Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Monday, July 17, 2017

Early Termination of NICRUTs and NIMCRUTs

Jerome M. Hesch, Stephen M. Breitstone, and David C. Jacobson have recently published their article entitled Statutory Clarity for Early Termination of NICRUTs and NIMCRUTs in the June 19, 2017 issue of Tax Notes. Special thanks to Tax Analysts, the original publisher, for permission to post their article on my blog.

Here is the introduction to their insightful article which reviews fundamental statutory construction principles that provide the reader with guidance that can be used in other areas of the tax law where clarification of the Code is needed.

On December 18, 2015, President Obama signed a bipartisan bill, the Protecting Americans From Tax Hikes (PATH) Act, which provides a definitive method for valuing the interests in some charitable remainder trusts (CRTs) that terminate before the end of their stated terms. 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.3 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.

You may download the article here: Download Hesch-Breitstone-Jacobson


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