sure what can be done for this, but at a minimum, some notice should be given to practitioners to beware of relying on the IRS sample forms to resolve this problem.

If it is convenient, I will call you in the near future to discuss this matter. I may be joined in this call with one or two others whose names are affixed to this letter.

² This one statement in the legislative history to Section 2511(c) could also be construed as treating the transfer as a gift to the charity of the entire value of the trust fund, including the value of the retained annuity or unitrust interest. We assume that Treasury would prefer not to adopt this construction, but we would be very interested to hear if our assumption is incorrect.

³ Section 2702 arrives at a similar result by valuing the transferred interest without subtracting the value of the reserved interest, but it does not state that the reserved interest is itself a gift.

⁴ That is why no part of a reserved interest is deemed to have been paid by the trustee for the transferred assets. See, Estate of Gregory v. Comm'r, 39 T.C. 1012 (1963); and Estate of Christ v. Comm'r, 54 T.C. 493 (1970).