26 USC 664 - Charitable remainder trusts

U.S Code last checked for updates: Nov 22, 2024

§ 664.

Charitable remainder trusts

(a)

General rule

(b)

Character of distributions

Amounts distributed by a charitable remainder annuity trust or by a charitable remainder unitrust shall be considered as having the following characteristics in the hands of a beneficiary to whom is paid the annuity described in subsection (d)(1)(A) or the payment described in subsection (d)(2)(A):

(1)

First, as amounts of income (other than gains, and amounts treated as gains, from the sale or other disposition of capital assets) includible in gross income to the extent of such income of the trust for the year and such undistributed income of the trust for prior years;

(2)

Second, as a capital gain to the extent of the capital gain of the trust for the year and the undistributed capital gain of the trust for prior years;

(3)

Third, as other income to the extent of such income of the trust for the year and such undistributed income of the trust for prior years; and

(4)

Fourth, as a distribution of trust corpus.

For purposes of this section, the trust shall determine the amount of its undistributed capital gain on a cumulative net basis.

(c)

Taxation of trusts

(1)

Income tax

(2)

Excise tax

(A)

In general

(B)

(C)

Tax court proceedings

(d)

Definitions

(1)

Charitable remainder annuity trust

For purposes of this section, a charitable remainder annuity trust is a trust—

(A)

from which a sum certain (which is not less than 5 percent nor more than 50 percent of the initial net fair market value of all property placed in trust) is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c) and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals,

(B)

from which no amount other than the payments described in subparagraph (A) and other than qualified gratuitous transfers described in subparagraph (C) may be paid to or for the use of any person other than an organization described in section 170(c),

(C)

following the termination of the payments described in subparagraph (A), the remainder interest in the trust is to be transferred to, or for the use of, an organization described in section 170(c) or is to be retained by the trust for such a use or, to the extent the remainder interest is in qualified employer securities (as defined in subsection (g)(4)), all or part of such securities are to be transferred to an employee stock ownership plan (as defined in section 4975(e)(7)) in a qualified gratuitous transfer (as defined by subsection (g)), and

(D)

the value (determined under section 7520) of such remainder interest is at least 10 percent of the initial net fair market value of all property placed in the trust.

(2)

Charitable remainder unitrust

For purposes of this section, a charitable remainder unitrust is a trust—

(A)

from which a fixed percentage (which is not less than 5 percent nor more than 50 percent) of the net fair market value of its assets, valued annually, is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c) and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals,

(B)

(C)

(D)

with respect to each contribution of property to the trust, the value (determined under section 7520) of such remainder interest in such property is at least 10 percent of the net fair market value of such property as of the date such property is contributed to the trust.

(3)

Exception

Notwithstanding the provisions of paragraphs (2)(A) and (B), the trust instrument may provide that the trustee shall pay the income beneficiary for any year—

(A)

the amount of the trust income, if such amount is less than the amount required to be distributed under paragraph (2)(A), and

(B)

any amount of the trust income which is in excess of the amount required to be distributed under paragraph (2)(A), to the extent that (by reason of subparagraph (A)) the aggregate of the amounts paid in prior years was less than the aggregate of such required amounts.

(4)

Severance of certain additional contributions

If—

(A)

any contribution is made to a trust which before the contribution is a charitable remainder unitrust, and

(B)

such contribution would (but for this paragraph) result in such trust ceasing to be a charitable unitrust by reason of paragraph (2)(D),

such contribution shall be treated as a transfer to a separate trust under regulations prescribed by the Secretary.

(e)

Valuation of interests

(f)

Certain contingencies permitted

(1)

General rule

(2)

Value determined without regard to qualified contingency

(3)

Qualified contingency

(g)

Qualified gratuitous transfer of qualified employer securities

(1)

In general

For purposes of this section, the term “qualified gratuitous transfer” means a transfer of qualified employer securities to an employee stock ownership plan (as defined in section 4975(e)(7)) but only to the extent that—

(A)

the securities transferred previously passed from a decedent dying before January 1, 1999, to a trust described in paragraph (1) or (2) of subsection (d),

(B)

no deduction under section 404 is allowable with respect to such transfer,

(C)

such plan contains the provisions required by paragraph (3),

(D)

such plan treats such securities as being attributable to employer contributions but without regard to the limitations otherwise applicable to such contributions under section 404, and

(E)

the employer whose employees are covered by the plan described in this paragraph files with the Secretary a verified written statement consenting to the application of sections 4978 and 4979A with respect to such employer.

