The "pre-'69" remainder trust
I had one of these again recently. Testator leaves residuary estate in trust for son, income only, remainder to a named charity.
Prior to TRA '69, this would have qualified, but section 664(d) requires the payout to the son to be either an annuity or a unitrust, at least five percent, etc.
Section 2055(e) provides a mechanism for reforming a nonqualifying trust, but the present value of the remainder to charity, before and after the reformation, must be within five percent. And with the section 7520 rates at historic lows, this can be tricky.
Let's say the son is fifty years old, and let's say the section 7520 rate is around two pct. The present value of the remainder of a straight income interest would be about fifty-five pct., thereabouts. So in restructuring this as a unitrust or annuity trust we would be looking for a remainder value somewhere between, say fifty-two pct. and fifty-eight pct.
In putting together the final proposal we were of course much more precise. Down to five decimal places.
With a unitrust paying the required minimum five pct., you are looking at a remainder value of less than twenty-seven pct. To get the remainder value up to fifty-two pct. we would have to cut the unitrust payout to about two pct.
But suppose we gave a piece of the unitrust payout to the remainder charity. IRS has approved this strategy in at least a couple of letter rulings. The present value of the portion of the unitrust payout going to the charity counts toward meeting the five pct. variance rule. The unitrust payout to the charity would qualify as a lead trust, for which there is no minimum five pct. payout requirement.
If the present value of the remainder is twenty-seven pct., and we distribute not quite two pct. to the charity on a current basis, we can hit the fifty-two pct. target and at least in theory the son is actually getting more than he would have under the straight income payout. Everybody wins. Maybe.
In the particular case, the situation was somewhat complicated by other computational issues involving state level inheritance taxes, etc.
Incidentally, in a situation like this, where the trust does not qualify because the payout is not in the form of an annuity or unitrust, you have a very limited window of time in which to bring the reformation action in a state court. Within ninety days after the 706 is due, with extensions, or if (as in this case) no 706 is to be filed, within ninety days after the due date of the first 1041 for the trust, again with extensions.
I had one of these again recently. Testator leaves residuary estate in trust for son, income only, remainder to a named charity.
Prior to TRA '69, this would have qualified, but section 664(d) requires the payout to the son to be either an annuity or a unitrust, at least five percent, etc.
Section 2055(e) provides a mechanism for reforming a nonqualifying trust, but the present value of the remainder to charity, before and after the reformation, must be within five percent. And with the section 7520 rates at historic lows, this can be tricky.
Let's say the son is fifty years old, and let's say the section 7520 rate is around two pct. The present value of the remainder of a straight income interest would be about fifty-five pct., thereabouts. So in restructuring this as a unitrust or annuity trust we would be looking for a remainder value somewhere between, say fifty-two pct. and fifty-eight pct.
In putting together the final proposal we were of course much more precise. Down to five decimal places.
With a unitrust paying the required minimum five pct., you are looking at a remainder value of less than twenty-seven pct. To get the remainder value up to fifty-two pct. we would have to cut the unitrust payout to about two pct.
But suppose we gave a piece of the unitrust payout to the remainder charity. IRS has approved this strategy in at least a couple of letter rulings. The present value of the portion of the unitrust payout going to the charity counts toward meeting the five pct. variance rule. The unitrust payout to the charity would qualify as a lead trust, for which there is no minimum five pct. payout requirement.
If the present value of the remainder is twenty-seven pct., and we distribute not quite two pct. to the charity on a current basis, we can hit the fifty-two pct. target and at least in theory the son is actually getting more than he would have under the straight income payout. Everybody wins. Maybe.
In the particular case, the situation was somewhat complicated by other computational issues involving state level inheritance taxes, etc.
Incidentally, in a situation like this, where the trust does not qualify because the payout is not in the form of an annuity or unitrust, you have a very limited window of time in which to bring the reformation action in a state court. Within ninety days after the 706 is due, with extensions, or if (as in this case) no 706 is to be filed, within ninety days after the due date of the first 1041 for the trust, again with extensions.