Charitable remainder trusts
26 U.S. Code § 664
(a) General rule
Notwithstanding any other
provision of this subchapter, the provisions of this section shall, in
accordance with regulations prescribed by the Secretary, apply in the case of a
charitable remainder annuity trust and a charitable remainder unitrust.
(b) Character of distributions
Amounts distributed by a
charitable remainder annuity trust or by a charitable remainder unitrust shall
be considered as having the following characteristics in the hands of a
beneficiary to whom is paid the annuity described in subsection (d)(1)(A) or
the payment described in subsection (d)(2)(A):
(1) First, as amounts of income (other
than gains, and amounts treated as gains, from the sale or other disposition of
capital assets) includible in gross income to the extent of such income of the
trust for the year and such undistributed income of the trust for prior years;
(2) Second, as a capital gain to the
extent of the capital gain of the trust for the year and the undistributed
capital gain of the trust for prior years;
(3) Third, as other income to the
extent of such income of the trust for the year and such undistributed income
of the trust for prior years; and
(4) Fourth, as a distribution of trust
corpus.
For purposes of this section,
the trust shall determine the amount of its undistributed capital gain on a
cumulative net basis.
(c) Taxation of trusts
(1) Income tax
A charitable remainder annuity
trust and a charitable remainder unitrust shall, for any taxable year, not be
subject to any tax imposed by this subtitle.
(2) Excise tax
(A) In general
In the case of a charitable
remainder annuity trust or a charitable remainder unitrust which has unrelated
business taxable income (within the meaning of section 512,
determined as if part III of subchapter F applied to such trust) for a taxable
year, there is hereby imposed on such trust or unitrust an excise tax equal to
the amount of such unrelated business taxable income.
(B) Certain rules to apply
The tax imposed by subparagraph
(A) shall be treated as imposed by chapter 42 for purposes of this title other
than subchapter E of chapter 42.
(C) Tax court proceedings
For purposes of this paragraph,
the references in section 6212 (c)(1) to section 4940 shall
be deemed to include references to this paragraph.
(d) Definitions
(1) Charitable remainder annuity
trust
For purposes of this section, a
charitable remainder annuity trust is a trust—
(A) from which a sum certain (which is
not less than 5 percent nor more than 50 percent of the initial net fair market
value of all property placed in trust) is to be paid, not less often than
annually, to one or more persons (at least one of which is not an organization
described in section170 (c) and, in the case of individuals, only
to an individual who is living at the time of the creation of the trust) for a
term of years (not in excess of 20 years) or for the life or lives of such
individual or individuals,
(B) from which no amount other than
the payments described in subparagraph (A) and other than qualified gratuitous
transfers described in subparagraph (C) may be paid to or for the use of any
person other than an organization described in section 170 (c),
(C) following the termination of the
payments described in subparagraph (A), the remainder interest in the trust is
to be transferred to, or for the use of, an organization described in section170 (c) or is to be retained by the trust for
such a use or, to the extent the remainder interest is in qualified employer
securities (as defined in subsection (g)(4)), all or part of such securities
are to be transferred to an employee stock ownership plan (as defined in
section 4975 (e)(7)) in a qualified gratuitous transfer (as
defined by subsection (g)), and
(D) the value (determined under
section 7520) of such remainder interest is at least
10 percent of the initial net fair market value of all property placed in the
trust.
(2) Charitable remainder unitrust
For purposes of this section, a
charitable remainder unitrust is a trust—
(A) from which a fixed percentage
(which is not less than 5 percent nor more than 50 percent) of the net fair
market value of its assets, valued annually, is to be paid, not less often than
annually, to one or more persons (at least one of which is not an organization
described in section 170 (c)and, in the case of individuals, only to an
individual who is living at the time of the creation of the trust) for a term
of years (not in excess of 20 years) or for the life or lives of such
individual or individuals,
(B) from which no amount other than
the payments described in subparagraph (A) and other than qualified gratuitous
transfers described in subparagraph (C) may be paid to or for the use of any
person other than an organization described in section 170 (c),
(C) following the termination of the
payments described in subparagraph (A), the remainder interest in the trust is
to be transferred to, or for the use of, an organization described in section170 (c) or is to be retained by the trust for
such a use or, to the extent the remainder interest is in qualified employer
securities (as defined in subsection (g)(4)), all or part of such securities
are to be transferred to an employee stock ownership plan (as defined in
section 4975 (e)(7)) in a qualified gratuitous transfer (as
defined by subsection (g)), and
(D) with respect to each contribution
of property to the trust, the value (determined under section7520)
of such remainder interest in such property is at least 10 percent of the net
fair market value of such property as of the date such property is contributed
to the trust.
