Oct 1, 2005 12:00 PM, Rorie M. Sherman Editor in Chief

By: Rorie M. Sherman Editor in Chief

David T. Leibell and Daniel L. Daniels, partners in Stamford, Conn.'s Cummings & Lockwood LLC, report:

• The Internal Revenue Service has updated the specimen charitable remainder unitrust forms. For the first time in 15 years, the Service has released updated specimen charitable remainder unitrust (CRUT) forms. The new CRUT specimens are much more helpful and detailed than those they replace and follow the formatting of the specimen charitable remainder annuity trust forms that were issued in 2003.

  The new CRUT forms also provide a safe harbor for drafting attorneys, guaranteeing that if the specimen language is used, the trust will be considered to have the appropriate governing instrument language for a qualified charitable remainder trust under Internal Revenue Code Section 664.

  Particularly helpful are the extensive footnotes annotating each sample form and providing alternative provisions.

  The eight new specimen CRUT forms are as follows:

  1. Revenue Procedure 2005-52 — Inter Vivos CRUT for One Measuring Life;

  2. Revenue Procedure 2005-53 — Inter Vivos CRUT for a Term of Years;

  3. Revenue Procedure 2005-54 — Inter Vivos CRUT for Consecutive Measuring Lives;

  4. Revenue Procedure 2005-55 — Inter Vivos CRUT for Concurrent and Consecutive Measuring Lives;

  5. Revenue Procedure 2005-56 — Testamentary CRUT for One Measuring Life;

  6. Revenue Procedure 2005-57 — Testamentary CRUT for a Term of Years;

  7. Revenue Procedure 2005-58 — Testamentary CRUT for Consecutive Measuring Lives; and

  8. Revenue Procedure 2005-59 — Testamentary CRUT for Concurrent and Consecutive Measuring Lives.

  The new specimens include language that takes into consideration major changes made in 1997 to IRC Section 664 and the corresponding Treasury Regulations issued in 1998. For example, the specimen additional contribution language provides for the establishment of a separate trust if an additional contribution fails the 10 percent minimum remainder test. The specimens also provide language for the new “combination of methods” CRUT, which is more commonly referred to as the FLIPCRUT. The annotations to the specimen net income CRUT provisions permit a discretionary power to make adjustments between principal and income, be granted to the trustee under the terms of the governing instrument, but only to the extent authorized under applicable state law and only to permit the trustee to make those adjustments to treat beneficiaries impartially.

  An interesting omission from all the new specimens is any reference to Revenue Procedure 2005-24, which if not complied with will disqualify all trusts that meet the requirements of the new specimens. Revenue Procedure 2005-24 requires that all charitable remainder trusts created on or after June 28 are disqualified retroactively to the date of creation if a spousal right of election: exists under relevant state law; exists at some future time if state law changes; or if the donor moves, marries or remarries. Disqualification for these trusts can be avoided if a spousal waiver of the right of election is obtained and kept with the trust records. The mere existence under state law of a right of election, even if it is never exercised, is enough to disqualify the charitable remainder trust if a waiver has not been obtained.

  This is not the last we will hear from the IRS on charitable trust forms. Now that the IRS has completed the CRT forms, they have indicated that they plan to issue charitable lead trust forms. Also, it's important for planners to note that while the specimen forms are very helpful, they are only a starting point. The advice of an experienced planner is critical for a host of reasons, including ensuring that the client chooses the correct type of CRT, that the chosen trust passes the 10 percent minimum remainder interest test (and, if the trust is a charitable remainder annuity trust, that it also passes the 5 percent probability of exhaustion test) and that the trust will not be disqualified because of a failure to deal adequately with the right of election issue or for various other reasons.

• The IRS also has issued proposed regulations on standards for recognition of tax-exempt status if a private benefit exists or an exempt organization has engaged in excess benefit transactions. The proposed regulations amend existing regulations regarding the substantive requirements for tax exemption under IRC Section 501(c)(3). The purpose of the proposed regulations is two-fold: (1) to clarify through additional examples the requirement that in order to be tax exempt, an organization must serve a public rather than a private interest; and (2) to describe the relationship between the requirements for tax exemption under IRC Section 501(c)(3) and the intermediate sanctions rules providing for the imposition of excise tax under IRC Section 4958 on transactions that provide excess benefits to disqualified persons and organization managers.

  To be an organization described in IRC Section 501(c)(3), an organization must be organized and operated exclusively for exempt purposes. This standard is not met if any of an organization's net earnings inure to the benefit of a private shareholder or individual, or if the organization is organized or operated for the benefit of private interests. Regulations under IRC Section 501(c)(3) were adopted substantially in their present form in 1959. The proposed regulations amend this by adding several examples to illustrate the requirement in Treasury Regulations Section 1.501(c)(3) — 1(d)(1)(ii) that an organization serve a public rather than a private interest. The examples illustrate that prohibited private benefits may involve non-economic benefits as well as economic benefits. They also show that prohibited private benefits may arise regardless of whether payments made to private interests are reasonable or excessive.

  In addition, the proposed regulations clarify the relationship between qualifying for tax-exempt status under IRC Section 501(c)(3) and the imposition of the IRC Section 4958 intermediate sanctions excise taxes effective for transactions occurring on or after Sept. 14, 1995. Section 4958, by its terms, does not address the tax-exempt status of applicable tax-exempt organizations, but instead imposes excise tax liability on disqualified persons and certain organization managers. The existing Section 4958 regulations, however, state that the IRS may — in lieu of (or in addition to) revocation of exempt status — impose intermediate sanctions for excess benefit transactions The proposed regulations clarify that Section 4958 does not apply to transactions involving an organization that has failed to establish that it satisfied all of the requirements for exemption under IRC Section 501(c)(3). The proposed regulations also make clear that the Service has the discretion to refuse to issue a ruling recognizing exemption under IRC Section 501(c)(3) to any organization whose purpose or activities violate any provision of Section 501(c)(3), including the private inurement prohibition and the limitation on private benefit, even though such violation could serve as grounds for imposing Section 4958 excise taxes if the applicant's tax-exempt status were recognized.

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