Rev. Rul. 2002-20

    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 Rul. 76-270  amplified and superseded.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