Gift Planning Tips

Contingency Clauses That Can End CRTs Early

Leona Helmsley’s estate plan famously included charitable remainder trusts for two grandsons that were to make payments to the beneficiaries for life, but would terminate early if the grandsons ever failed to visit the grave of their father at least once every year.

IRC §664(f) permits “qualified contingencies” to terminate CRTs early, so long as the trust can only end sooner than the specified trust term.  Sec. 664(f) was a creature of the Tax Reform Act of 1984.  Prior to passage, a unitrust or annuity trust that directed the trustee to make payment to the grantor’s surviving spouse for life, or until he or she remarried, would not have qualified, even though the tax deduction was based on payments for the widow’s or widower’s entire lifetime.  The committee notes to §664(f) made specific mention of remarriage as a qualified contingency that could terminate a charitable remainder trust early.  Here are some variations on that theme approved by the IRS:

• • Change in payouts upon remarriage of surviving spouse.  A trust that was to pay to A for life and then to B and C in equal shares for their lives provided that in the event of A’s remarriage, the payout was to be divided between A, B and C equally for their joint lives (PLR 9750061). Because the trust payments would not terminate later than payments would otherwise end under the trust, the provision was considered a qualified contingency and would not disqualify the trust.

• • Divorce or separation of donor’s child. A testamentary charitable remainder trust could make payments for life to a daughter and then to her husband for life, unless the couple had divorced or separated prior to the daughter’s death (PLR 9252017).  The testator apparently preferred that charity benefit immediately upon the daughter’s death, rather than have payments continue to a son-in-law who was divorced or living apart from the daughter.

• • Death of another person. A unitrust would pay income to B for life – or could end upon the earlier death of C (PLR 9322031).  One reported use of such a contingency was by a father with a $100 million estate who established a $10 million unitrust for his son (his only heir) that would pay the son for life or until the father’s earlier death (after which the son would have no further need of the trust payments).

• • Completion of education. A 20-year annuity trust could make payments to the donor, or if he died within 20 years, payments could continue to an educational trust that would pay college expenses for 15 students. The trust would end on completion of the 20-year term or the date on which all students had completed their educations, whichever happened sooner (PLR 8749052).

• • Death before term of years ends. A testamentary annuity trust could terminate after five years or the earlier death of the income beneficiary.  The termination of the payments upon the beneficiary’s earlier death was a qualified contingency under IRC §664(f)(3), although the contingency would be disregarded for purposes of determining the charitable deduction (PLR 200726005).

Copyright © by R&R Newkirk. All rights reserved.