Take-Away: If the transfer to a spouse or a charity under a charitable remainder unitrust cannot be quantified as to its present value, that transfer is not eligible to be claimed as a deduction for federal estate tax purposes.

Background: A recent Chief Counsel Advice has acted as a helpful reminder for those involved with charitable giving with regard to claiming charitable and marital deductions. The Advice denied both a marital deduction and a charitable deduction on the settlor’s death when a testamentary charitable remainder unitrust was created from the decedent’s estate.

CCA: Chief Counsel Advice (CCA) 202233014, August 19, 2022

Facts: The decedent died, survived by his spouse. The decedent left a portion of his estate to a testamentary trust that was intended to qualify as  a charitable remainder unitrust. [IRC 664.] The charitable remainder unitrust, or CRUT,  provided for a annual unitrust payments of 5% for the term of the spouse’s life. The CRUT provided that the trustee had distribute 25% of that 5% annual unitrust amount, i.e. 1.25% of the CRUT, to the decedent’s spouse. The trustee under the CRUT was given the discretion to distribute the remaining 75% of the annual 5% unitrust amount, i.e. 3.75% of the CRUT’s annual distribution, to either a charity or the decedent’s spouse. On the decedent’s spouse’s death, the trustee had to then distribute the CRUT’s remainder to the charity.

  • CRUT Remainder Qualifies for Charitable Deduction: The CCA found that a federal estate tax charitable deduction would be available to the decedent’s estate for the present value of the CRUT’s remainder interest. That estate tax charitable deduction was available because the CRUT qualified as a charitable remainder trust under IRC 664. [IRC 2055(e)(2)(A).]
  • 25% Interest Qualified for Marital Deduction: With regard to the martial interest give to the surviving spouse, because that 25% portion of the 5% annual unitrust amount had to be distributed by the trustee to, and it would be received by the surviving spouse under the terms of the CRUT, that interest will be considered to have passed from the decedent to his spouse as beneficial owner. [IRC 2055(a).] Because the surviving spouse is the only beneficiary of the CRUT who is not a charitable beneficiary, her interest in the 25% portion of the unitrust amount is not subject to the terminable interest rule in IRC 2056(b)(1).  [IRC 2056(b)(8).] Consequently, the decedent’s estate may claim a federal estate tax marital deduction for the value of this 1.25% interest.
  • Denied Charitable Deduction for the 3.75% Discretionary Interest: The portion of the CRUT where the trustee possessed discretion to either pay the decedent’s surviving spouse or the charity the remaining 3.75% of the CRUT did not qualify for the federal estate tax charitable deduction. This was because the charity’s ‘interest’ is not in the form of a fixed unitrust amount to must be distributed to the charity annually. Since no part of that unitrust interest was ascertainable or severable from the surviving spouse’s noncharitable interest, the ‘interest’ of the charity was not deductible by the decedent’s estate. [IRC 2055(e)(2)(B) and Regulation 20.2055-2(a).] Similarly, the value of the surviving spouse’s interest in the remaining 75% portion of the 5% annual unitrust amount could not be established as of the date of the decedent’s death. Accordingly, it cannot be considered to have passed from the decedent to his surviving spouse as a  beneficial interest. [IRC 2056(a).] Since the extent of the surviving spouse’s interest in that 75% portion  cannot be established because the amount to be distributed to the survivor annually is within the sole discretion of the trustee, it is not ascertainable at the time of the decedent’s death whether the surviving spouse will receive any of the 75% portion of the 5% unitrust amount each year. As such, the surviving spouse’s ‘interest’ in the 75% portion is not treated as having passed to her as it is not quantifiable , and the deceased spouse’s estate cannot claim a federal estate tax marital deduction for the value of this interest. [IRC 2056(a); Regulation 20.2056(c)-2(a).]

Gift Tax Consequences: The CCA also mentioned in a footnote that had the donor spouse created a lifetime CRUT with the same provisions, the same result would have occurred under IRC 2523.

Conclusion: At first glance, the terms of the CRUT would seem to satisfy the ability to claim estate tax deductions, because only the surviving spouse and a charity were the beneficiaries of the CRUT. However, by giving the CRUT trustee the ability to exercise its discretion to allocate 75% of the annual  5% unitrust distribution amount between the surviving spouse and the charity, no deduction was available since the charitable portion could be quantified as of the date of the decedent’s death, and the portion that ‘might’ ultimately be available to the decedent’s surviving spouse was terminable. In short, a creative and flexible CRUT that was intended to achieve  large federal estate tax deductions failed, in part, due to that same flexibility.