§ 664. Charitable remainder trusts
(a)
General rule
Notwithstanding any other provision of this subchapter, the provisions of this section shall, in accordance with regulations prescribed by the Secretary, apply in the case of a charitable remainder annuity trust and a charitable remainder unitrust.
(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
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
A charitable remainder annuity trust and a charitable remainder unitrust shall, for any taxable year, not be subject to any tax imposed by this subtitle.
(2)
Excise tax
(A)
In general
In the case of a charitable remainder annuity trust or a charitable remainder unitrust which has unrelated business taxable income (within the meaning of section
512, determined as if part III of subchapter F applied to such trust) for a taxable year, there is hereby imposed on such trust or unitrust an excise tax equal to the amount of such unrelated business taxable income.
(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)
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)
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—
(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 for purposes of charitable contribution
For purposes of determining the amount of any charitable contribution, the remainder interest of a charitable remainder annuity trust or charitable remainder unitrust shall be computed on the basis that an amount equal to 5 percent of the net fair market value of its assets (or a greater amount, if required under the terms of the trust instrument) is to be distributed each year.
(f)
Certain contingencies permitted
(1)
General rule
If a trust would, but for a qualified contingency, meet the requirements of paragraph (1)(A) or (2)(A) of subsection (d), such trust shall be treated as meeting such requirements.
(2)
Value determined without regard to qualified contingency
For purposes of determining the amount of any charitable contribution (or the actuarial value of any interest), a qualified contingency shall not be taken into account.
(3)
Qualified contingency
For purposes of this subsection, the term “qualified contingency” means any provision of a trust which provides that, upon the happening of a contingency, the payments described in paragraph (1)(A) or (2)(A) of subsection (d) (as the case may be) will terminate not later than such payments would otherwise terminate under the trust.
(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),
(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
(2)
Exception
The term “qualified gratuitous transfer” shall not include a transfer of qualified employer securities to an employee stock ownership plan unless—
(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 limitations under sections
415
(c) and (e),[1] 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—
(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
For purposes of subparagraph (A), the term “5-percent shareholder” means any person who owns (directly or through the application of section
318
(a)) more than 5 percent of the outstanding stock of the corporation which issued such qualified employer securities or of any corporation which is a member of the same controlled group of corporations (within the meaning of section
409
(l)(4)) as such corporation. For purposes of the preceding sentence, section
318
(a) shall be applied without regard to the exception in paragraph (2)(B)(i) thereof.
(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—
(B)
Cost-of-living adjustment
The Secretary shall adjust annually the $30,000 amount under subparagraph (A)(i) at the same time and in the same manner as under section
415
(d), except that the base period shall be the calendar quarter beginning October 1, 1993, and any increase under this subparagraph which is not a multiple of $5,000 shall be rounded to the next lowest multiple of $5,000.
[1] See References in Text note below.