[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.664-1]

[Page 122-133]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.664-1  Charitable remainder trusts.

    (a) In general--(1) Introduction--(i) General description of a 
charitable remainder trust. Generally, a charitable

[[Page 123]]

remainder trust is a trust which provides for a specified distribution, 
at least annually, to one or more beneficiaries, at least one of which 
is not a charity, for life or for a term of years, with an irrevocable 
remainder interest to be held for the benefit of, or paid over to, 
charity. The specified distribution to be paid at least annually must be 
a sum certain which is not less than 5 percent of the initial net fair 
market value of all property placed in trust (in the case of a 
charitable remainder annuity trust) or a fixed percentage which is not 
less than 5 percent of the net fair market value of the trust assets, 
valued annually (in the case of a charitable remainder unitrust). A 
trust created after July 31, 1969, which is a charitable remainder trust 
is exempt from all of the taxes imposed by subtitle A of the Code for 
any taxable year of the trust except a taxable year in which it has 
unrelated business taxable income.
    (ii) Scope. This section provides definitions, general rules 
governing the creation and administration of a charitable remainder 
trust, and rules governing the taxation of the trust and its 
beneficiaries. For the application of certain foundation rules to 
charitable remainder trusts, see paragraph (b) of this section. If the 
trust has unrelated business taxable income, see paragraph (c) of this 
section. For the treatment of distributions to recipients, see paragraph 
(d) of this section. For the treatment of distributions to charity, see 
paragraph (e) of this section. For the time limitations for amendment of 
governing instruments, see paragraph (f) of this section. For 
transitional rules under which particular requirements are inapplicable 
to certain trusts, see paragraph (g) of this section. Section 1.664-2 
provides rules relating solely to a charitable remainder annuity trust. 
Section 1.664-3 provides rules relating solely to a charitable remainder 
unitrust. Section 1.664-4 provides rules governing the calculation of 
the fair market value of the remainder interest in a charitable 
remainder unitrust. For rules relating to the filing of returns for a 
charitable remainder trust, see paragraph (a)(6) of Sec. 1.6012-3 and 
section 6034 and the regulations thereunder.
    (iii) Definitions. As used in this section and Sec. Sec. 1.664-2, 
1.664-3, and 1.664-4:
    (a) Charitable remainder trust. The term charitable remainder trust 
means a trust with respect to which a deduction is allowable under 
section 170, 2055, 2106, or 2522 and which meets the description of a 
charitable remainder annuity trust (as described in Sec. 1.664-2) or a 
charitable remainder unitrust (as described in Sec. 1.664-3).
    (b) Annuity amount. The term annuity amount means the amount 
described in paragraph (a)(1) of Sec. 1.664-2 which is payable, at 
least annually, to the beneficiary of a charitable remainder annuity 
trust.
    (c) Unitrust amount. The term unitrust amount means the amount 
described in paragraph (a)(1) of Sec. 1.664-3 which is payable, at 
least annually, to the beneficiary of a charitable remainder unitrust.
    (d) Recipient. The term recipient means the beneficiary who receives 
the possession or beneficial enjoyment of the annuity amount or unitrust 
amount.
    (e) Governing instrument. The term governing instrument has the same 
meaning as in section 508(e) and the regulations thereunder.
    (2) Requirement that the trust must be either a charitable remainder 
annuity trust or a charitable remainder unitrust. A trust is a 
charitable remainder trust only if it is either a charitable remainder 
annuity trust in every respect or a charitable remainder unitrust in 
every respect. For example, a trust which provides for the payment each 
year to a noncharitable beneficiary of the greater of a sum certain or a 
fixed percentage of the annual value of the trust assets is not a 
charitable remainder trust inasmuch as the trust is neither a charitable 
remainder annuity trust (for the reason that the payment for the year 
may be a fixed percentage of the annual value of the trust assets which 
is not a ``sum certain'') nor a charitable remainder unitrust (for the 
reason that the payment for the year may be a sum certain which is not a 
``fixed percentage'' of the annual value of the trust assets).
    (3) Restrictions on investments. A trust is not a charitable 
remainder trust if the provisions of the trust include a

[[Page 124]]

