January 29, 1998 | Read Time: 2 minutes
The I.R.S. has authorized independent trustees of charitable remainder trusts to purchase deferred annuities. Trustees who buy such annuities can pick a year when they want the proceeds to be paid to the trust’s income beneficiary.
The ruling, delivered in a technical-advice memorandum, is significant because it hints at how the I.R.S. will treat deferred income when it formulates new regulations on charitable remainder trusts, possibly this year. There has been a continuing question in the charity world over whether independent trustees can purchase deferred annuities and control their flow of income. While a technical-advice memorandum deals with issues raised in a specific case and cannot be cited as legal precedent, such documents often give insight into the I.R.S.’s thinking.
A charitable remainder trust enables a donor to designate a gift to charity, take a tax deduction, and collect regular interest payments from the gift. Upon the death of the beneficiary — usually the donor, a spouse, or their children — the remainder of the trust goes to charity.
The I.R.S. memorandum applies to a form of remainder trust called a Net Income With Makeup Charitable Remainder Unitrust, or NIMCRUT. In such an arrangement, a donor receives an annual income that is based on a fixed percentage of the fair market value of the trust’s assets. The trust’s value is recalculated annually. If the trust’s income should fall short of the designated percentage in any particular year, the donor is allowed to “make up” for the deficiency in later years when the trust’s earnings are higher.
The case covered by the technical-advice memorandum involves a donor who contributed appreciated assets to his charitable remainder trust. The trustee sold the assets and used the proceeds to buy two deferred annuities from a commercial insurance company. The income beneficiary — the donor — did not need the income from the trust immediately and wanted to delay it for several years.
Emil Kallina, a Baltimore lawyer and chairman of the government-relations committee of the National Committee on Planned Giving, said the case involved one of his clients, who permitted him to release the ruling. Mr. Kallina declined to name the client. Normally, the I.R.S. does not publish a technical advice memorandum for several months after issuing it.
The I.R.S. ruled that the purchase of annuities and the deferral of trust income by the trustee were not technical violations of tax laws on “self dealing,” even though the flow of income from the annuities could be turned on and off. The service also ruled that the tax-exempt status of the charitable remainder trust remained intact.
