Charitable remainder trusts are a valuable method to create a charitable gift. They usually provide the donor with an income stream, for life or a term of up to 20 years, while giving the qualified charity a remainder interest gift.
Because a CRT has tax-exempt status under the Internal Revenue Code, the donor receives an income tax deduction for the present value of the remainder interest projected to pass to the qualified charity. There is, however, a new danger that could cause the CRT to lose its tax-exempt status, thereby decreasing its attractiveness for current and potential clients.
A spouse who elects rights in the estate of a deceased grantor of a CRT may disqualify the CRT. To avoid this adverse result, the IRS issued a revenue procedure stating that CRTs created on or after June 28, 2005, will not be disqualified if the surviving spouse waives the right of election.
CRTs are created under applicable state trust law and some states allow a spouse to make an election of his or her statutory share against the estate. This statutory share election may require that a portion of the share come from the assets of the CRT.
Therefore, all or part of the remainder interest that the charity should receive may pass to the spouse, not to the charity. This was not the donor’s intent and it clearly disadvantages the charity. Also to consider is what happens to the income tax deduction the donor received when the trust was created.
The IRS Solution
Effective June 28, 2005, the trustee of a CRT must retain a copy of a waiver by the spouse of his or her elective share or right in the CRT, if permitted by state law. Revenue Procedure 2005-24 provides a safe harbor under which a right of election may be disregarded.
The revenue procedure states that for trusts created on or after June 28, 2005, the failure of the donor’s spouse to waive the right of election in accordance with the revenue procedure will cause the CRT to lose its tax-exempt status, regardless of whether the spouse exercises the right of election.
The revenue procedure requires that the waiver be obtained on or before the date that is six months after the due date (not including extensions) of IRS Form 5227, the Split-Interest Trust Information Return, for the year in which the latest date of the following events occurs:
==at the creation of the trust;
==at the donor’s marriage to a spouse;
==when the donor first becomes domiciled in a jurisdiction whose law provides a right of election that could be satisfied from assets of the trust; or
==when the state enacts a new law creating a right of election.
CRTs created before June 28, 2005, are generally grandfathered under the old procedures. That is, Revenue Procedure 2005-24 states that the IRS will not require a spousal waiver of right of election in existing trusts. The danger, however, is that CRTs could still lose their tax-exempt status if the surviving spouse actually elects his or her statutory share and it is paid from the CRT assets.