provision which restricts the trustee from investing the trust assets in 
a manner which could result in the annual realization of a reasonable 
amount of income or gain from the sale or disposition of trust assets. 
In the case of transactions with, or for the benefit of, a disqualified 
person, see section 4941(d) and the regulations thereunder for rules 
relating to the definition of self-dealing.
    (4) Requirement that trust must meet definition of and function 
exclusively as a charitable remainder trust from its creation. In order 
for a trust to be a charitable remainder trust, it must meet the 
definition of and function exclusively as a charitable remainder trust 
from the creation of the trust. Solely for the purposes of section 664 
and the regulations thereunder, the trust will be deemed to be created 
at the earliest time that neither the grantor nor any other person is 
treated as the owner of the entire trust under subpart E, part 1, 
subchapter J, chapter 1, subtitle A of the Code (relating to grantors 
and others treated as substantial owners), but in no event prior to the 
time property is first transferred to the trust. For purposes of the 
preceding sentence, neither the grantor nor his spouse shall be treated 
as the owner of the trust under such subpart E merely because the 
grantor or his spouse is named as a recipient. See examples 1 through 3 
of subparagraph (6) of this paragraph for illustrations of the foregoing 
rule.
    (5) Rules applicable to testamentary transfers--(i) Deferral of 
annuity or unitrust amount. Notwithstanding subparagraph (4) of this 
paragraph and Sec. Sec. 1.664-2 and 1.664-3, for purposes of sections 
2055 and 2106 a charitable remainder trust shall be deemed created at 
the date of death of the decedent (even though the trust is not funded 
until the end of a reasonable period of administration or settlement) if 
the obligation to pay the annuity or unitrust amount with respect to the 
property passing in trust at the death of the decedent begins as of the 
date of death of the decedent, even though the requirement to pay such 
amount is deferred in accordance with the rules provided in this 
subparagraph. If permitted by applicable local law or authorized by the 
provisions of the governing instrument, the requirement to pay such 
amount may be deferred until the end of the taxable year of the trust in 
which occurs the complete funding of the trust. Within a reasonable 
period after such time, the trust must pay (in the case of an 
underpayment) or must receive from the recipient (in the case of an 
overpayment) the difference between:
    (a) Any annuity or unitrust amounts actually paid, plus interest on 
such amounts computed at the rate of interest specified in paragraph 
(a)(5)(iv) of this section, compounded annually, and
    (b) The annuity or unitrust amounts payable, plus interest on such 
amounts computed at the rate of interest specified in paragraph 
(a)(5)(iv) of this section, compounded annually.

The amounts payable shall be retroactively determined by using the 
taxable year, valuation method, and valuation dates which are ultimately 
adopted by the charitable remainder trust. See subdivision (ii) of this 
subparagraph for rules relating to retroactive determination of the 
amount payable under a charitable remainder unitrust. See paragraph 
(d)(4) of this section for rules relating to the year of inclusion in 
the case of an underpayment to a recipient and the allowance of a 
deduction in the case of an overpayment to a recipient.
    (ii) For purposes of retroactively determining the amount under 
subdivision (i)(b) of this subparagraph, the governing instrument of a 
charitable remainder unitrust may provide that the amount described in 
subdivision (i)(b) of this subparagraph with respect to property passing 
in trust at the death of the decedent for the period which begins on the 
date of death of the decedent and ends on the earlier of the date of 
death of the last recipient or the end of the taxable year of the trust 
in which occurs the complete funding of the trust shall be computed by 
multiplying:
    (a) The sum of (1) the value, on the earlier of the date of death of 
the last recipient or the last day in such taxable year, of the property 
held in trust which is attributable to property passing to the trust at 
the death of the decedent, (2) any distributions in respect of unitrust 
amounts made by the trust

[[Page 125]]

or estate before such date, and (3) interest on such distributions 
computed at the rate of interest specified in paragraph (a)(5)(iv) of 
this section, compounded annually, from the date of distribution to such 
date by:
    (b) (1) In the case of transfers made after November 30, 1983, for 
which the valuation date is before May 1, 1989, a factor equal to 
1.000000 less the factor under the appropriate adjusted payout rate in 
Table D in Sec. 1.664-4(e)(6) opposite the number of years in column 1 
between the date of death of the decedent and the date of the earlier of 
the death of the last recipient or the last day of such taxable year.
    (2) In the case of transfers for which the valuation date is after 
April 30, 1989, a factor equal to 1.000000 less the factor under the 
appropriate adjusted payout rate in Table D in Sec. 1.664-4(e)(6) 
opposite the number of years in column 1 between the date of death of 
the decedent and the date of the earlier of the death of the last 
recipient or the last day of such taxable year. The appropriate adjusted 
payout rate is determined by using the appropriate Table F contained in 
Sec. 1.664-4(e)(6) for the section 7520 rate for the month of the 
valuation date.
    (3) If the number of years between the date of death and the date of 
the earlier of the death of the last recipient or the last day of such 
taxable year is between periods for which factors are provided, a linear 
interpolation must be made.
    (iii) Treatment of distributions. The treatment of a distribution to 
a charitable remainder trust, or to a recipient in respect of an annuity 
or unitrust amount, paid, credited, or required to be distributed by an 
estate, or by a trust which is not a charitable remainder trust, shall 
be governed by the rules of subchapter J, chapter 1, subtitle A of the 
Code other than section 664. In the case of a charitable remainder trust 
which is partially or fully funded during the period of administration 
of an estate or settlement of a trust (which is not a charitable 
remainder trust), the treatment of any amount paid, credited, or 
required to be distributed by the charitable remainder trust shall be 
governed by the rules of section 664.
    (iv) Rate of interest. The following rates of interest shall apply 
for purposes of paragraphs (a)(5) (i) through (ii) of this section:
    (a) The section 7520 rate for the month in which the valuation date 
with respect to the transfer is (or one of the prior two months if 
elected under Sec. 1.7520-2(b)) after April 30, 1989;
    (b) 10 percent for instruments executed or amended (other than in 
the case of a reformation under section 2055(e)(3)) on or after August 
9, 1984, and before May 1, 1989, and not subsequently amended;
    (c) 6 percent or 10 percent for instruments executed or amended 
(other than in the case of a reformation under section 2055(e)(3)) after 
October 24, 1983, and before August 9, 1984; and
    (d) 6 percent for instruments executed before October 25, 1983, and 
not subsequently amended (other than in the case of a reformation under 
section 2055(e)(3)).
    (6) Examples. The application of the rules in paragraphs (a)(4) and 
(a)(5) of this section require the use of actuarial factors contained in 
Sec. Sec. 1.664-4(e) and 1.664-4A(d) and (e) and may be illustrated by 
use of the following examples:

