Guidance Issued on Dividing CRTs, Assiting Divorcing Couples and Squabbling Annuitants

The IRS has issued Revenue Ruling 2008-41 confirming that charitable remainder trusts (CRTs) can be divided into separate but equal trusts for each recipient without adverse tax consequences. If properly divided, the separate trusts will continue to qualify as CRTs, and no private foundation termination excise taxes will apply under IRC § 507(c). Nor will the division be treated as a sale, constitute an act of self-dealing under section 4941, or constitute a taxable expenditure under section 4945. Such divisions are common when the income recipients desire to separate their interests and when joint income recipients divorce.

The ruling clarified that the division of the trust into separate trusts does not disqualify the separate trusts as CRTs under section 664(d) as long as the division is pro rata and the separate trusts have the same governing provisions, recipients, remainder beneficiaries, total remainder interests and assets as the original trust— with some exceptions. In both of two examples given, the recipients paid all the costs of the division. The IRS also said that qualifying divisions do not constitute a sale, exchange or other taxable disposition producing gain or loss.

The ruling provides greater assurance that in the case of annuitants with concurrent present interests, each party can relinquish its successor interests after the other party’s death. It also consolidates issues that have been the subject of many previous private letter rulings (PLRs) and is similar to Revenue Ruling 2002-28 and PLR 200616008.

A CRT that divides in half must split each stock 50/50 so that each new trust gets half of each stock and maintains the same cost basis in each resulting trust. That works for assets that are divisible and that have a readily ascertainable value. However, it may pose difficulties for assets that cannot be easily split due to minimum unit sizes, or for real estate or closely held interests not broken down into units or shares. Taxpayer/trustees may want to consider keeping such interests undivided and titling the property accordingly. They may also consider liquidating or otherwise converting hard-to-split assets to cash before splitting the CRT. However, the remainder beneficiaries’ interests need to be considered as well, especially in the case of a “fire sale” or a highly appreciating asset.

Revenue Ruling 2008-41, 2008-30 IRB 170 (7/8/2008)

By AICPA Technical Manager Eileen Reichenberg Sherr, CPA, M. Taxation, the staff liaison for the AICPA’s Trust, Estate and Gift Tax TRP and its CRT Task Force.