Spousal Right of Election and Its Effects on CRTs
As noted in an earlier column, a charitable remainder trust (CRT) is a valuable tax-planning tool. However, Revenue Procedure 2005-24, issued on March 30, adds new rules to CRTs to address the problem of spouses “electing against the will,” which can arise in certain states.
A basic tenet of a CRT is that only the unitrust or annuity trust payment may be made to a non-charitable recipient.
For more information about CRUTS, see ”On the Record” from the November 2003 edition of FundRaising Success magazine.
If any other payment is made, the trust will not qualify as a CRT. An example of a potentially disqualifying payment is when a CRT has a primary beneficiary and a non-charitable beneficiary successor.
Upon the death of the primary beneficiary, there might be death taxes charged to the CRT — attributable to the successor beneficiary’s interest. This can occur if state law provides for the equitable apportionment of any federal estate or state death taxes imposed on his death, as well as the payment of taxes from the CRT assets.
The Internal Revenue Service’s Rev. Rul. 82-128 requires the CRT trust to condition the vesting of a beneficiary’s interest upon her payment of any death taxes attributable to her interest. On the flip side, the donor can stipulate that the funds come from another source, such as his estate.
Spousal right of election
There is another method in which a CRT could be paid to someone other than a charity: a spouse’s right of election permitted under many states’ laws.
According to law, a surviving spouse cannot be disinherited. These states permit a surviving spouse to take a statutory share of the deceased spouse’s estate rather than take whatever, if anything, the deceased spouse provided for him.
This right to “elect against the will” historically only applied to assets that passed under the deceased spouse’s will.
Lisa B. Petkun is a partner in the tax department at Pepper Hamilton LLP.