Charity Advisor Resource Newsletter - Volume 1.2 2009

Revenue Ruling 85-49

Rev. Rul. 85-49, 1985-1 CB 330, IRC Sec(s). 2522

Can annuity interests that will continue for a term of years or for a period of lives in being plus a term of years qualify as guaranteed annuity interests under section 2522(c)(2)(B) of the Internal Revenue Code?

FACTS

In 1984 A created a trust and funded the trust with $250,000 in cash. The trust instrument provides that the trustee of the trust shall distribute at the end of each taxable year an annuity of $20,000 to charities described in sections 170(c), 2055(a), and 2522(a) of the Code. The trust will terminate on the earlier of a period of 30 years after the funding of the trust, or 21 years after the death of the last survivor of A's children living on the date when the trust was created, in favor of A's surviving issue. When A created the trust, A had three adult children aged 55, 60, and 63. The trust instrument has provisions that satisfy section 25.2522(c)-3(c)(2)(v)(e) of the Gift Tax Regulations.

LAW AND ANALYSIS

Section 2501 of the Code imposes a tax on the transfer of property by gift. Section 2522 of the Code provides for a deduction in computing taxable gifts for a calendar year for the value of property transferred to charitable organizations and for purposes described in section 2522(a). Under section 2522(c)(2)(B) of the Code, if a donor transfers a termfor- years interest in property to a charitable organization and a remainder interest in the same property to a noncharitable beneficiary, no deduction is allowed for the interest passing to charity unless it is in the form of a guaranteed annuity or is a fixed percentage distributed yearly of the fair market value of the property (to be determined yearly). Section 25.2522(c)-3(c)(2)(v) of the regulations sets forth the requirements for a guaranteed annuity.

A guaranteed annuity is an arrangement under which a determinable amount is paid periodically, but not less often than annually, for a specified term or for the life or lives of an individual or individuals, each of whom must be living at the date of the gift and can be ascertained at such date. For example, the annuity may be paid for the life of A plus a term of years. An amount is determinable if the exact amount that must be paid under the conditions specified in the instrument of transfer can be ascertained as of the date of the gift. Section 25.2522(c)-3(c)(2)(v)(a) of the regulations.

In this case the annuity interests are payable for the lesser of a term of years or for a period of lives in being plus a term of years. As of the date the trust is created, each of the possible payment periods is an allowable payment period described in section 25.2522(c)-3(c)(2)(v) of the regulations, and the lesser value of the two can be computed as provided in section 25.2522(c)-3(d)(2)(iv) of the regulations. When the annuity interests terminate, such interests will have continued for a term of years or for a period of lives in being plus a term of years. Accordingly, the annuity interests in this case meet the definition of and qualify as guaranteed annuity interests described in section 25.2522(c)-3(c)(2)(v) of the regulations.

Section 25.2522(c)-3(d)(2)(iv) of the regulations provides that the present value of a guaranteed annuity interest is to be determined under section 25.2512-5 of the regulations. Moreover, section 25.2512-5(e) of the regulations provides that if the interest to be valued is dependent upon the continuation or the termination of more than one life or upon a term certain concurrent with one or more lives, a special factor must be used. The factor is to be computed on the basis of interest at the rate of 10 percent a year, compounded annually, and life contingencies determined as to each person involved, from the values of 1x that are set forth in column 2 of Table LN of paragraph (f) of section 20.2031-7 of the Estate Tax Regulations. A request for a special factor may be made to the Commissioner. The request must be accompanied by the date of birth of each person the duration of whose life may affect the value of the interest, and by copies of the relevant instruments. In this case the present worth of an annuity of $1.00 per year payable annually until the first to occur of (a) 30 years hence or (b) 21 years after the death of the last to die of three persons aged 55, 60, and 63 is $9.4261.

HOLDING

Annuity interests that will continue for a term of years or for a period of lives in being plus a term of years can qualify as guaranteed annuity interests under section 2522(c)(2)(B) of the Code.