    Example (1). On September 19, 1971, H transfers property to a trust 
over which he retains an inter vivos power of revocation. The trust is 
to pay W 5 percent of the value of the trust assets, valued annually, 
for her life, remainder to charity. The trust would satisfy all of the 
requirements of section 664 if it were irrevocable. For purposes of 
section 664, the trust is not deemed created in 1971 because H is 
treated as the owner of the entire trust under subpart E. On May 26, 
1975, H predeceases W at which time the trust becomes irrevocable. For 
purposes of section 664, the trust is deemed created on May 26, 1975, 
because that is the earliest date on which H is not treated as the owner 
of the entire trust under subpart E. The trust becomes a charitable 
remainder trust on May 26, 1975, because it meets the definition of a 
charitable remainder trust from its creation.
    Example (2). The facts are the same as in example (1), except that H 
retains the inter vivos power to revoke only one-half of the trust. For 
purposes of section 664, the trust is deemed created on September 19, 
1971, because on that date the grantor is not treated as the owner of 
the entire trust under subpart E. Consequently, a charitable deduction 
is not allowable either at the creation of the trust or at H's death 
because the trust does

[[Page 126]]

not meet the definition of a charitable remainder trust from the date of 
its creation. The trust does not meet the definition of a charitable 
remainder trust from the date of its creation because the trust is 
subject to a partial power to revoke on such date.
    Example (3). The facts are the same as in example (1), except that 
the residue of H's estate is to be paid to the trust and the trust is 
required to pay H's debts. The trust is not a charitable remainder trust 
at H's death because it does not function exclusively as a charitable 
remainder trust from the date of its creation which, in this case, is 
the date it becomes irrevocable.
    Example (4). (i) In 1971, H transfers property to Trust A over which 
he retains an inter vivos power of revocation. Trust A, which is not a 
charitable remainder trust, is to provide income or corpus to W until 
the death of H. Upon H's death the trust is required by its governing 
instrument to pay the debts and administration expenses of H's estate, 
and then to terminate and distribute all of the remaining assets to a 
separate Trust B which meets the definition of a charitable remainder 
annuity trust.
    (ii) Trust B will be charitable remainder trust from the date of its 
funding because it will function exclusively as a charitable remainder 
trust from its creation. For purposes of section 2055, Trust B will be 
deemed created at H's death if the obligation to pay the annuity amount 
begins on the date of H's death. For purposes of section 664, Trust B 
becomes a charitable remainder trust as soon as it is partially or 
completely funded. Consequently, unless Trust B has unrelated business 
taxable income, the income of the trust is exempt from all taxes imposed 
by subtitle A of the Code, and any distributions by the trust, even 
before it is completely funded, are governed by the rules of section 
664. Any distributions made by Trust A, including distributions to a 
recipient in respect of annuity amounts, are governed by the rules of 
subchapter J, chapter 1, subtitle A of the Code other than section 664.
    Example (5). In 1973, H dies testate leaving the net residue of his 
estate (after payment by the estate of all debts and administration 
expenses) to a trust which meets the definition of a charitable 
remainder unitrust. For purposes of section 2055, the trust is deemed 
created at H's death if the requirement to pay the unitrust amount 
begins on H's death and is a charitable remainder trust even though the 
estate is obligated to pay debts and administration expenses.
    For purposes of section 664, the trust becomes a charitable 
remainder trust as soon as it is partially or completely funded. 
Consequently, unless the trust has unrelated business taxable income, 
the income of the trust is exempt from all taxes imposed by subtitle A 
of the Code, and any distributions by the trust, even before it is 
completely funded, are governed by the rules of section 664. Any 
distributions made by H's estate, including distributions to a recipient 
in respect of unitrust amounts, are governed by the rules of subchapter 
J, chapter 1, subtitle A of the Code other than section 664.
    Example (6). (i) On January 1, 1974, H dies testate leaving the 
residue of his estate to a charitable remainder unitrust. The governing 
instrument provides that, beginning at H's death, the trustee is to make 
annual payments to W, on December 31 of each year of 5 percent of the 
net fair market value of the trust assets, valued as of December 31 of 
each year, for W's life and to pay the remainder to charity at the death 
of W. The governing instrument also provides that the actual payment of 
the unitrust amount need not be made until the end of the taxable year 
of the trust in which occurs the complete funding of the trust. The 
governing instrument also provides that the amount payable with respect 
to the period between the date of death and the end of such taxable year 
shall be computed under the special method provided in subparagraph 
(5)(ii) of this paragraph. The governing instrument provides that, 
within a reasonable period after the end of the taxable year of the 
trust in which occurs the complete funding of the trust, the trustee 
shall pay (in the case of an underpayment) or shall receive from the 
recipient (in the case of an overpayment) the difference between the 
unitrust amounts paid (plus interest at 6 percentage compounded 
annually) and the amount computed under the special method. The trust is 
completely funded on September 20, 1976. No amounts were paid before 
June 30, 1977. The trust adopts a fiscal year of July 1 to June 30. The 
net fair market value of the trust assets on June 30, 1977, is $100,000.
    (ii) Because no amounts were paid prior to the end of the taxable 
year in which the trust was completely funded, the amount payable at the 
end of such taxable year is equal to the net fair market value of the 
trust assets on the last day of such taxable year (June 30, 1977) 
multiplied by a factor equal to 1.0 minus the factor in Table D 
corresponding to the number of years in the period between the date of 
death and the end of such taxable year. The adjusted payout rate 
(determined under Sec. 1.664-4A(c)) is 5 percent. Because the last day 
of the taxable year in which the trust is completely funded in June 30, 
1977, there are 3 181/365 years in such period. Because there is no 
factor given in Table D for such a period, a linear interpolation must 
be made:

