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Fifteen PLRs Approve Partial Termination of CRAT

Fifteen PLRs Approve Partial Termination of CRAT

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Published by: r. willis on Oct 08, 2012
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CharitablePlanning.comFifteen PLRs Approve PartialTermination of CRAT
JUNE 1, 2009
In a series of 15
(200922013through200922027), the
ruled that pre-1969
could partially terminate and distribute to remainder
corpus in excess of the amountrequired to fund
payouts. As a result, the CRATs would not lose grandfathered statuswith respect to the
tax and there would be no
recognized gain 
to the trusts, theannuitants, or the remainder charities.
Extended Summary
was established under a decedent's will sometime prior to the enactment of the
Tax Reform Act of 1969 
, which required that the
payout from a
be at least 5%of the initial
fair market value 
. A fixed annuity was to be paid from trust income to each of thedecedent's five nieces and nephews, or to the descendants, collectively, of a deceased nieceor nephew, who were alive at the decedent's death. Income in excess of the amount requiredto fund the
was to be
in equal shares among 6 identified
, whichwere also the remaindermen.One niece and one nephew had died childless, increasing the share of income paid currentlyto the charities, but trust principal had grown over the years to many multiples of the amountrequired to fund the annuity payouts.Under a state statute permitting a court to modify the terms of an
irrevocable trust 
uponconsent of all the beneficiaries (provided the modification did not "frustrate a materialpurpose" of the trust), the remainder charities proposed, the annuitants accepted, and a statecourt approved an agreement under which the trust would distribute to the charities theentire portion of the trust principal in excess of the amount (about 4%) required to fund the
Fifteen PLRs Approve Partial Termination of CRAThttps://www.charitableplanning.com/commentary/comments/1445830?sim...1 of 37/23/2012 10:22 AM
annuity payouts. Each trust would otherwise continue to operate according to its originalterms, paying the same annuities to the remaining nephews and nieces and theirdescendants, with the remainder at the death of the last annuitant to the charities. As part of the agreement, the charities also undertook to buy from their own resourcescommercial annuity contracts for the benefit of each of the three remaining family groups.The relationship between the amount of the annuity payout or the cost of these contracts andany of the other amounts involved in the transaction is not made clear in the text of therulings as released.The
ruled:the transaction would not cause the trust to lose its "grandfathered" status under section1433(b)(2)(A) of the Tax Reform Act of 1986 or
 26.2601-1(b)(4)(i), exemptingit from
taxation;1.the partial termination and early
to remaindermen would not result in"immediate" realization of 
capital gain 
capital loss 
, or taxable income by any of theannuitants, the trust itself, or the charities; and2.the purchase by the charities of the commercial annuity contracts would not result in the"immediate" realization of capital
, capital loss, or taxable income by any of theannuitants.3.
CPC Commentary
There is a problem in these rulings with
private inurement 
private benefit 
, concepts whichare basically ignored.The amount transferred to the
did not impair, at least actuarially, the ability of the
to continue to pay the fixed
, and everything in excess of the amount requiredto fund the annuities was already committed to the charities. Thus neither the trust nor theindividual annuitants would be in a position to claim an income tax charitable
. Thecharities received exactly what they would be entitled to receive, albeit about 43 years early.This being the case, why did the charities purchase the commercial
? Was this a hedgeagainst the possibility that the trust might become unable at some future date to pay thefixed annuities? The immediate effect of the charities' implicit obligation to purchase thesecommercial annuities is to increase the amounts the annuitants are receiving. Isn't thisprivate inurement or excess benefit? Doesn't this guarantee viatiate the concept that theincome beneficiary of a
can only look to trust assets for repayment?
Fifteen PLRs Approve Partial Termination of CRAThttps://www.charitableplanning.com/commentary/comments/1445830?sim...2 of 37/23/2012 10:22 AM

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