Sec. 1089

SEC. 1089. LIMITATIONS ON CHARITABLE REMAINDER TRUST ELIGIBILITY FOR CERTAIN TRUSTS.

(a) Limitation on Noncharitable Distributions. --

(1) In general. -- Paragraphs (1)(A) and (2)(A) of section 664(d) (relating to charitable remainder trusts) are each amended by inserting "nor more than 50 percent" after "not less than 5 percent".

(2) Effective date. -- The amendment made by paragraph (1) shall apply to transfers in trust after June 18, 1997.

(b) Minimum Charitable Benefit. --

(1) Charitable remainder annuity trusts. -- Paragraph (1) of section 664(d) is amended by striking "and" at the end of subparagraph (B), by striking the period at the end of subparagraph (C), and by adding at the end the following new subparagraph:

"(D) the value (determined under section 7520) of such remainder interest is at least 10 percent of the initial net fair market value of all property placed in the trust."

(2) Charitable remainder unitrusts. -- Paragraph (2) of section 664(d) is amended by striking "and" at the end of subparagraph (B), by striking the period at the end of subparagraph (C), and by adding at the end the following new subparagraph:

"(D) with respect to each contribution of property to the trust, the value (determined under section 7520) of such remainder interest in such property is at least 10 percent of the net fair market value of such property as of the date such property is contributed to the trust.".

(3) Void or reformed trust. -- Paragraph (3) of section 2055(e) is amended by adding at the end the following new subparagraph:

"(J) Void or reformed trust in cases of insufficient remainder interests. -- In the case of a trust that would qualify (or could be reformed to qualify pursuant to subparagraph (B)) but for failure to satisfy the requirement of paragraph (1)(D) or (2)(D) of section 664(d), such trust may be --

"(i) declared null and void ab initio, or

"(ii) changed by reformation, amendment, or otherwise to meet such requirement by reducing the payout rate or the duration (or both) of any noncharitable beneficiary's interest to the extent necessary to satisfy such requirement,

pursuant to a proceeding that is commenced within the period required in subparagraph (C)(iii). In a case described in clause (i), no deduction shall be allowed under this title for any transfer to the trust and any transactions entered into by the trust prior to being declared void shall be treated as entered into by the transferor."

(4) Severance of certain additional contributions. -- Subsection (d) of section 664 is amended by adding at the end the following new paragraph:

"(4) Severance of certain additional contributions. -- If --

"(A) any contribution is made to a trust which before the contribution is a charitable remainder unitrust, and

"(B) such contribution would (but for this paragraph) result in such trust ceasing to be a charitable unitrust by reason of paragraph (2)(D),

such contribution shall be treated as a transfer to a separate trust under regulations prescribed by the Secretary."

(5) Conforming amendment. -- Section 2055(e)(3)(G) is amended by inserting "(or other proceeding pursuant to subparagraph (J)" after "reformation".

(6) Effective dates. --

(A) In general. -- Except as otherwise provided in this paragraph, the amendments made by this subsection shall apply to transfers in trust after July 28, 1997.

(B) Special rule for certain decedents. -- The amendments made by this subsection shall not apply to transfers in trust under the terms of a will (or other testamentary instrument) executed on or before July 28, 1997, if the decedent --

(i) dies before January 1, 1999, without having republished the will (or amended such instrument) by codicil or otherwise, or

(ii) was on July 28, 1997, under a mental disability to change the disposition of his property and did not regain his competence to dispose of such property before the date of his death.

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Last modified: November 15, 2006