Correspondence to Treasury and IRS: Issue Regulations that Exempt Charitable Remainder Trusts and Pooled Income Funds from the Scope of Section 2511(c)

Emanuel J. Kallina, II, Editor-in-Chief of www.CharitablePlanning.com corresponded with the Treasury and IRS in regards to Section 2511(c) and Notice 2010-19.  In his correspondence, Kallina urged the Treasury to issue regulations excepting charitable remainder trusts ("CRTs") and pooled income funds ("PIFs") from the scope of Section 2511(c).  The following is the text of the correspondence:

                                                     "March 17, 2010

 

Laura Urich Daly, Esq.

Office of Associate Chief Counsel

(Passthroughs and Special Industries)

CC:PSI:4, Room 4107

1111 Constitution Avenue NW

Washington, DC 20224

 

Catherine V. Hughes, Esq.

Department of the Treasury

1500 Pennsylvania Avenue, NW

Room 42128

Washington, DC 20220

 

Re: Section 2511(c) and Notice 2010-19

 

Dear Ms. Daly and Ms. Hughes:

 

I am writing on behalf of www.CharitablePlanning.Com ("CPC") to urge Treasury to issue regulations excepting charitable remainder trusts ("CRTs") and pooled income funds ("PIFs") from the scope of Code section 2511(c).

 

CPC is a destination website devoted to charitable giving, with a focus on the tools and techniques to best achieve gifts to charity. We have attached below an article appearing on CPC that lays out our concerns with section 2511(c).

 

By its literal terms, section 2511(c) treats any transfer "in trust" as a transfer "by gift" unless the trust is treated as "wholly owned" by the settlor or the settlor's spouse for income tax purposes under the "grantor trust" rules, sections 671 et seq.

 

Since a CRT or PIF by definition is not a grantor trust, on its face the statute would appear to treat any transfer to a CRT or a PIF as a completed gift, regardless whether the settlor may have reserved (as is typical in two-life trusts) a testamentary power to revoke the successive income interest.

 

The statute contemplates exceptions "as provided in regulations," but nothing is said about the Treasury's scope in making such exceptions.

 

As you know, section 2511(c) was added to EGTRRA, Pub. L. 107-16, in conference, so there is very little legislative history. House Report No. 107-84, the Conference Committee report accompanying H.R. 1836, merely paraphrases the statutory language, stating simply, at page 192:

 

  ". . . except as provided in regulations, a transfer

  to trust will be treated as a taxable gift, unless

  the trust is treated as wholly owned by the donor

  or the donor's spouse under the grantor trust provisions

  of the Code."

 

A technical amendment enacted a few months later as part of Pub. L. 107-147 substituted the phrase "transfer of property by gift" for "taxable gift under section 2503."

 

A report by the Joint Committee on Taxation, JCX-12-02, offered some interpretive guidance, albeit after the fact. At page 38 of the report, the Joint Committee states that the amendment is intended merely to clarify "that the gift tax annual exclusion and the marital and charitable deductions may apply to such transfers." The Joint Committee gives two examples:

 

  "[I]f in 2010 an individual transfers property

  in trust to pay the income to one person for life,

  remainder to such persons and in such portions as

  the settlor may decide, then the entire value of

  the property will be treated as being transferred

  by gift under the provision, even though the transfer

  of the remainder interest in the trust would not

  be treated as a completed gift under current Treas.

  Reg. sec. 25.2511-2(c).

 

  Similarly, if in 2010 an individual transfers property

  in trust to pay the income to one person for life,

  and makes no transfer of a remainder interest, the

  entire value of the property will be treated as being

  transferred by gift under the provision."

 

This seems to be the extent of the legislative history on section 2511(c). The two examples cited in the Joint Committee report suggest, as one might have supposed, that the intent of the enactment was to prevent an individual from shifting income to other taxpayers, without having to suffer the consequences of having made a completed gift and paying gift taxes.

 

There is statutory language granting the Treasury express authority to regulate this area. This authority clearly implies that Treasury has the right and authority to exempt by regulation transactions that are not subject to this abuse. CRTs and PIFs obviously fall into this category.

 

We urge Treasury to issue temporary regulations immediately announcing an exception to section 2511(c) for CRTs and PIFs, with proposed final regulations opening a comment period. To the extent that the Treasury or the Service considers section 2511(c) being applicable to a gift a remainder interest in a farm or residence, combined with a retained life estate, we request the Treasury extend an exception to this planned giving vehicle also.

 

         Sincerely yours,

        

         Emanuel J. Kallina, II

         Editor-in-Chief

         www.CharitablePlanning.com

         Emil.Kallina@charitableplanning.com"

See also Group Seeks Guidance Providing Exceptions from Gift Tax Provision, 2010 TNT 54-55, March 22, 2010.

Posted by Neil I. Rumbak, Associate Editor, Wealth Strategies Journal.