TAM 9244001

TAM 9244001

Story posted in Technical Advice Memoranda on 20 January 2000
audience: PGDC Network | last updated: 15 June 2011
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REMAINDER INTEREST QUALIFIES FOR ESTATE TAX CHARITABLE DEDUCTION

Reference:

Section 2055 -- Estate Tax Charitable Deduction

Full Text:

Date: September 17, 1991

Control No. TR-32-146-91

Taxpayer's Name = * * *
Taxpayer's Address = * * *

Taxpayer's I.D. No. = * * *
Date of death = * * *
No conference held

LEGEND:
Decedent = * * *
Spouse = * * *
Trust No. 2 = * * *
Company Stock = * * *
ESOP Trust = * * *
First Foundation = * * *
Second Foundation = * * *
Third Foundation = * * *

ISSUES

1) Does the spouse's unitrust income interest in the trust qualify for a marital deduction under section 2056(b)(8) of the Internal Revenue Code?

2) Does the remainder interest in the trust qualify for a charitable deduction under section 2055 of the Code?

FACTS

The Decedent died in November 1988. His will provided that all of his residuary estate was to be distributed to a trust designated as Trust No 2. The residuary estate consists primarily of shares of Company Stock.

Under the provisions of Trust No. 2, the Spouse is to receive an annual amount equal to five percent of the net fair market value of the trust assets, valued as of the first day of the taxable year. On the Spouse's death, all or part of the trust corpus consisting of the Company Stock may be paid to the ESOP Trust provided that the ESOP Trust is then 1) an entity described in section 2055(a) of the Code, and 2) a qualified beneficiary of a trust described in section 664 of the Code. If the ESOP Trust is not an entity described in section 2055(a) of the Code and is not a qualified beneficiary of a trust described in section 664 of the Code, then the Company Stock must be distributed along with the balance of the Trust No. 2 property.

On the Spouse's death, the balance of the corpus of Trust No. 2 is to be distributed to Foundation One. If Foundation One is not then an organization described in sections 170(b)(1)(a), 509(a)(3), 2055(a), and 2522 of the Code, the corpus is to be distributed to Foundation Two. If Foundation Two is not then an organization described in sections 170(b)(1)(A), 509(a)(3), 2055(a), and 2522, the corpus is to be distributed to Foundation Three. If Foundation Three is not then an organization described in sections 170(b)(1)(A), 509(a)(3), 2055(a), and 2522, the trustee shall distribute the corpus to charitable organizations described in sections 170(b)(1)(A), 2055(a) and 2522.

LAW AND ANALYSIS

Section 2055(a) of the Code provides that the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all transfers to a trustee but only if such contributions are to be used exclusively for religious, charitable, scientific, literary or educational purposes.

Section 2055(e)(2) of the Code provides that where an interest in property passes from the decedent to a person or for a use described in subsection (a), and an interest in the same property passes (for less than an adequate and full consideration in money or money's worth) from the decedent to a person, or for a use, not described in subsection (a), no deduction shall be allowed for the interest which passes to the person, or for the use, described in subsection (a) unless in the case of a remainder interest in trust, such interest is a charitable remainder annuity trust or a charitable remainder unitrust or a pooled income fund.

Section 2056(a) of the Code provides that the value of the taxable estate shall be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes from the decedent to the surviving spouse.

Section 2056(b)(1) of the Code provides that where, on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur, an interest passing to the surviving spouse will terminate or fail, no deduction shall be allowed under section 2056 with respect to such interest if (A) an interest in such property passes (for less than an adequate and full consideration in money or money's worth) from the decedent to any person other than such surviving spouse, and (B) if by reason of such passing such person may possess or enjoy any part of such property after such termination or failure of the interest so passing to the surviving spouse.

Section 2056(b)(8) of the Code provides that if the surviving spouse of the decedent is the only noncharitable beneficiary of a qualified remainder trust, paragraph (1) shall not apply to any interest in such trust which passes from the decedent to the surviving spouse. The term "qualified charitable remainder trust" means a charitable remainder annuity trust or charitable remainder unitrust (described in section 664).

Under section 2056(b)(8) of the Code, an interest passing to a surviving spouse in a trust is eligible for the marital deduction provided in section 2056(a) if the trust is a charitable remainder trust described in section 664 and, other than the interest held by the surviving spouse, no interests are held by beneficiaries that are not organizations described in section 170(c).

In this case, Trust No. 2, permits an ultimate distribution of Company Stock to the ESOP Trust only if the ESOP Trust is then an organization to which the remainder interest in a qualified charitable remainder unitrust may be transferred. Under section 664(d)(2)(C) of the Code, a trust constitutes a charitable remainder unitrust only if the remainder is distributable to an organization described in section 170(c). Further, any distribution to the ESOP Trust can take place only if, at that time, the ESOP Trust is an organization described in section 2055(a).

Thus, at a minimum, the ESOP Trust must satisfy the requirements of sections 170(c) and 2055(a) before any distributions may be made to it. If the ESOP Trust does not so qualify at the death of the Spouse, the remainder must be distributed to one or more recipients that do meet the requirements of sections 170(c) and 2055(a). Therefore, Trust No. 2 meets the requirements of sections 664 and 2055(e)(2) of the Code. Consequently, the spouse's interest in Trust No. 2 is eligible for the marital deduction under section 2056(b)(8).

CONCLUSION ISSUE 1

The spouse's unitrust income interest in the trust qualifies for a marital deduction under section 2056(b)(8) of the Code.

CONCLUSION ISSUE 2

The remainder interest in the trust qualifies for a charitable deduction under section 2055(a) of the Code.

A copy of this Technical Advice Memorandum should be given to the taxpayer. Section 6110(j) of the Code provides that it may not be used or cited as precedent. Temporary or final regulations pertaining to one or more of the issues addressed in this memorandum have not been adopted. Therefore, this memorandum will be modified or revoked by the adoption of temporary or final regulations to the extent that the regulations are inconsistent with any conclusion in the memorandum. See section 14.04 or Rev. Proc 91-2, 1991-1 I.R.S. 38, (or its successor). However, a technical advice memorandum is not revoked or modified retroactively if the taxpayer can demonstrate that the criteria in section 14.05 of Rev. Proc. 91-2 are satisfied.

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