Internal Revenue Service
Revenue Ruling
Rev. Rul. 2002-20, 2002-17 I.R.B. 794
Internal Revenue Service (I.R.S.)
Revenue Ruling
CHARITABLE REMAINDER TRUSTS; QUALIFIED CHARITABLE REMAINDER UNITRUSTS;
RECIPIENT TRUSTS
Published: April 29, 2002
Section 664.--Charitable Remainder Trusts, 26 CFR 1.664-3: Charitable
remainder unitrust.
Charitable remainder trusts; qualified charitable remainder unitrusts;
recipient trusts. This ruling provides that, in three situations, a
charitable remainder unitrust may pay the unitrust amounts to a second
trust for the life of an individual, who is financially disabled as
defined in section 6511(h)(2)(A) of the Code. In each situation, the use of
the unitrust amounts by the second trust is consistent with the manner in
which the individual's own assets would be used, and the individual is,
therefore, considered to have received the unitrust amounts directly from
the charitable remainder unitrust for purposes of section 664(d)(2)(A).
Rev. Rul. 76-270 amplified and superseded.
Charitable remainder trusts; qualified charitable remainder unitrusts;
recipient trusts. This ruling provides that, in three situations, a
charitable remainder unitrust may pay the unitrust amounts to a second
trust for the life of an individual, who is financially disabled as
defined in section 6511(h)(2)(A) of the Code. In each situation, the use of
the unitrust amounts by the second trust is consistent with the manner in
which the individual's own assets would be used, and the individual is,
therefore, considered to have received the unitrust amounts directly from
the charitable remainder unitrust for purposes of section 664(d)(2)(A).
ISSUE
May a trust qualify as a charitable remainder unitrust under 664 of the
Internal Revenue Code, if the unitrust amounts are paid to a separate
trust for the life of an individual who is "financially disabled," as
defined in 6511(h)(2)(A)?
FACTS
An individual concurrently creates Trust A, a trust that otherwise
qualifies as a charitable remainder unitrust, and a separate trust, Trust
B. Under the governing instrument of Trust A, annual unitrust amounts will
be paid to Trust B for the life of C. C is an individual who is financially
disabled, that is, C is unable to manage C's own financial affairs by
reason of a medically determinable physical or mental impairment that can
be expected to result in death or that has lasted or can be expected to
last for a continuous period of not less than 12 months.
Situation 1. Under the governing instrument of Trust B, a designated
portion of the amount it receives from Trust A will be paid to C each
month. If, at any time in the sole judgment of the trustee, the monthly
payment to C is insufficient to provide adequately for the care, support,
and maintenance of C, or is insufficient for the needs of C for any
reason, additional amounts will be paid as needed to or on behalf of C
from Trust B. Upon C's death, the balance remaining in Trust B will be
distributed to C's estate.
Situation 2. Under the governing instrument of Trust B, the trustee may
make distributions of income and principal, as determined in the trustee's
sole and absolute discretion, for the financial aid and best interests of
C in a manner that supplements but does not supplant any governmental
benefits otherwise available to C. Upon C's death, the balance remaining in
Trust B will be distributed to C's estate.
Situation 3. Under the governing instrument of Trust B, the trustee may
make distributions of income and principal, as determined in the trustee's
sole and absolute discretion, for the financial aid and best interests of
C in a manner that supplements but does not supplant any governmental
benefits otherwise available to C. Upon C's death, the governing instrument
requires the trustee to reimburse the state for the total costs of medical
assistance provided to C under the state's Medicaid plan. C is given a
testamentary general power of appointment over the balance remaining in
Trust B. If C fails to exercise the power, the balance will be
distributed, in equal shares, to C's sister and to X, a charitable
organization.
LAW AND ANALYSIS
A charitable remainder unitrust is a trust from which a unitrust amount
is payable at least annually during its term with an irrevocable remainder
interest held for the benefit of charity. Under 664(d)(2)(A), the unitrust
amount is a fixed percentage (not less than 5 percent and not more than 50
percent) of the net fair market value of the trust assets, valued annually.
The unitrust amount is to be paid to one or more persons (at least one of
which is not an organization described in 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 the individual or individuals.
Section 1.664-3(a)(5)(i) of the Income Tax Regulations provides that the
period for which the unitrust amount is payable begins with the first year
of the charitable remainder trust and continues either for the life or
lives of a named individual or individuals or for a term of years not to
exceed 20 years. Only an individual or an organization described in 170(c)
may receive an amount for the life of an individual.
In general, a charitable remainder unitrust may pay unitrust amounts to
a second trust only for a term of 20 years or less. In Situations 1, 2,
and 3, the unitrust amounts are payable to Trust B for the life of C, not
for a term of years. However, in each of these situations, the sole
function of Trust B is to receive and administer the unitrust amounts for
the benefit of C, who is unable to manage C's own financial affairs by
reason of a medically determinable mental or physical impairment. Upon C's
death, the assets remaining in Trust B will be distributed either to C's
estate or, after reimbursing the state for any Medicaid benefits provided
to C, will be subject to C's general power of appointment. In these
situations, the use of the assets in Trust B during C's life and at C's
death is consistent with the manner in which C's own assets would be used.
C, therefore, is considered to have received the unitrust amounts directly
from Trust A for purposes of 664(d)(2)(A). Accordingly, the term of Trust
A may be for the life of C and is not limited to a term of years.
The same result would apply if Trust A were a charitable remainder
annuity trust.
HOLDING
A trust may qualify as a charitable remainder unitrust under 664 if the
unitrust amounts will be paid for the life of a financially disabled
individual to a separate trust that will administer these payments on
behalf of that individual and, upon the individual's death, will distribute
the remaining assets either to the individual's estate or, after
reimbursing the state for any Medicaid benefits provided to the
individual, subject to the individual's general power of appointment.
EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 76-270 (1976-2 C.B. 194) which addresses facts covered by
Situation 1, is amplified and superseded.
DRAFTING INFORMATION
The principal author of this revenue ruling is Jan Bennett Geier of the
Office of Associate Chief Counsel (Passthroughs and Special Industries).
For further information regarding this revenue ruling, contact Ms. Geier
at (202) 622-7830 (not a toll-free call).
Rev. Rul. 2002-20, 2002-17 I.R.B. 794
