Deloitte Tax Seeks Clarification on Gift Tax Consequences for CRTs

Full Text:

March 15, 2010

Ms. Laura Urich Daly
Office of Associate Chief Counsel
(Passthroughs and Special Industries)
CC:PSI:4
Room 4107
1111 Constitution Avenue NW
Washington, DC 20224

Re: Notice 2010-19

Dear Ms. Daly:

I am writing as you suggested in our telephone discussion focusing on an issue raised by the above notice that may adversely affect charitable planning. We would appreciate guidance clarifying the gift tax issue discussed below.

Charitable remainder trusts (CRTs) are not grantor trusts, so it might appear on first reading that Sec. 2511(c) would create a fully taxable gift when a CRT is funded by a donor, reduced only by the charitable deduction allowed for the value of the remainder interest. There is no indication in the legislative history of IRC Section 2511(c) that CRTs' status as non-grantor trusts was considered either during the original enactment of Sec. 2511(c) or in the technical correction in 2002. CRTs are not grantor trusts due to their unique system of taxation under Internal Revenue Code (IRC) Section 664(b) and (c). Their non-grantor status is confirmed by Treasury Regulation Section 1.664-1(a)(4). Were it not for the statutory exception, CRTs would be grantor trusts under Section 677(a)(1) and (2).

What is clear from the technical correction Committee Report of P.L. 107-147 is that Sec. 2511(c) was being amended to clarify that gifts in 2010 could qualify for the gift tax marital and charitable deductions under IRC Secs. 2523 and 2522 respectively. So a CRT established for a US citizen spouse, even under the Sec. 2511(c) analysis, would not produce a net taxable gift. The lead annuity or unitrust interest given to the spouse would qualify for the marital deduction, and the remainder would qualify for the charitable deduction, just as they did before 2010 (Treas. Reg. Sec. 25.2523(g)-1(a)).

It would seem unlikely that Congress intended that an individual who established a CRT for themselves would pay gift tax, but if they established the same trust for their spouse that they would not. The vast majority of CRTs are established with only the donor, or the donor and their spouse, as the lead beneficiaries.

As you state in Notice 2010-19, the substantive law applicable to gift tax was not amended by EGTRRA, and those pre-existing gift tax principles continue to apply. Among those principles would be the one stated in Walton v. CIR (115 TC 589 (2000)): "it is axiomatic that an individual cannot make a gift to himself or to his or her own estate." A transfer by a donor to a CRT, retaining an amount fixed in value by the regulations under IRC Sec. 7520, can be contrasted with the incomplete gifts described in Treas. Reg. Sec. 25.2511-2(b) and the Bluebook examples accompanying the 2002 legislation. In the incomplete gift transfers in the regulations, the amount that would return to the donor is not susceptible of valuation at the date of the transfer to the trust: indeed, no amount may be returned to the donor. In the transfers described in the Bluebook, some portion of the property was not disposed of by the donor. Although not free from doubt, it appears that the addition of Sec. 2511(c) was intended to treat certain incomplete transfers described in Treas. Reg. Sec. 2511-2(b) and (c) as fully taxable gifts. A CRT is not the type of discretionary trust described in that regulation or the Bluebook examples, since the amounts to be returned to the donor are fixed and determinable at the inception of the CRT, based on his or her retained interest, and the donor has disposed of the remainder to charity.

Another perspective is that the funding of a CRT is only a "transfer" (either within the dictionary definition or the IRC's definition) to the extent that value is relinquished (in other words, the only "transfer" is the value of the remainder interest). That approach would also be consistent with the Walton decision, and remove the value of the lead interest in a CRT from the purview of Sec. 2511(c) entirely.

Since it seems unlikely that Sec. 2511(c) was enacted with the intention of subjecting a donor's retained interest in statutory CRTs to gift tax, we would appreciate an exercise of your regulatory discretion under Sec. 2511(c) to provide guidance which would reduce the confusion currently existing among charitable planners and donors. If you have any questions, please call the undersigned at (202) 879-5320.