(3) Exception
Notwithstanding the provisions
of paragraphs (2)(A) and (B), the trust instrument may provide that the trustee
shall pay the income beneficiary for any year—
(A) the amount of the trust income, if
such amount is less than the amount required to be distributed under paragraph
(2)(A), and
(B) any amount of the trust income
which is in excess of the amount required to be distributed under paragraph
(2)(A), to the extent that (by reason of subparagraph (A)) the aggregate of the
amounts paid in prior years was less than the aggregate of such required
amounts.
(4) Severance of certain additional
contributions
If—
(A) any contribution is made to a
trust which before the contribution is a charitable remainder unitrust, and
(B) such contribution would (but for
this paragraph) result in such trust ceasing to be a charitable unitrust by
reason of paragraph (2)(D),
such contribution shall be
treated as a transfer to a separate trust under regulations prescribed by the
Secretary.
(e) Valuation for purposes of
charitable contribution
For purposes of determining the
amount of any charitable contribution, the remainder interest of a charitable
remainder annuity trust or charitable remainder unitrust shall be computed on
the basis that an amount equal to 5 percent of the net fair market value of its
assets (or a greater amount, if required under the terms of the trust
instrument) is to be distributed each year.
(f) Certain contingencies permitted
(1) General rule
If a trust would, but for a
qualified contingency, meet the requirements of paragraph (1)(A) or (2)(A) of
subsection (d), such trust shall be treated as meeting such requirements.
(2) Value determined without regard
to qualified contingency
For purposes of determining the
amount of any charitable contribution (or the actuarial value of any interest),
a qualified contingency shall not be taken into account.
(3) Qualified contingency
For purposes of this subsection,
the term “qualified contingency” means any provision of a trust which provides
that, upon the happening of a contingency, the payments described in paragraph
(1)(A) or (2)(A) of subsection (d) (as the case may be) will terminate not
later than such payments would otherwise terminate under the trust.
(g) Qualified gratuitous transfer
of qualified employer securities
(1) In general
For purposes of this section,
the term “qualified gratuitous transfer” means a transfer of qualified employer
securities to an employee stock ownership plan (as defined in section 4975 (e)(7)) but only to the extent that—
(A) the securities transferred
previously passed from a decedent dying before January 1, 1999, to a trust
described in paragraph (1) or (2) of subsection (d),
(B) no deduction under section 404 is
allowable with respect to such transfer,
(C) such plan contains the provisions
required by paragraph (3),
(D) such plan treats such securities
as being attributable to employer contributions but without regard to the
limitations otherwise applicable to such contributions under section 404,
and
(E) the employer whose employees are
covered by the plan described in this paragraph files with the Secretary a
verified written statement consenting to the application of sections 4978 and4979A with
respect to such employer.
(2) Exception
The term “qualified gratuitous
transfer” shall not include a transfer of qualified employer securities to an
employee stock ownership plan unless—
(A) such plan was in existence on
August 1, 1996,
(B) at the time of the transfer, the
decedent and members of the decedent’s family (within the meaning of
section 2032A (e)(2)) own (directly or through the application
of section 318 (a)) no more than 10 percent of the value of
the stock of the corporation referred to in paragraph (4), and
(C) immediately after the transfer,
such plan owns (after the application of section 318 (a)(4)) at least 60 percent of the value of
the outstanding stock of the corporation.
