The Highs and Lows of Rising Interest Rates

* Testamentary CRUT with concurrent and consecutive interests for two measuring lives — Rev. Proc. 2005-56.

These sample trust forms meet all of the requirements under the Internal Revenue Code for each specific type of trust.

While the forms are helpful and informative, the annotations to the forms are even more so. For example, the annotations include alternate language for testamentary additions to a CRUT and methods of computing the deferred payments. The annotations to the income-only type of CRUT deal with changes in state law definitions of income and provide that proceeds of sales of assets

may be allocated to income under the terms of the governing instrument, if not prohibited by local law. In addition, the trustee may be given discretionary power to make the allocation, provided the applicable state statute permits the trustee to make adjustments between income and principal to treat beneficiaries impartially. A “flip” CRUT can change from an income-only CRUT to a regular CRUT on a one-time basis. The annotations state that the change may not be discretionary with or in the control of the trustees or any other person.

It’s important (and disturbing) to note that all of the forms issued by the IRS are silent on the new spousal waiver requirement of Revenue Procedure 2005-24, which bars a charitable deduction for a charitable remainder trust unless a spouse waives his or her elective rights in the transferred property. This is a potential “trap for the unwary,” and unless the IRS changes the requirements of the spousal waiver, no matter what form is used to create the trust, a waiver must be added.

The annotations point out that if the trust is funded with unmarketable assets, the determination of fair market value that must be made at least annually must be made by an independent trustee or must be determined by a qualified appraisal from a qualified appraiser as defined in the regulations.