Including an option in a purported charitable remainder trust for the trustee to choose between making distributions of the annual unitrust payment to the surviving spouse or a charity ended up with the decedent’s estate not being able to claim either a charitable contribution or marital deduction by the estate for these amounts, the IRS ruled in a Chief Counsel Advice.[1]

Terms of the Trust

The CCA provides the following summary of the facts of this situation:

Decedent died, survived by Spouse, leaving a portion of his estate to a testamentary trust that is a charitable remainder unitrust described in § 664 (“CRUT”). CRUT provides for annual unitrust payments of five percent for the term of Spouse’s life. CRUT provides that the trustee must distribute 25 percent of the unitrust amount (i.e., 1.25 percent of CRUT) to Spouse. The trustee may distribute the remaining 75 percent of the unitrust amount (i.e., 3.75 percent of CRUT) to either Charity or Spouse at Trustee’s complete discretion. Upon Spouse’s death, the trustee must distribute the remainder of CRUT to Charity.[2]

IRS Ruling on the Impact of These Provisions

The IRS begins by finding that a charitable deduction would be available to the estate for the present value of the remainder interest:

In this case, the terms of CRUT create two charitable interests: a discretionary interest in a portion of the unitrust amount and a remainder interest. Decedent's estate may claim an estate tax charitable deduction for the value of the remainder interest under § 2055(a), because CRUT is a charitable remainder unitrust described in § 664. See §2055(e)(2)(A).[3]

However, the portion of the unitrust where it could go either to the surviving spouse or the charity does not qualify for any charitable deduction:

However, Decedent’s estate may not claim an estate tax charitable deduction under § 2055(a) for the value of any portion of the unitrust interest that may be distributed to Charity in the discretion of the trustee because Charity’s interest is not in the form of a fixed unitrust amount to be distributed annually and no part of the unitrust interest is ascertainable or severable from Spouse’s noncharitable interest. See § 2055(e)(2)(B) and § 20.2055-2(a).[4]

The 25% interest in the unitrust payments that must be paid to the surviving spouse qualify for the marital deduction:

With regard to the marital interests in CRUT, because the interest in the 25 percent portion of the unitrust amount must be distributed to and will be received by Spouse pursuant to the terms of CRUT, this interest is considered to pass from Decedent to Spouse as beneficial owner for purposes of § 2056(a). Under § 2056(b)(8), because Spouse is the only beneficiary of CRUT who is not a charitable beneficiary the interest in the 25 percent portion of the unitrust amount is not subject to the terminable interest rule in § 2056(b)(1). Accordingly, Decedent's estate may claim an estate tax marital deduction for the value of this interest under § 2056.[5]

But the 75% of the interest that could go to either the charity or the surviving spouse will not qualify at the date of death for the marital deduction:

In contrast, the extent of Spouse's interest in the remaining 75 percent portion of the unitrust amount cannot be established as of Decedent's date of death and, therefore, is not considered to pass from Decedent to Spouse as beneficial owner for purposes of § 2056(a). The extent of Spouse's interest cannot be established because the amount to be distributed to Spouse annually is within the sole and complete discretion of the trustee. It is not possible to ascertain as of the date of death whether spouse will receive any of the 75 percent portion of the unitrust amount each year since all of such portion of the unitrust interest may be distributed to charity. Because the interest is not treated as passing to Spouse for purposes of § 2056(a), Decedent's estate may not claim an estate tax marital deduction for the value of this interest under § 2056(a).1 See § 20.2056(c)-2(a). See also Estate of Turner v. Commissioner, 138 T.C. 306, 316 (2012) (“property that passed to a person other than a surviving spouse cannot also be considered as passing to the surviving spouse”).[6]

In a footnote, the memorandum notes that the result would be the same if the transfer were via gift made while the decedent had been alive:

The analysis and conclusion would be the same under § 2523 for a completed gift transfer to a CRUT with similar terms.[7]

[1] CCA 202233014, August 19, 2022, https://www.taxnotes.com/research/federal/irs-private-rulings/legal-memorandums/no-deduction-allowed-for-distributed-portion-of-unitrust-interest/7dyrw?h=202233014 (retrieved August 28, 2022)

[2] CCA 202233014, August 19, 2022

[3] CCA 202233014, August 19, 2022

[4] CCA 202233014, August 19, 2022

[5] CCA 202233014, August 19, 2022

[6] CCA 202233014, August 19, 2022

[7] CCA 202233014, August 19, 2022