Stephen Breton, Jerry Hesch, and David Jacobson have published their article, Statutory Clarify for Early Termination of NICRUTS and NIMCRUTS in Tax Notes Today. The article begins as follows:
In this report, Hesch, Breitstone, and Jacobson discuss how to value interests in charitable remainder unitrusts upon an early termination, and they address the self-dealing considerations when there is an early termination.
On December 18, 2015, President Obama signed a bipartisan bill, the Protecting Americans From Tax Hikes (PATH) Act, to the text of the note which provides a definitive method for valuing the interests in some charitable remainder trusts (CRTs) that terminate before the end of their stated terms to the text of the note. The relevant statutory language, added to section 664(e), is terse but unequivocal:
In the case of the early termination of a trust which is a charitable remainder unitrust by reason of subsection (d)(3), the valuation of interests in such trust for purposes of this section shall be made under rules similar to the rules of the preceding sentence referring to the valuation method on contribution.
The statutory clarification ends uncertainty created by the lack of regulatory guidance and by the IRS’s no-rule policy on early terminations of CRTs, first adopted in 2008.
Some commentary has suggested the need for administrative guidance on several aspects of early terminations to the text of the note. Although guidance would be welcome, we believe there is sufficient authority for taxpayers to now rely on section 664(e) and that there is no need to address self-dealing in most early terminations.
This report discusses the issues that have been resolved by section 664(e) and explains how established principles of statutory construction (and the relevant legislative history) may be relied on to fill in the blanks on the key elements of early terminations. We conclude that noncharitable beneficiaries holding an annuity interest or unitrust interest (the lead interest) and charitable remainder beneficiaries may rely on the clear import of sections 664(e) and 4947(a)(2)(A) to proceed with early terminations and that they need not wait for further administrative guidance in most instances. Although administrative guidance should confirm our conclusions and may be necessary to address some unusual issues, most early terminations of CRTs should be able to proceed in the absence of that guidance.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.