Rev. Proc. 2016-42: Language To Be Included In A CRAT To Qualify Under IRC Section 664(f)

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Author: Kerry Reilly, Esq., K. Reilly Law LLC

Rev. Proc. 2016-42 – Language To Be Included In A CRAT To Qualify Under IRC Section 664(f)

The IRS has released sample language to be included in Charitable Remainder Annuity Trusts (CRATs) to satisfy the qualified contingency requirements under Internal Revenue Code (Code) Section 664(f). The sample language applies to all CRATs created after the effective date of the Rev Proc.

By using the language provided in the Rev. Proc., the CRAT will not “fail to qualify as a CRAT under Code §664,” nor be subject to the “probability of exhaustion test” pursuant to Rev. Proc. 70-452 (see also Rev. Proc. 77-374). The language is designed to ensure that (1) the beneficiary does not benefit at the expense of the charity, (2) that the charity ultimately receives an amount in keeping with the donor’s charitable deduction at the creation of the CRAT, and (3) that the charity be protected from some of the investment risk of the assets in the CRAT.

The use of similar but not identical language to the sample provision will not guarantee treatment as a “qualified beneficiary” pursuant to §664(f).

The sample language is as follows: (emphasis unchanged)

“The first day of the annuity period shall be the date the property is transferred to the trust and the last day of the annuity period shall be the date of the Recipient’s death or, if earlier, the date of the contingent termination. The date of the contingent termination is the date immediately preceding the payment date of any annuity payment if, after making that payment, the value of the trust corpus, when multiplied by the specified discount factor, would be less than 10 percent of the value of the initial trust corpus. The specified discount factor is equal to [1/(1+i)]t, where t is the time from inception of the trust to the date of the annuity payment, expressed in years and fractions of a year, and i is the interest rate determined by the Internal Revenue Service for purposes of section 7520 of the Internal Revenue Code of 1986, as amended (section 7250 rate), that was used to determine the value of the charitable remainder at the inception of the trust. The section 7520 rate used to determine the value of the charitable remainder at the inception of the trust is the section 7520 rate in effect for [insert the month and year], which is [insert the applicable section 7520 rate].”