1.0 minus 0.814506 (factor at 5 percent for 4 years)........    0.185494
1.0 minus 0.857375 (factor at 5 percent for 3 years)........     .142625
                                                             -----------
    Difference..............................................     .042869

[[Page 127]]


                           181/365=X/0.042869

                               X=0.021258

1.0 minus 0.857375 (factor at 5 percent for 3 years.........    0.142625
Plus: X.....................................................     .021258
                                                             -----------
    Interpolated factor.....................................     .163883



Thus, the amount payable for the period from January 1, 1974, to June 
30, 1977, is $16,388.30 ($100,000x0.163883). Thereafter, the trust 
assets must be valued on December 31 of each year and 5 percent of such 
value paid annually to W for her life.

    (7) Valuation of unmarketable assets--(i) In general. If 
unmarketable assets are transferred to or held by a trust, the trust 
will not be a trust with respect to which a deduction is available under 
section 170, 2055, 2106, or 2522, or will be treated as failing to 
function exclusively as a charitable remainder trust unless, whenever 
the trust is required to value such assets, the valuation is--
    (a) Performed exclusively by an independent trustee; or
    (b) Determined by a current qualified appraisal, as defined in Sec. 
1.170A-13(c)(3), from a qualified appraiser, as defined in Sec. 1.170A-
13(c)(5).
    (ii) Unmarketable assets. Unmarketable assets are assets that are 
not cash, cash equivalents, or other assets that can be readily sold or 
exchanged for cash or cash equivalents. For example, unmarketable assets 
include real property, closely-held stock, and an unregistered security 
for which there is no available exemption permitting public sale.
    (iii) Independent trustee. An independent trustee is a person who is 
not the grantor of the trust, a noncharitable beneficiary, or a related 
or subordinate party to the grantor, the grantor's spouse, or a 
noncharitable beneficiary (within the meaning of section 672(c) and the 
applicable regulations).
    (b) Application of certain foundation rules to charitable remainder 
trusts. See section 4947(a)(2) and section 4947(b)(3)(B) and the 
regulations thereunder for the application to charitable remainder 
trusts of certain provisions relating to private foundations. See 
section 508(e) for rules relating to required provisions in governing 
instruments prohibiting certain activities specified in section 
4947(a)(2).
    (c) Taxation of nonexempt charitable remainder trusts. If the 
charitable remainder trust has any unrelated business taxable income 
(within the meaning of section 512 and the regulations thereunder, 
determined as if part III, subchapter F, chapter 1, subtitle A of the 
Code applied to such trust) for any taxable year, the trust is subject 
to all of the taxes imposed by subtitle A of the Code for such taxable 
year. For taxable years beginning after December 31, 1969, unrelated 
business taxable income includes debt-financed income. The taxes imposed 
by subtitle A of the Code upon a nonexempt charitable remainder trust 
shall be computed under the rules prescribed by subparts A and C, part 
1, subchapter J, chapter 1, subtitle A of the Code for trusts which may 
accumulate income or which distribute corpus. The provisions of subpart 
E, part 1 of such subchapter J are not applicable with respect to a 
nonexempt charitable remainder trust. The application of the above rules 
may be illustrated by the following example:

    Example. In 1975, a charitable remainder trust which has a calendar 
year as its taxable year has $1,000 of ordinary income, including $100 
of unrelated business taxable income, and no deductions other than under 
sections 642(b) and 661(a). The trust is required to pay out $700 for 
1975 to a noncharitable recipient. Because the trust has some unrelated 
business taxable income in 1975, it is not exempt for such year. 
Consequently, the trust is taxable on all of its income as a complex 
trust. Under section 661(a) of the Code, the trust is allowed a 
deduction of $700. Under section 642(b) of the Code, the trust is 
allowed a deduction of $100. Consequently, the taxable income of the 
trust for 1975 is $200 ($1,000-$700-$100).