(2)

Exception

The term “qualified gratuitous transfer” shall not include a transfer of qualified employer securities to an employee stock ownership plan unless—

(A)

such plan was in existence on August 1, 1996,

(B)

at the time of the transfer, the decedent and members of the decedent’s family (within the meaning of section 2032A(e)(2)) own (directly or through the application of section 318(a)) no more than 10 percent of the value of the stock of the corporation referred to in paragraph (4), and

(C)

immediately after the transfer, such plan owns (after the application of section 318(a)(4)) at least 60 percent of the value of the outstanding stock of the corporation.

(3)

Plan requirements

A plan contains the provisions required by this paragraph if such plan provides that—

(A)

the qualified employer securities so transferred are allocated to plan participants in a manner consistent with section 401(a)(4),

(B)

plan participants are entitled to direct the plan as to the manner in which such securities which are entitled to vote and are allocated to the account of such participant are to be voted,

(C)

an independent trustee votes the securities so transferred which are not allocated to plan participants,

(D)

each participant who is entitled to a distribution from the plan has the rights described in subparagraphs (A) and (B) of section 409(h)(1),

(E)

such securities are held in a suspense account under the plan to be allocated each year, up to the applicable limitation under paragraph (7) (determined on the basis of fair market value of securities when allocated to participants), after first allocating all other annual additions for the limitation year, up to the limitation under section 415(c), and

(F)

on termination of the plan, all securities so transferred which are not allocated to plan participants as of such termination are to be transferred to, or for the use of, an organization described in section 170(c).

For purposes of the preceding sentence, the term “independent trustee” means any trustee who is not a member of the family (within the meaning of section 2032A(e)(2)) of the decedent or a 5-percent shareholder. A plan shall not fail to be treated as meeting the requirements of section 401(a) by reason of meeting the requirements of this subsection.

(4)

Qualified employer securities

For purposes of this section, the term “qualified employer securities” means employer securities (as defined in section 409(l)) which are issued by a domestic corporation—

(A)

which has no outstanding stock which is readily tradable on an established securities market, and

(B)

which has only 1 class of stock.

(5)

Treatment of securities allocated by employee stock ownership plan to persons related to decedent or 5-percent shareholders

(A)

In general

If any portion of the assets of the plan attributable to securities acquired by the plan in a qualified gratuitous transfer are allocated to the account of—

(i)

any person who is related to the decedent (within the meaning of section 267(b)) or a member of the decedent’s family (within the meaning of section 2032A(e)(2)), or

(ii)

any person who, at the time of such allocation or at any time during the 1-year period ending on the date of the acquisition of qualified employer securities by the plan, is a 5-percent shareholder of the employer maintaining the plan,

the plan shall be treated as having distributed (at the time of such allocation) to such person or shareholder the amount so allocated.

(B)

5-percent shareholder

(C)

Cross reference

(6)

Tax on failure to transfer unallocated securities to charity on termination of plan

If the requirements of paragraph (3)(F) are not met with respect to any securities, there is hereby imposed a tax on the employer maintaining the plan in an amount equal to the sum of—

(A)

the amount of the increase in the tax which would be imposed by chapter 11 if such securities were not transferred as described in paragraph (1), and

(B)

interest on such amount at the underpayment rate under section 6621 (and compounded daily) from the due date for filing the return of the tax imposed by chapter 11.

(7)

Applicable limitation

(A)

In general

For purposes of paragraph (3)(E), the applicable limitation under this paragraph with respect to a participant is an amount equal to the lesser of—

(i)

$30,000, or

(ii)

25 percent of the participant’s compensation (as defined in section 415(c)(3)).

(B)

Cost-of-living adjustment

(Added Pub. L. 91–172, title II, § 201(e)(1), Dec. 30, 1969, 83 Stat. 562; amended Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 98–369, div. A, title X, § 1022(d), July 18, 1984, 98 Stat. 1029; Pub. L. 105–34, title X, § 1089(a)(1), (b)(1), (2), (4), title XV, § 1530(a), (b), (c)(5), Aug. 5, 1997, 111 Stat. 960, 1075, 1078; Pub. L. 105–206, title VI, § 6010(r), July 22, 1998, 112 Stat. 817; Pub. L. 106–554, § 1(a)(7) [title III, § 319(7)], Dec. 21, 2000, 114 Stat. 2763, 2763A–646; Pub. L. 107–16, title VI, § 632(a)(3)(H), June 7, 2001, 115 Stat. 114; Pub. L. 109–280, title VIII, § 868(a), Aug. 17, 2006, 120 Stat. 1025; Pub. L. 109–432, div. A, title IV, § 424(a), Dec. 20, 2006, 120 Stat. 2974; Pub. L. 114–113, div. Q, title III, § 344(a), Dec. 18, 2015, 129 Stat. 3115; Pub. L. 115–141, div. U, title IV, § 401(b)(27), Mar. 23, 2018, 132 Stat. 1203.)

cite as: 26 USC 664