Rev. Rul. 82-165

The purpose of this revenue ruling is to provide sample provisions for inclusion in the governing instrument of a charitable remainder trust that satisfy the requirements of sections 1.664-1(a)(5)(i) and 1.664-3(a)(1)(v) of the Income Tax Regulations.

(1) Satisfying the requirements of section 1.664-1(a)(5)(i) of the regulations. Rev. Rul. 80-123, 1980-1 C.B. 205, modified Rev. Rul. 72- 395,1972-2 C.B. 340, by providing that the governing instrument of a testamentary charitable remainder trust must contain provisions conforming to section 1.664-1(a)(5) in order for the charitable interest to qualify for an estate tax charitable deduction under section 2055 of the Internal Revenue Code. That is, the governing instrument must provide (1) that the obligation to pay the unitrust or annuity amount begins on the date of death, and (2) for corrective payments in the case of an underpayment or overpayment of the annuity or unitrust amount determined to be payable.

Rev. Rul. 72-395 explains the requirements for charitable remainder trusts and sets forth sample provisions for drafting trust instruments.

However, the sample provisions set forth in Rev. Rul. 72-395 do not adequately deal with the requirements of section 1.664-1(a)(5) of the regulations. Specifically, the sample provision described in section 5.02 of Rev. Rul. 72-395 does not deal directly with the handling of under or overpayments of the amounts determined to be payable. The following sample provision, therefore, replaces the second paragraph of the sample provision set forth in section 5.02 of Rev. Rul. 72-395 and satisfies the requirements of section 1.664-1(a)(5) which provides (1) that the governing instrument must provide that the obligation to pay the annuity amount begin on the date of death, and (2) for corrective payments in the case of an underpayment or overpayment of the annuity payment determined to be payable:

The obligation to pay the annuity amount shall commence with the date of my death, but payment of the annuity amount may be deferred from the date of my death until the end of the taxable year of the trust in which occurs the complete funding of the trust. Within a reasonable time after the end of the taxable year in which the complete funding of the trust occurs, the trustee must pay to A, in the case of an underpayment, or must receive from A, in the case of an overpayment, the difference between:

(a) Any annuity amounts actually paid, plus interest on such amounts computed at 6 percent a year, compounded annually; and

(b) The annuity amounts payable, plus interest on such amounts computed at 6 percent a year, compounded annually.

With respect to testamentary charitable remainder unitrusts, the following sample provision replaces the second paragraph of the sample provision set forth in section 7.02 of Rev. Rul. 72-395 and satisfies the requirements of section 1.664-1(a)(5) of the regulations:

The obligation to pay the unitrust amount shall commence with the date of my death, but payment of the unitrust amount may be deferred from the date of my death until the end of the taxable year of the trust in which occurs the complete funding of the trust, Within a reasonable time after the end of the taxable year in which the complete funding of the trust occurs, the trustee must pay to A, in the case of an underpayment, or must receive from A, in the case of an overpayment, the difference between:

(a) Any unitrust amounts actually paid, plus interest on such amounts computed at 6 percent a year, compounded annually and

(b) The unitrust amounts payable, determined under the method described in section 1.664-1(a)(5)(ii) of the federal income tax regulations, plus interest on such amounts computed at 6 percent a year, compounded annually.

(2) Satisfying the requirements of section 1.664-3(a)(1)(i)(a) of the regulations. Under section 1.664-3(a)(1)(i)(a), the governing instrument of a charitable remainder unitrust must provide that the trust shall pay, not less often than annually, a fixed percentage of the net fair market value of the trust assets, determined annually. The trust assets may be valued, for example, as of the first business day of each taxable year. See section 1.664-3(a)(1)(iv). If a valuation date other than the first day of the taxable year is selected, the governing instrument of the trust must provide that where no valuation date occurs in a taxable year of the trust that is a short taxable year or before the termination of the noncharitable interests in the taxable year in which the noncharitable interests terminate, the trust assets shall be valued as of the last day of such short taxable year or as of the day on which such noncharitable interests terminate. See section 1.664- 3(a)(1)(v)(a)(3) and (b)(1)(iii), and section 6.05 of Rev. Rul. 72-395.

The following is a sample provision suggested for inclusion in the governing instrument that satisfies the requirements of the mandatory provision described above:

If the valuation date selected does not occur in a taxable year of the trust, other than the year in which the noncharitable interests terminate, the trust assets shall be valued as of the last day of such taxable year. In the case of the taxable year in which the noncharitable interests terminate, if the selected valuation date does not occur before the day the noncharitable interests terminate, the trust assets shall be valued as of the day the noncharitable interests terminate.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 72-395 and Rev. Rul. 80-123 are clarified.