    (d) Treatment of annual distributions to recipients--(1) Character 
of distributions--(i) Order of distributions. Annuity and unitrust 
amounts shall be treated as having the following characteristics in the 
hands of the recipients (whether or not the trust is exempt) without 
credit for any taxes which are imposed by subtitle A of the Code on the 
trust:
    (a) Ordinary income. First, as ordinary income to the extent of the 
sum of the trust's ordinary income for the

[[Page 128]]

taxable year of the trust and its undistributed ordinary income for 
prior years. An ordinary loss for the current year shall be used to 
reduce undistributed ordinary income for prior years and any excess 
shall be carried forward indefinitely to reduce ordinary income for 
future years. For purposes of this section, the amount of current and 
prior years' income shall be computed without regard to the deduction 
for net operating losses provided by sections 172 or 642(d).
    (b) Capital gain. Second, as capital gain to the extent of the 
trust's undistributed capital gains. Undistributed capital gains of the 
trust are determined on a cumulative net basis under the rules of this 
subdivision without regard to the provisions of section 1212.
    (1) Long- and short-term capital gains. If, in any taxable year of 
the trust, the trust has both undistributed short-term capital gain and 
undistributed long-term capital gain, then the short term capital gain 
shall be deemed distributed prior to any long-term capital gain.
    (2) Capital losses in excess of capital gains. If the trust has for 
any taxable year capital losses in excess of capital gains, any excess 
of the net short-term capital loss over the net long-term capital gain 
for such year shall be a short- term capital loss in the succeeding 
taxable year and any excess of the net long-term capital loss over the 
net short-term capital gain for such year shall be a long-term capital 
loss in the succeeding taxable year.
    (3) Capital gains in excess of capital losses. If the trust has for 
any taxable year capital gains in excess of capital losses, any excess 
of the net short-term capital gain over the net long-term capital loss 
for such year shall be, to the extent not deemed distributed, a short-
term capital gain in the succeeding taxable year and any excess of the 
net long-term capital gain over the net short-term capital loss for such 
year shall be, to the extent not deemed distributed, a long-term capital 
gain in the succeeding taxable year.

The application of the rules in this subdivision (b) may be illustrated 
by the following example:

    Example. (i) The X Trust is a charitable remainder trust created on 
January 1, 1975, and has the calendar year as its taxable year. During 
the years indicated, it has the following capital transactions:

1975:
  Long-term capital loss....................................         $10
  Short-term capital gain...................................           5
1976:
  Short-term capital gain...................................          20
  Short-term capital loss...................................           5
1977:
  Long-term capital gain....................................          15



Distributions for 1975 and 1976 were not in excess of current and 
accumulated ordinary income for those years. In 1977, distributions 
exceeded current and accumulated ordinary income by $5.
    (ii) The treatment of the 1975 and 1976 transactions is as follows:

1975:
  Long-term capital loss recognized.........................       $(10)
  Short-term capital gain recognized........................           5
                                                             -----------
    Net long-term capital loss carried forward to 1976......         (5)
                                                             ===========
1976:
  Short-term capital gain recognized........................          20
  Short-term capital loss recognized........................         (5)
  Long-term capital loss carried forward from 1975..........         (5)
                                                             -----------
    Net short-term capital gain carried forward to 1977.....         $10
                                                             ===========
1977:
  Long-term capital gain recognized.........................          15
  Net short-term capital gain carried forward from 1976.....          10


    (iii) Application of section 643(a)(7). For application of the anti-
abuse rule of section 643(a)(7) to distributions from charitable 
remainder trusts, see Sec. 1.643(a)-8.
    (iv) In 1977, the trust has long-term capital gain of $15 and short-
term capital gain of $10. If the trust has both short-term capital gain 
and long-term capital gain for the same taxable year, the short-term 
capital gain is deemed distributed prior to the long-term capital gain. 
Therefore, the distribution of $5 in 1977 is deemed to be short-term 
capital gain. The undistributed net short-term capital gain of $5 is a 
short-term capital gain carried forward to 1978. The undistributed net 
long-term capital gain of $15 is a long-term capital gain carried 
forward to 1978.

    (c) Other income. Third, as other income (including income excluded 
under part III, subchapter B, chapter 1, subtitle A of the Code) to the 
extent of the sum of the trust's other income for the taxable year and 
its undistributed other income for prior years. A loss in this category 
for the current year shall be used to reduce undistributed income in 
such category for prior years and

[[Page 129]]

any excess shall be carried forward indefinitely to reduce such income 
for future years.
    (d) Corpus. Finally, as a distribution of trust corpus. For purposes 
of this section, the term corpus means the net fair market value of the 
trust assets less the total undistributed income (but not loss) in each 
of the above categories.
    (ii) Rules relating to character of distributions. The determination 
of the character of amounts distributed shall be made as of the end of 
the taxable year of the trust. Amounts treated as paid from one of the 
categories of income described in (a), (b), or (c) of subdivision (i) of 
this subparagraph shall be treated as consisting of the same proportion 
of each class of items included in such category as the total of the 
current and accumulated income of each class of items bears to the total 
of the current and accumulated income for that category. A loss in one 
of such categories may not be used to reduce a gain in any other 
category. The provisions of subparts D and E, part 1, subchapter J, 
chapter 1, subtitle A of the Code are not applicable with respect to a 
charitable remainder trust (regardless of whether the trust is exempt).
    (iii) Application of section 643(a)(7). For application of the anti-
abuse rule of section 643(a)(7) to distributions from charitable 
remainder trusts, see Sec. 1.643(a)-8.
    (iv) Example. The following example illustrates the application of 
this paragraph (d)(1):

