Love and Charitable Remainder Trusts

Clients who wish to fund a testamentary trust for a surviving spouse and charity have two choices, either of which will completely avoid estate tax.  Code §2056(b)(8)(A) allows a marital deduction for the surviving spouse’s income interest in a charitable remainder trust, an exception to the general rule that the spouse must be entitled to all the income for life.  The surviving spouse must be the only noncharitable beneficiary.  The other option is the garden-variety QTIP trust [Code §2056(b)(7)], in which all trust income is paid to the surviving spouse for life.  The trust qualifies for the marital deduction in the first spouse’s estate and for the charitable deduction in the survivor’s estate.  The charitable remainder trust may be preferable if assets will include items of income in respect of a decedent.

In the case of an inter vivos charitable remainder trust, if only one spouse is the donor and income beneficiary, with the surviving spouse the successor beneficiary, it might be advisable for the donor to retain the testamentary right to revoke the survivor’s income interest [Reg. §§1.664-2(a), 1.664-3(a)(4)].  Otherwise, if the couple divorces, the income interest would pass at the donor’s death to the ex-spouse and would not qualify for the marital deduction [Code §2056(b)(8)].  Where the inter vivos trust is initially funded with joint property and the couple later divorces, the IRS has ruled in several cases that the trust can be split in two, with each spouse continuing to receive the same payout from a smaller trust and each trust terminating at the death of the respective income beneficiary (e.g., Letter Ruling 200035014).


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