Rev. Rul. 76-225

Advice has been requested whether a charitable deduction is allowable under section 2055(a) of the Internal Revenue Code of 1954 for the value of an annuity interest bequeathed to charity, under the circumstances described below.

The decedent died testate on October 19, 1975. The decedent's will executed on March 14, 1974 provided, among other things, for the creation of a trust qualifying as a charitable remainder annuity trust under section 664(d)(1) of the Code. The trustee of the trust is to pay an annual annuity amount of six percent of the initial net fair market value of the property passing to the trust to the decedent's surviving spouse for life. At the death of the surviving spouse, the annuity amount is to be paid to three individuals in equal shares for their lives. Upon the death of any of such three individuals, that individual's share of the annuity amount is to be paid to a qualified charitable organization named as the recipient of the trust corpus at the termination of the trust term. At the death of the last to die of the individual recipients of the annuity amount, the trust will terminate and the remaining trust property shall be paid to the qualified charitable organization.

The question presented is whether the annuity amount passing to charity upon the deaths of the individual recipients is in the form of a guaranteed annuity interest within the meaning of section 2055(e)(2)(B) of the Code so as to qualify for the charitable deduction authorized under section 2055(a).

In determining the value of the taxable estate for Federal estate tax purposes, section 2055(a) of the Code provides for a deduction of amounts passing to or for the use of the organizations, persons and purposes described in section 2055(a). However, with respect to decedents dying after December 31, 1969, section 2055(e)(2) provides that where an interest in property (other than a remainder interest in a personal residence or farm or an undivided portion of the decedent's entire interest in property) passes from the decedent for the benefit of charity and an interest in the same property passes to a person or for a use that does not benefit charity, no deduction is allowed with respect to the charitable interest unless, in the case of a remainder interest, such interest is in either a charitable remainder annuity trust or a charitable remainder unitrust (described in section 664) or a pooled income fund (described in section 642(c)(5)), or, in the case of any other interest, such interest is in the form of a guaranteed annuity or a fixed percentage distributed yearly of the fair market value of the property (determined yearly).

Section 20.2055-2(e)(2)(v) of the Estate Tax Regulations defines a guaranteed annuity interest as follows:

(a) * * * For purposes of this subdivision (v), the term 'guaranteed annuity interest' means the right pursuant to the instrument of transfer to receive a guaranteed annuity. A guaranteed annuity is an arrangement under which a determinable amount is paid periodically, but not less often than annually, for a specified term or for the life or lives of an individual or individuals, each of whom must be living at the date of death of the decedent and can be ascertained at such date. * * *

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(f) Where a charitable interest in the form of a guaranteed annuity interest is in trust, the charitable interest will not be considered a guaranteed annuity interest if any amount other than an amount in payment of a guaranteed annuity interest may be paid by the trust for a private purpose before the expiration of all the income interests for a charitable purpose, unless such amount for a private purpose is paid from a group of assets which, pursuant to the governing instrument of the trust, are devoted exclusively to private purposes and to which section 4947(a)(2) is inapplicable by reason of section 4947(a)(2)(B). The exception in the immediately preceding sentence with respect to any guaranteed annuity for a private purpose shall apply only if the obligation to pay the annuity for a charitable purpose begins as of the date of death of the decedent and the obligation to pay the guaranteed annuity for a private purpose does not precede in point of time the obligation to pay the annuity for a charitable purpose and only if the governing instrument of the trust does not provide for any preference or priority in respect of any payment of the guaranteed annuity for a private purpose as opposed to any payment of any annuity for a charitable purpose. * * *

Under subsection (f) of the above regulation, if guaranteed annuity interests are payable for private and charitable purposes out of a trust before the expiration of the charitable interest, then in order for the charitable annuity interest to be deductible it must, among other requirements, begin at the date of the decedent's death and the obligation to pay it must begin either before or at the same time as the private annuity interest and on a basis of equality. See also example (4) of section 20.2055-2(f)(2)(iv) of the regulations.

In the present case, the governing instrument of the trust provides for the payment of an annuity amount for a recognized charitable purpose, but the obligation to pay such amount does not begin at the date of decedent's death and the obligation to pay the charitable interest is preceded in point of time by the obligation to pay the annuity amount for a private purpose. The charitable annuity interest is not, therefore, a "guaranteed annuity interest" within the meaning of section 2055(e)(2)(B) of the Code.

Accordingly, since in the present case, the annuity interest passing to charity is not a guaranteed annuity interest within the meaning of section 2055(e)(2)(B) of the Code, no deduction for the value of the annuity interest is allowable under section 2055(a). However, the value of the charitable remainder interest in the trust is deductible.