(3) Plan requirements
A plan contains the provisions
required by this paragraph if such plan provides that—
(A) the qualified employer securities
so transferred are allocated to plan participants in a manner consistent with
section 401 (a)(4),
(B) plan participants are entitled to
direct the plan as to the manner in which such securities, which are entitled
to vote and are allocated to the account of such participant are to be voted,
(C) an independent trustee votes the securities
so transferred which are not allocated to plan participants,
(D) each participant who is entitled
to a distribution from the plan has the rights described in subparagraphs (A)
and (B) of section 409 (h)(1),
(E) such securities are held in a
suspense account under the plan to be allocated each year, up to the applicable
limitation under paragraph (7) (determined on the basis of fair market value of
securities when allocated to participants), after first allocating all other
annual additions for the limitation year, up to the limitations under
sections 415 (c) and (e), [1] and
(F) on termination of the plan, all
securities so transferred which are not allocated to plan participants as of
such termination are to be transferred to, or for the use of, an organization
described in section 170 (c).
For purposes of the preceding
sentence, the term “independent trustee” means any trustee who is not a member
of the family (within the meaning of section 2032A(e)(2)) of the decedent or a
5-percent shareholder. A plan shall not fail to be treated as meeting the
requirements of section 401(a) by reason of meeting the requirements
of this subsection.
(4) Qualified employer securities
For purposes of this section,
the term “qualified employer securities” means employer securities (as defined
in section 409 (l)) which are issued by a domestic
corporation—
(A) which has no outstanding stock
which is readily tradable on an established securities market, and
(B) which has only 1 class of stock.
(5) Treatment of securities
allocated by employee stock ownership plan to persons related to decedent or
5-percent shareholders
(A) In general
If any portion of the assets of
the plan attributable to securities acquired by the plan in a qualified
gratuitous transfer are allocated to the account of—
(i) any person who is related to the
decedent (within the meaning of section 267 (b)) or a member of the decedent’s family
(within the meaning of section 2032A (e)(2)), or
(ii) any person who, at the time of
such allocation or at any time during the 1-year period ending on the date of
the acquisition of qualified employer securities by the plan, is a 5-percent
shareholder of the employer maintaining the plan,
the plan shall be treated as
having distributed (at the time of such allocation) to such person or
shareholder the amount so allocated.
(B) 5-percent shareholder
For purposes of subparagraph
(A), the term “5-percent shareholder” means any person who owns (directly or
through the application of section 318 (a)) more than 5 percent of the outstanding
stock of the corporation which issued such qualified employer securities or of
any corporation which is a member of the same controlled group of corporations
(within the meaning of section409 (l)(4)) as such corporation. For purposes of
the preceding sentence, section 318 (a) shall be applied without regard to
the exception in paragraph (2)(B)(i) thereof.
(C) Cross reference
For excise tax on allocations
described in subparagraph (A), see section 4979A.
(6) Tax on failure to transfer
unallocated securities to charity on termination of plan
If the requirements of paragraph
(3)(F) are not met with respect to any securities, there is hereby imposed a
tax on the employer maintaining the plan in an amount equal to the sum of—
(A) the amount of the increase in the
tax which would be imposed by chapter 11 if such securities were not
transferred as described in paragraph (1), and
(B) interest on such amount at the
underpayment rate under section 6621 (and
compounded daily) from the due date for filing the return of the tax imposed by
chapter 11.
(7) Applicable limitation
(A) In general
For purposes of paragraph
(3)(E), the applicable limitation under this paragraph with respect to a
participant is an amount equal to the lesser of—
(i) $30,000, or
(ii) 25 percent of the participant’s
compensation (as defined in section 415 (c)(3)).
(B) Cost-of-living adjustment
The Secretary shall adjust
annually the $30,000 amount under subparagraph (A)(i) at the same time and in
the same manner as under section 415 (d), except that the base period shall be the
calendar quarter beginning October 1, 1993, and any increase under this
subparagraph which is not a multiple of $5,000 shall be rounded to the next
lowest multiple of $5,000.
[1] See References in Text note below.
