The IRS denied both trust and CRUT status to an entity that was proposed to be established by an S corporation essentially to receive its profits and make distributions to its owners. The Service ruled that the proposed entity would not qualify as a trust under Treasury Regulation Sections 1.301.7701-4(a), 1.301-7701-4(c), or as a valid CRUT.4
10 Percent Remainder Interest Requirement
The value of the remainder interest (i.e., the charitable deduction) must equal at least 10 percent of the net fair market value of the property as of the date it is contributed to the trust.5 The value of a remainder interest for this purpose is calculated using the IRC Section 7520 interest rate, which is published every month by the IRS. The calculation of the deduction can be made using the current rate or either of the previous two months’ rates. See Q 8099 for an explanation of the calculation of the deduction.
If a transfer to an existing charitable remainder unitrust does not meet the 10 percent remainder interest value requirement, the contribution will be treated as if it were made to a separate trust; thus, the existing CRUT will not become disqualified by a contribution that does not meet this requirement.6 It appears that the separate trust will be taxed as a complex trust, since it will not meet the requirements for a CRT.