    Example. (i) X is a charitable remainder unitrust described in 
section 664(d)(2) and (3). The annual unitrust amount is the lesser of 
the amount of trust income, as defined in Sec. 1.664-3(a)(1)(i)(b), or 
six percent of the net fair market value of the trust assets valued 
annually. The net fair market value of the trust assets on the valuation 
date in 1996 is $150,000. During 1996, X has $7,500 of income after 
allocating all expenses. All of X's income for 1996 is tax-exempt 
income. At the end of 1996, X's ordinary income for the current taxable 
year and undistributed ordinary income for prior years are both zero; 
X's capital gain for the current taxable year is zero and undistributed 
capital gain for prior years is $30,000; and X's tax-exempt income for 
the current year is $7,500 and undistributed tax-exempt income for prior 
years is $2,500.
    (ii) Because the trust income of $7,500 is less than the fixed 
percentage amount of $9,000, the unitrust amount for 1996 is $7,500. The 
character of that amount in the hands of the recipient of the unitrust 
amount is determined under section 664(b). Because the unitrust amount 
is less than X's undistributed capital gain income, the recipient of the 
unitrust amount treats the distribution of $7,500 as capital gain. At 
the beginning of 1997, X's undistributed capital gain for prior years is 
reduced to $22,500, and X's undistributed tax-exempt income is increased 
to $10,000.

    (2) Allocation of deductions. Items of deduction of the trust for a 
taxable year of the trust which are deductible in determining taxable 
income (other than the deductions permitted by sections 642(b), 642(c), 
661, and 1202) which are directly attributable to one or more classes of 
items within a category of income or to corpus (determined under 
subparagraph (1)(i) of this paragraph) shall be allocated to such 
classes of items or to corpus. All other allowable deductions for such 
taxable year which are not directly attributable to one or more classes 
of items within a category of income or to corpus (other than the 
deductions permitted by sections 642(b), 642(c), 661, and 1202) shall be 
allocated among the classes of items within the category (excluding 
classes of items with net losses) on the basis of the gross income of 
such classes for such taxable year reduced by the deductions allocated 
thereto under the first sentence of this subparagraph, but in no event 
shall the amount of expenses allocated to any class of items exceed such 
income of such class for the taxable year. Items of deduction which are 
not allocable under the above two sentences (other than the deductions 
permitted by sections 642(b), 642(c), 661, and 1202) may be allocated in 
any manner. All taxes imposed by subtitle A of the Code for which the 
trust is liable because it has unrelated business taxable income and all 
taxes imposed by chapter 42 of the Code shall be allocated to corpus. 
Any expense which is not deductible in determining taxable income and 
which is not allocable to any class of items described in subparagraph 
(1)(i)(c) of this paragraph shall be allocated to corpus. The deductions 
allowable to a trust under sections 642(b), 642(c), 661, and

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1202 are not allowed in determining the amount or character of any class 
of items within a category of income or corpus in the categories 
described in subparagraph (1) of this paragraph.
    (3) Allocation of income among recipients. If there are two or more 
recipients, each will be treated as receiving his pro rata portion of 
the categories of income and corpus. The application of this rule may be 
illustrated by the following example:

    Example. X transfers $40,000 to a charitable remainder annuity trust 
which is to pay $3,000 per year to X and $2,000 per year to Y for a term 
of 5 years. During the first taxable year the trust has $3,000 of 
ordinary income, $500 of capital gain, and $500 of tax-exempt income 
after allocation of all expenses. X is treated as receiving ordinary 
income of $1,800 ($3,000/$5,000x$3,000), capital gain of $300 ($3,000/
$5,000x$500), tax exempt income of $300 ($3,000/$5,000x$500), and corpus 
of $600 ($3,000/$5,000x[$5,000-$4,000] ). Y is treated as receiving 
ordinary income of $1,200 ($2,000/$5,000x$3,000), capital gain of $200 
($2,000/$5,000x$500), tax exempt income of $200 ($2,000/$5,000x$500), 
and corpus of $400 ($2,000/$5,000x[$5,000-$4,000] ).

