Rev. Rul. 82-105

1982-1 C.B. 133, 1982-21 I.R.B. 7.

                       Internal Revenue Service
                                 Revenue Ruling

             CHARITABLE REMAINDER TRUST; PRIVATE ANNUITY; VALUATION

                            Published: May 24, 1982

  Charitable remainder trust; private annuity; valuation. The portion of a charitable remainder trust includible in the decedent-grantor's gross estate, where the decedent is the private annuitant, is that portion of trust corpus necessary to yield the private annuity payment, assuming a 6 percent return.

ISSUE

  For purposes of section 2036 of the Internal Revenue Code, what portion of the value of a charitable remainder annuity trust is includible in the grantor's gross estate when the grantor is the private annuitant for life?

FACTS

  In 1974 D created a trust that qualified as a charitable remainder annuity trust under section 664 of the Code.  The trust agreement provided for an annuity of 12x dollars to be paid each year to D for life and for the remainder upon D's death to be distributed to N, a charitable organization described in section 2055(a).  The trust was funded with 200x dollars.  D died on March 1, 1980.  The value of the trust assets on D's date of death was 300x dollars. D's executor did not elect to use the alternate valuation date.

LAW AND ANALYSIS

  Section 2036(a)(1) of the Code provides, in part, that a decedent's gross estate shall include the value of any interest in property transferred by the decedent if the decedent retained for life the possession or enjoyment of, or the right to income from, the property.

  Section 20.2036-1(a) of the Estate Tax Regulations provides generally that if the decedent retained or reserved an interest or right with respect to all of the property transferred by the decedent, the amount to be included in the gross estate under section 2036 of the Code is the value of the entire property on the date of death.  If the decedent retained a right with respect to only part of the property transferred, the amount to be included in the decedent's gross estate under section 2036 is the proportionate amount of corpus.

  Under the trust agreement D did not retain the right to the income from the cash transferred, but retained the right to receive the annuity amount.  In effect, D has retained the right to income from a portion of the property transferred.

  In order to determine the amount includible under section 2036 of the Code, it is necessary to ascertain the specific portion of corpus over which D, in effect, possessed an income interest.

  In Northeastern Rennsylvania National Bank & Trust Company v. United States, 387 U.S. 213 (1967), Ct.D. 1916, 1967-2 C.B. 343, a bequest to the decedent's spouse of a fixed monthly stipend, payable from trust income or corpus, was held to satisfy the requirement of section 2056(b)(5) of the Code that the spouse receive all the income from a specific portion of trust corpus.  The specific portion of corpus qualifying for the marital deduction was determined by computing the amount of corpus necessary to produce the guaranteed monthly payment, assuming a fixed rate of return.

  This computation is discussed in Citizens National Bank of Evansville v. United States, 359 F.2d 817 (7th Cir. 1966), cert. denied, 387 U.S. 941 (1966), which involved an identical issue. The court computed the allowable marital deduction by capitalizing the annual annuity payment at an assumed rate of 3 1/2% (rate specified under section 20.2031-7 of the reguations, applicable in the case of decedents dying prior to 1971).

  In Estate of Marvin L. Pardee v. Commissioner, 49 T.C. 140 (1967), acq., 1973-2 C.B. 3, the decedent created a trust and retained the right to use the income of the trust to satisfy a legal obligation of the decedent to pay, as child support, the sum of $500 per month.  The court held that, under section 2036(a)(1) of the Code, the right retained by the decedent was the right to satisfy the legal obligation of $500 per month, and the amount includible in the decedent's estate was the amount which is required to yield monthly payments of $500 per month at 3 1/2% (rate specified under section 20.2031-7 of the regulations, applicable in the case of decedents dying prior to 1971).  See also United States National Bank of Portland v. United States, 188 F. Supp. 332 (D. Ore. 1960), which discusses a computation similar to the computation in Pardee.

  For estate tax purposes, the annual rate of return of a charitable remainder annuity trust is presumed to be 6 percent in the case of decedents dying after December 31, 1970.  See section 20 .2031-10 of the Estate Tax Regulations.  See also section 1.664-2(c) of the Income Tax Regulations which refers to section 20.2031-10 of the Estate Tax Regulations, and Rev. Rul. 77-374, 1977-2 C.B. 329. Therefore, in accordance with Northeastern, the portion of corpus over which D has retained a right to income is that portion which will yield an annuity of 12x dollars a year, assuming a 6 percent annual rate of return.  At a 6 percent rate of return on investment, the amount of corpus necessary to generate 12x dollars per year is 200x dollars:

12x dollars/.06  = 200x dollars

Accordingly, although the value of the corpus on D's date of death was 300x dollars, only 200x dollars is includible in D's gross estate under section 2036 of the Code. Alternatively, if the value of the trust assets was 200x dollars or less on D's date of death, the entire corpus would be includible in D's gross estate.  Compare Rev. Rul. 76-273, 1976-2 C.B. 268, which demonstrates the application of section 2036 of the Code to a charitable remainder unitrust.

HOLDING

  For purposes of section 2036 of the Code, the portion of the value of a charitable remainder annuity trust that is includible in D's gross estate at death is the amount necessary, at the rate of 6 percent as specified under section 20.2031-10 of the regulations, to yield the guaranteed annual payment. In the instant case, the amount includible is 200x dollars

(12x dollars/.06  =200x dollars) However,

because the 200x dollars constitutes part of the remainder interest passing to a charitable organization described in section 2055(a), the 200x dollars is deductible from D's gross estate under section 2055. The amount of the charitable deduction cannot exceed the value of the transferred property required to be included in the gross estate.  Section 2055(d).

  The holding of this ruling applies only to the portion of the value of a charitable remainder annuity trust that is includible in the gross estate under section 2036.  The ruling does not consider the amount, if any, that may be includible in the gross estate under any other provisions of the Code.

Rev. Rul. 82-105, 1982-1 C.B. 133, 1982-21 I.R.B. 7.