No Deduction for Estate, Tax Court Rules

By GRANT WILLIAMS

The U.S. Tax Court has decided that a Florida estate is not entitled to a charitable tax deduction for the remainder interest in a trust that was initially set up as a charitable remainder annuity trust. In such a trust, a popular form of planned giving, a donor transfers cash or stock to the trust. The trust then provides regular payments to the donor, a beneficiary, or both. When the donor and any beneficiaries die, the trust assets go to charity.

Melvine B. Atkinson, of Miami Beach, created an annuity trust in 1991 with stock worth nearly $4-million. The trust, as allowed by federal law, was supposed to pay her an annuity equal to 5 percent of the initial fair market value of the assets of the trust — quarterly payments of $49,999 — until her death, which occurred in 1993 when she was 97. At her death, the 5-percent annuity payment was to be distributed to secondary beneficiaries under certain conditions.

But the Tax Court concluded that Ms. Atkinson´s trust failed to operate properly.

One reason: The court said that it found no evidence that the trust ever made the seven quarterly payments — worth a total of $349,997 — to Ms. Atkinson that should have been provided to her before she died. The court heard testimony that the trustee wrote checks to Ms. Atkinson that she didn´t cash. The estate and trustee argued that the court should set aside or ignore the 5-percent distribution requirement because the rule served only to decrease the ultimate contribution to charity and because Ms. Atkinson didn´t need the money from the payments.

But the Tax Court said that the law´s minimum-distribution requirement is clear: 5 percent must be paid out, and the trustee “presented no persuasive evidence that checks for the 5-percent annuity ever existed or were sent to the decedent.” Because the trust value was “undiminished” and no transfer of funds occurred, the court said that the trust had failed “operationally” to qualify as a charitable remainder trust.

The court noted that the 5-per-cent requirement was designed by Congress to make sure that people didn´t use charitable trusts to get around the income-distribution requirements imposed on private foundations (Estate of Melvine B. Atkinson, and Christopher J. MacQuarrie v. Commissioner of Internal Revenue, 115 T.C. No. 3).