    (4) Year of inclusion--(i) General rule. To the extent required by 
this paragraph, the annuity or unitrust amount is includible in the 
recipient's gross income for the taxable year in which the annuity or 
unitrust amount is required to be distributed even though the annuity or 
unitrust amount is not distributed until after the close of the taxable 
year of the trust. If a recipient has a different taxable year (as 
defined in section 441 or 442) from the taxable year of the trust, the 
amount he is required to include in gross income to the extent required 
by this paragraph shall be included in his taxable year in which or with 
which ends the taxable year of the trust in which such amount is 
required to be distributed.
    (ii) Payments resulting from incorrect valuations. Notwithstanding 
subdivision (i) of this subparagraph, any payments which are made or 
required to be distributed by a charitable remainder trust pursuant to 
paragraph (a)(5) of this section, under paragraph (f)(3) of this section 
because of an amendment to the governing instrument, or under paragraphs 
(a)(1) of Sec. Sec. 1.664-2 and 1.664-3 because of an incorrect 
valuation, shall, to the extent required by this paragraph, be included 
in the gross income of the recipient in his taxable year in which or 
with which ends the taxable year of the trust in which the amount is 
paid, credited, or required to be distributed. For rules relating to 
required adjustments of underpayments and overpayments of the annuity or 
unitrust amounts in respect of payments made prior to the amendment of a 
governing instrument, see paragraph (f)(3) of this section. There is 
allowable to a recipient a deduction from gross income for any amounts 
repaid to the trust because of an overpayment during the reasonable 
period of administration or settlement or until the trust is fully 
funded, because of an amendment, or because of an incorrect valuation, 
to the extent such amounts were included in his gross income. See 
section 1341 and the regulations thereunder for rules relating to the 
computation of tax where a taxpayer restores substantial amounts held 
under a claim of right.
    (iii) Rules applicable to year of recipient's death. If the taxable 
year of the trust does not end with or within the last taxable year of 
the recipient because of the recipient's death, the extent to which the 
annuity or unitrust amount required to be distributed to him is included 
in the gross income of the recipient for his last taxable year, or in 
the gross income of his estate, is determined by making the computations 
required under this paragraph for the taxable year of the trust in which 
his last taxable year ends. (The last sentence of subdivision (i) of 
this subparagraph does not apply to such amounts.) The gross income for 
the last taxable year of a recipient on the cash basis includes (to the 
extent required by this paragraph) amounts actually distributed to the 
recipient before his death. Amounts required to be distributed which are 
distributed to his estate, are included (to the extent required by this 
paragraph) in the gross income of the estate as income in respect of a 
decedent under section 691.
    (5) Distributions in kind. The annuity or unitrust amount may be 
paid in cash or in other property. In the case

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of a distribution made in other property, the amount paid, credited, or 
required to be distributed shall be considered as an amount realized by 
the trust from the sale or other disposition of property. The basis of 
the property in the hands of the recipient is its fair market value at 
the time it was paid, credited, or required to be distributed. The 
application of these rules may be illustrated by the following example:

    Example. On January 1, 1971, X creates a charitable remainder 
annuity trust, whose taxable year is the calendar year, under which X is 
to receive $5,000 per year. During 1971, the trust receives $500 of 
ordinary income. On December 31, 1971, the trust distributed cash of 
$500 and a capital asset of the trust having a fair market value of 
$4,500 and a basis of $2,200. The trust is deemed to have realized a 
capital gain of $2,300. X treats the distribution of $5,000 as being 
ordinary income of $500, capital gain of $2,300 and trust corpus of 
$2,200. The basis of the distributed property is $4,500 in the hands of 
X.

    (e) Other distributions--(1) Character of distributions. An amount 
distributed by the trust to an organization described in section 170(c) 
other than the annuity or unitrust amount shall be considered as a 
distribution of corpus and of those categories of income specified in 
paragraph (d)(1) of this section in an order inverse to that prescribed 
in such paragraph. The character of such amount shall be determined as 
of the end of the taxable year of the trust in which the distribution is 
made after the character of the annuity or unitrust amount has been 
determined.
    (2) Distributions in kind. In the case of a distribution of an 
amount to which subparagraph (1) of this paragraph applies, no gain or 
loss is realized by the trust by reason of a distribution in kind unless 
such distribution is in satisfaction of a right to receive a 
distribution of a specific dollar amount or in specific property other 
than that distributed.
    (f) Effective date--(1) General rule. The provisions of this section 
are effective with respect to transfers in trust made after July 31, 
1969. Any trust created (within the meaning of applicable local law) 
prior to August 1, 1969, is not a charitable remainder trust even if it 
otherwise satisfies the definition of a charitable remainder trust.
    (2) Transfers to pre-1970 trusts. Property transferred to a trust 
created (within the meaning of applicable local law) before August 1, 
1969, whose governing instrument provides that an organization described 
in section 170(c) receives an irrevocable remainder interest in such 
trust, shall, for purposes of subparagraphs (1) and (3) of this 
paragraph, be deemed transferred to a trust created on the date of such 
transfer provided that the transfer occurs after July 31, 1969, and 
prior to October 18, 1971, and the transferred property and any 
undistributed income therefrom is severed and placed in a separate trust 
before December 31, 1972, or if later, on or before the 30th day after 
the date on which any judicial proceedings begun before December 31, 
1972, which are required to sever such property, become final.
    (3) Amendment of post-1969 trusts. A trust created (within the 
meaning of applicable local law) subsequent to July 31, 1969, and prior 
to December 31, 1972, which is not a charitable remainder trust at the 
date of its creation, may be treated as a charitable remainder trust 
from the date it would be deemed created under Sec. 1.664-1(a) (4) and 
(5)(i) for all purposes: Provided, That all the following requirements 
are met:
    (i) At the time of the creation of the trust, the governing 
instrument provides that an organization described in section 170(c) 
receives an irrevocable remainder interest in such trust.
    (ii) The governing instrument of the trust is amended so that the 
trust will meet the definition of a charitable remainder trust and, if 
applicable, will meet the requirement of paragraph (a)(5)(i) of this 
section that obligation to make payment of the annuity or unitrust 
amount with respect to property passing at death begin as of the date of 
death, before December 31, 1972, or if later, on or before the 30th day 
after the date on which any judicial proceedings which are begun before 
December 31, 1972, and which are required to amend its governing 
instrument, become final. In the case of a trust created (within the 
meaning of applicable local law) subsequent to July 31, 1969, and prior 
to December 31, 1972, the provisions of section 508(d)(2)(A) shall not

