The Internal Revenue Service has issued a revenue procedure saying a charitable remainder annuity trust that includes a sample provision in its governing agreement won’t be subject to a test that could disqualify it.
Revenue Procedure 2016-42 states that a charitable remainder annuity trust, or CRAT, containing the sample provision will not be subject to a “probability of exhaustion” test, which holds that only a negligible chance exists that the charity will receive nothing.
The sample provision can be included in the governing instrument of a CRAT providing for annuity payments that are payable for one or more measuring lives followed by the distribution of trust assets to one or more charitable “remaindermen,” that is, the people who receive the remainder of the principal left in the trust account after the other necessary payments have been made to the beneficiary and for other expenses.
The IRS will treat the sample provision as a qualified contingency within the meaning of Section 664(f) of the Tax Code. Including the sample provision in the trust instrument will not cause the trust to fail to qualify as a charitable remainder trust under Section 664, and any CRAT containing the sample provision will not be subject to the “probability of exhaustion” test.
The “probability of exhaustion” test helps determine whether a CRAT complies with a regulatory requirement that applies to all contingent charitable transfers assuring there is only a negligible chance the charity will receive no money.
Charitable remainder annuity trusts have become a popular planned giving and estate planning vehicle. It involves a donor putting a large amount of money, or a piece of property, into a trust, which then pays a specified amount of income annually to the donor, or to a beneficiary identified by the donor. When the donor passes away, the remainder of the trust is donated to the charity chosen by the donor. A trustee, such as an accountant, financial advisor, attorney or bank, generally administers the CRAT.
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