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Internal Revenue Code Section 2511(c) Affects Charitable Remainder Trusts Funded During 2010

July 5, 2010

Unfortunately, the tax law known as EGGSTRA passed by the Republican-controlled Congress in 2001 and signed into law by President George W. Bush has made intelligent estate planning difficult for quite some time, and the 2010 estate and gift tax law is a mess.   Unintended consequences may have resulted, and Internal Revenue Code Section 2511(c), effective only for gifts made during 2010, may significantly affect charitable remainder trusts.

The Internal Revenue Service has already attempted to provide guidance about Internal Revenue Code Section 2511(c).  IRS Notice 2010-19 states that “[C]ertain transfers in trust are treated as transfers of property by gift even though such transfers would have been regarded as incomplete gifts, or would have been treated as transfers under the gift tax provisions in effect prior to 2010. … Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax.  Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor’s spouse … is considered to be a transfer by gift of the entire interest in the property under section 2511(c).”

Doesn’t this language mean that a transfer to a trust is either a completed gift or it is not, and that there’s nothing in between? If so, perhaps nobody should establish and fund a charitable remainder trust during 2010. First, one way of reading the current IRS interpretation of Internal Revenue Code Section 2511(c) is that the entire amount contributed to a charitable remainder trust is a completed gift, even the amount retained as the income interest. Under that interpretation, only part of the gift would be deemed to charity, and the remainder would utilize the grantor’s $1,000,000 lifetime gift tax exemption. Second, a trust that provides for a successive income interest would also be treated as a completed gift, because the retention of a power of appointment over that interest (as is usually done) would not cause it to be an incomplete gift during 2010.

For another opinion on this topic, see Section 2511(c) and Charitable Gift Planning.

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