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apply if the governing instrument of the trust is amended so as to 
comply with the requirements of section 508(e) before December 31, 1972, 
or if later, on or before the 30th day after the date on which any 
judicial proceedings which are begun before December 31, 1972, and which 
are required to amend its governing instrument, become final. 
Notwithstanding the provisions of paragraphs (a)(3) and (a)(4) of 
Sec. Sec. 1.664-2 and 1.664-3, the governing instrument may grant to 
the trustee a power to amend the governing instrument for the sole 
purpose of complying with the requirements of this section and Sec. 
1.664-2 or Sec. 1.664-3: Provided, That at the creation of the trust, 
the governing instrument (a) provides for the payment of a unitrust 
amount described in Sec. 1.664-3(a)(1)(i) or an annuity which meets the 
requirements of paragraph (a)(2) of Sec. 1.664-2 or Sec. 1.664-3, (b) 
designates the recipients of the trust and the period for which the 
amount described in (a) of this subdivision (ii) is to be paid, and (c) 
provides that an organization described in section 170(c) receives an 
irrevocable remainder interest in such trust. The mere granting of such 
a power is not sufficient to meet the requirements of this subparagraph 
that the governing instrument be amended in the manner and within the 
time limitations of this subparagraph.
    (iii)(a) Where the amount of the distributions which would have been 
made by the trust to a recipient if the amended provisions of such trust 
had been in effect from the time of creation of such trust exceeds the 
amount of the distributions made by the trust prior to its amendment, 
the trust pays an amount equal to such excess to the recipient.
    (b) Where the amount of distributions made to the recipient prior to 
the amendment of the trust exceeds the amount of the distributions which 
would have been made by such trust if the amended provisions of such 
trust had been in effect from the time of creation of such trust, such 
excess is repaid to the trust by the recipient.

See paragraph (d)(4) of this section for rules relating to the year of 
inclusion in the case of an underpayment to a recipient and the 
allowance of a deduction in the case of an overpayment to a recipient. A 
deduction for a transfer to a charitable remainder trust shall not be 
allowed until the requirements of this paragraph are met and then only 
if the deduction is claimed on a timely filed return (including 
extensions) or on a claim for refund filed within the period of 
limitations prescribed by section 6511(a).
    (4) Valuation of unmarketable assets. The rules contained in 
paragraph (a)(7) of this section are applicable for trusts created on or 
after December 10, 1998. A trust in existence as of December 10, 1998, 
whose governing instrument requires that an independent trustee value 
the trust's unmarketable assets may be amended or reformed to permit a 
valuation method that satisfies the requirements of paragraph (a)(7) of 
this section for taxable years beginning on or after December 10, 1998.
    (g) Transitional effective date. Notwithstanding any other provision 
of this section, Sec. 1.664-2 or Sec. 1.664-3, the requirement of 
paragraph (a)(5)(i) of this section that interest accrue on overpayments 
and underpayments, the requirement of paragraph (a)(5)(ii) of this 
section that the unitrust amount accruing under the formula provided 
therein cease with the death of the last recipient, and the requirement 
that the governing instrument of the trust contain the provisions 
specified in paragraph (a)(1)(iv) of Sec. 1.664-2 (relating to 
computation of the annuity amount in certain circumstances), paragraph 
(a)(1)(v) of Sec. 1.664-3 (relating to computation of the unitrust 
amount in certain circumstances), paragraphs (b) of Sec. Sec. 1.664-2 
and 1.664-3 (relating to additional contributions), and paragraph 
(a)(1)(iii) of Sec. 1.664-3 (relating to incorrect valuations), 
paragraphs (a)(6)(iv) of Sec. Sec. 1.664-2 and 1.664-3 (relating to 
alternative remaindermen) shall not apply to:
    (1) A will executed on or before December 31, 1972, if:
    (i) The testator dies before December 31, 1975, without having 
republished the will after December 31, 1972, by codicil or otherwise.
    (ii) The testator at no time after December 31, 1972, had the right 
to change the provisions of the will which pertain to the trust, or

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    (iii) The will is not republished by codicil or otherwise before 
December 31, 1975, and the testator is on such date and at all times 
thereafter under a mental disability to republish the will by codicil or 
otherwise, or
    (2) A trust executed on or before December 31, 1972, if:
    (i) The grantor dies before December 31, 1975, without having 
amended the trust after December 31, 1972,
    (ii) The trust is irrevocable on December 31, 1972, or
    (iii) The trust is not amended before December 31, 1975, and the 
grantor is on such date and at all times thereafter under a mental 
disability to change the terms of the trust.

[T.D. 7202, 37 FR 16913, Aug. 23, 1972; 37 FR 28288, Dec. 22, 1972, as 
amended by T.D. 7955, 49 FR 19983, May 11, 1984; T.D. 8540, 59 FR 30102, 
30116, June 10, 1994; T.D. 8791, 63 FR 68191, Dec. 10, 1998; T.D. 8819, 
64 FR 23228, 23229, Apr. 30, 1999; T.D. 8886, 65 FR 36943, June 12, 
2000; T.D. 8926, 66 FR 1037, Jan. 5, 2001]