May 30, 2002 | Read Time: 3 minutes
Three recent rulings by the IRS allow charities and donors or their heirs to terminate charitable trusts before they would normally have ended.
The rulings have surprised some planned-giving experts who thought such trusts would be more difficult to end. As a result of the rulings, Christopher Hoyt, a University of Missouri law professor, urges fund raisers to use caution when discussing such trusts with donors. “We have to be careful when we say this is a permanent trust and your kids can’t have access to it, because we’ve now seen several of these cases where the trusts are terminated early,” he said.
The rulings involve charitable remainder trusts or similar arrangements. Through a charitable remainder trust, a donor gives cash, stock, real estate, or other assets to a charity, which then sets up a trust by investing the gift. In exchange, the charity provides regular payments to the donor, a beneficiary, or both. After the donor and any beneficiaries die, the charity receives control of all remaining assets in the trust.
In the first ruling that was issued, the IRS agreed to allow a charity and a donor’s heir to terminate a charitable remainder trust after the donor died. The donor’s heir sought the change after becoming dissatisfied with the amount of the payments received. Lump-sum settlements that represented the value of the assets were distributed to the charity and the heir (Letter Ruling 2002208039).
In the second case, donors who created a trust were permitted to terminate it after they said that they hadn’t understood it properly and that the charity that helped set it up had mischaracterized some aspects of it. The donors had set up the trust using stock in a closely held company. The trust, which was unable to sell the stock, began making payments to the donors in the form of stock certificates, on which the donors were required to pay capital-gains taxes.
The donors appealed to a court to undo the trust, saying they were told that distributions from the trust would not begin until the stock was sold and that they were unaware they would have to pay tax on the stock distributions. The court ordered the trust rescinded and directed that the remaining assets be returned to the donors. The IRS agreed with the court’s ruling (Letter Ruling 200219012).
In the third ruling, the IRS permitted donors’ heirs and a private foundation to dissolve two trusts. The trusts were established by the sisters of the head of the private foundation, with the foundation executive’s children named as beneficiaries. The children were eligible to receive payments from the trusts throughout their lifetimes, and any remainder after their death would go to the private foundation. After the executive’s children and the trustees of the trusts disagreed over how to invest the trusts and over the payout amounts, all parties sought to dissolve the trusts. The heirs and the foundation each received a share of the trust’s assets (Letter Ruling 200219038).
While the rulings apply only to the specific cases involved, they serve as an indication of the IRS’s thinking on charitable remainder trusts. As is its custom, the IRS did not identify the people or groups involved.
