8084 / What safe harbor provisions are available to avoid disqualification of a charitable remainder annuity trust (CRAT) or charitable remainder unitrust (CRUT) if spousal election rights are provided by the grantor?
Spousal Election Rights and Charitable Remainder Trusts. The IRS and Treasury Department issued guidance providing a safe harbor procedure to avoid the disqualification of a charitable remainder annuity trust (CRAT) or charitable remainder unitrust (CRUT) if, under applicable state law, the grantor’s surviving spouse has a right of election exercisable upon the grantor’s death to receive an elective, statutory share of the grantor’s estate, and that share could be satisfied in whole or part from assets of the CRAT or CRUT (in violation of IRC Section 664(d)).1
The surviving spouse’s elective right to receive an elective share of the grantor’s estate (if the share could include any assets of a CRAT or CRUT created or funded by the grantor) will be disregarded for purposes of determining whether the CRAT or CRUT has met the requirements of IRC Section 664(d) continuously since its creation if all of the following requirements are satisfied:
(1) Waiver effective under state law: The surviving spouse must irrevocably waive the right of election to whatever extent necessary to ensure that no part of the trust (other than the annuity or unitrust interest of which the surviving spouse is the named recipient under the terms of the trust) may be used to satisfy the elective share. A valid waiver of the elective share or elective right will satisfy the requirements in the preceding sentence if the waiver is valid under applicable state law, in writing, and signed and dated by the surviving spouse.
(2) Timing of waiver: For CRATs and CRUTs created by the grantor on or after June 28, 2005, the requirements set forth in item (1), above, must be satisfied on or before the date that is six months after the due date (excluding extensions) for filing Form 5227 (the trust’s information return) for the year in which the later of the following occurs: (a) the creation of the trust; (b) the date of the grantor’s marriage to the surviving spouse; (c) the date the grantor first becomes domiciled or resident in a jurisdiction whose law provides a right of election that could be satisfied from the assets of the trust; or (d) the effective date of applicable state law creating a right of election.
(3) Trustee to retain copy: A copy of the signed waiver must be provided to the trustee of the CRAT or CRUT. The trustee must retain the copy in the official records of the trust as long as the contents may become material in the administration of any internal revenue law.
Until further guidance is published regarding the spousal right of election on a trust’s qualification as a CRAT or CRUT, the Service will disregard the existence of such a right of election—even without a waiver—but only if the surviving spouse does not exercise the right of election.2
In effect, this provision was so controversial that the IRS basically withdrew the provisions of Revenue Procedure 2005-24 by its issuance of Notice 2006-15.
For details as to the requirements for a charitable remainder annuity trust, see Q 8088, for charitable remainder unitrusts see Q 8089, and for pooled income fund requirements, see Q 8097. For the tax treatment of the payments to the noncharitable beneficiary, see Q 8100. To calculate the amount of the deduction for a CRT gift, see Q 8099, and for general limits on all charitable deductions of long-term capital gain property, see Q 8072.