SERVICE CLARIFIES METHOD FOR COMPUTING DEFERRED PAYMENTS BY TESTAMENTARY CHARITABLE REMAINDER UNITRUSTS.

Rev. Rul. 92-57

SECTION 1. PURPOSE

This revenue ruling clarifies the proper method for computing deferred payments that is prescribed by section 1.664-1(a)(5) of the Income Tax Regulations in the case of a testamentary charitable remainder unitrust. Section 3 of Rev. Rul. 88-81, 1988-2 C.B. 127, and Rev. Rul. 82-165, 1982-1 C.B. 117, provide erroneous sample language that indicates that interest should be added to the figure determined under the formula contained in section 1.664-1(a)(5)(ii) in arriving at the unitrust amounts payable plus interest, as described in section 1.664-1(a)(5)(i). This revenue ruling provides new sample language that correctly applies the regulation.

SEC. 2. BACKGROUND

01. Rev. Rul. 80-123, 1980-1 C.B. 205, holds that the governing instrument of a testamentary charitable remainder trust must provide rules conforming to section 1.664-1(a)(5)(i) of the regulations. The obligation to pay the unitrust or annuity amount must commence, on the date of death; however, the requirement to pay the unitrust or annuity amount may be deferred until the end of the taxable year of the trust in which occurs the complete funding of the trust. Within a reasonable period after that time, the trust must pay the recipient (in the case of an underpayment) or must receive from the recipient (in the case of an overpayment) the difference between (a) any annuity or unitrust amounts actually paid, plus interest on those amounts computed at the rate of interest specified in section 1.664- 1(a)(5)(iv) compounded annually, and (b) the annuity or unitrust amount payable, plus interest on those amounts computed at the rate of interest specified in section 1.664-1(a)(5)(iv), compounded annually.

02. In many cases (for example, in the case of a residuary bequest to a charitable remainder unitrust), the unitrust payments the beneficiary would have received if the trust had been fully funded and functioning on the date of death plus interest (the amount specified in section 1.664-1(a)(5)(i)(b) of the regulations) are difficult to calculate. Section 1.664-1(a)(5)(ii) prescribes an alternative method for determining the section 1.664-1(a)(5)(i)(b) amount, i.e., the unitrust amounts payable plus interest on those amounts.

03. Section 3 of Rev. Rul. 88-81, 1988-2 C.B. 127, and Rev. Rul. 82-165, 1982-1 C.B. 117, provide sample language to be used in trust instruments for the purpose of computing the payments required under section 1.664-1(a)(5)(i) of the regulations. The sample language provided in both revenue rulings erroneously indicates that interest should be added to the figure determined under the formula contained in section 1.664-1(a)(5)(ii) in arriving at the unitrust amounts payable plus interest, as described in section 1.664-1(a)(5)(i). The amount obtained by applying the formula provided in section 1.664- 1(a)(5)(ii) equals the unitrust amount payable plus interest, and no additional amount (representing interest) should be added to that amount. Rev. Rul. 77-471, 1977-2 C.B. 322, contains an example of the correct computation.

SEC. 3. INSTRUCTIONS TO TAXPAYERS

01. For governing instruments of charitable remainder unitrusts, the sample provisions in Rev. Proc. 90-30, 1990-1 C.B. 534, and Rev. Proc. 90-31, 1990-1 C.B. 539, correctly apply section 1.664-1(a)(5) of the regulations.

02. As an alternative to the sample provisions contained in Rev. Proc. 90-30 and Rev. Proc. 90-31, the following sample provision may be used. This provision replaces the corresponding sample provision contained in Rev. Rul. 88-81 and Rev. Rul. 82-165.

The obligation to pay the unitrust amount shall commence with the date of my death, but payment of the unitrust amount may be deferred from the date of my death until the end of the taxable year of the trust in which occurs the complete funding of the trust. Within a reasonable time after the end of the taxable year in which the complete funding of the trust occurs, the trustee must pay to A, in the case of an underpayment, or must receive from A, in the case of an overpayment, the difference between:

(a) any unitrust amount actually paid, plus interest, compounded annually, computed for a period at the rate of interest that the federal income tax regulations under section 664 of the Internal Revenue Code prescribe for the trust for that computation for that period, and

(b) the unitrust amounts payable, determined under the method described in section 1.664-1(a)(5)(ii) of the Federal Income Tax Regulations.

SEC. 4. EFFECT ON OTHER DOCUMENTS

Rev. Rul. 88-81 and Rev. Rul. 82-165 are modified.

SEC. 5. EFFECTIVE DATE

This revenue ruling applies to all testamentary charitable remainder unitrusts created by decedents dying after July 20, 1992, other than any testamentary charitable remainder unitrust created under a governing instrument executed prior to July 21, 1992, which is not amended after July 20, 1992.

DRAFTING INFORMATION

The principal author of this revenue ruling is Marilyn F. Hale of the Office of the Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Ms. Hale on (202) 566-2442 (not a toll-free call).