[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: 26CFR1.664-2]

[Page 133-139]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.664-2  Charitable remainder annuity trust.

    (a) Description. A charitable remainder annuity trust is a trust 
which complies with the applicable provisions of Sec. 1.664-1 and meets 
all of the following requirements:
    (1) Required payment of annuity amount--(i) Payment of sum certain 
at least annually. The governing instrument provides that the trust will 
pay a sum certain not less often than annually to a person or persons 
described in paragraph (a)(3) of this section for each taxable year of 
the period specified in paragraph (a)(5) of this section.
    (a) General rule applicable to all trusts. A trust will not be 
deemed to have engaged in an act of self-dealing (within the meaning of 
section 4941), to have unrelated debt-financed income (within the 
meaning of section 514), to have received an additional contribution 
(within the meaning of paragraph (b) of this section), or to have failed 
to function exclusively as a charitable remainder trust (within the 
meaning of Sec. 1.664-1(a)(4)) merely because the annuity amount is 
paid after the close of the taxable year if such payment is made within 
a reasonable time after the close of such taxable year and the entire 
annuity amount in the hands of the recipient is characterized only as 
income from the categories described in section 664(b)(1), (2), or (3), 
except to the extent it is characterized as corpus described in section 
664(b)(4) because--
    (1) The trust pays the annuity amount by distributing property 
(other than cash) that it owned at the close of the taxable year to pay 
the annuity amount, and the trustee elects to treat any income generated 
by the distribution as occurring on the last day of the taxable year in 
which the annuity amount is due;
    (2) The trust pays the annuity amount by distributing cash that was 
contributed to the trust (with respect to which a deduction was 
allowable under section 170, 2055, 2106, or 2522); or
    (3) The trust pays the annuity amount by distributing cash received 
as a return of basis in any asset that was contributed to the trust 
(with respect to which a deduction was allowable under section 170, 
2055, 2106, or 2522), and that is sold by the trust during the year for 
which the annuity amount is due.
    (b) Special rule for trusts created before December 10, 1998. In 
addition to the circumstances described in paragraph (a)(1)(i)(a) of 
this section, a trust created before December 10, 1998, will not be 
deemed to have engaged in an act of self-dealing (within the meaning of 
section 4941), to have unrelated debt-financed income (within the 
meaning of section 514), to have received an additional contribution 
(within the meaning of paragraph (b) of this section), or to have failed 
to function exclusively as a charitable remainder trust (within the 
meaning of Sec. 1.664-1(a)(4)) merely because the annuity amount is 
paid after the close of the taxable year if such payment is made within 
a reasonable time after the close of such taxable year and the sum 
certain to be paid each year as the annuity amount is 15 percent or less 
of the initial net fair market value of the property irrevocably passing 
in trust as determined for federal tax purposes.
    (c) Reasonable time. For this paragraph (a)(1)(i), a reasonable time 
will not ordinarily extend beyond the date by which the trustee is 
required to file

[[Page 134]]

Form 5227, ``Split-Interest Trust Information Return,'' (including 
extensions) for the taxable year.
    (d) Example. The following example illustrates the rules in 
paragraph (a)(1)(i)(a) of this section:

    Example. X is a charitable remainder annuity trust described in 
section 664(d)(1) that was created after December 10, 1998. The prorated 
annuity amount payable from X for Year 1 is $100. The trustee does not 
pay the annuity amount to the recipient by the close of Year 1. At the 
end of Year 1, X has only $95 in the ordinary income category under 
section 664(b)(1) and no income in the capital gain or tax-exempt income 
categories under section 664(b)(2) or (3), respectively. By April 15 of 
Year 2, in addition to $95 in cash, the trustee distributes to the 
recipient of the annuity a capital asset with a $5 fair market value and 
a $2 adjusted basis to pay the $100 annuity amount due for Year 1. The 
trust owned the asset at the end of Year 1. Under Sec. 1.664-1(d)(5), 
the distribution is treated as a sale by X, resulting in X recognizing a 
$3 capital gain. The trustee elects to treat the capital gain as 
occurring on the last day of Year 1. Under Sec. 1.664-1(d)(1), the 
character of the annuity amount for Year 1 in the recipient's hands is 
$95 of ordinary income, $3 of capital gain income, and $2 of trust 
corpus. For Year 1, X satisfied paragraph (a)(1)(i)(a) of this section.

    (e) Effective date. This paragraph (a)(1)(i) is applicable for 
taxable years ending after April 18, 1997. However, paragraphs 
(a)(1)(i)(a)(2) and (3) of this section apply only to distributions made 
on or after January 5, 2001.
    (ii) Definition of sum certain. A sum certain is a stated dollar 
amount which is the same either as to each recipient or as to the total 
amount payable for each year of such period. For example, a provision 
for an amount which is the same every year to A until his death and 
concurrently an amount which is the same every year to B until his 
death, with the amount to each recipient to terminate at his death, 
would satisfy the above rule. Similarly, provisions for an amount to A 
and B for their joint lives and then to the survivor would satisfy the 
above rule. In the case of a distribution to an organization described 
in section 170(c) at the death of a recipient or the expiration of a 
term of years, the governing instrument may provide for a reduction of 
the stated amount payable after such a distribution: Provided, That:
    (a) The reduced amount payable is the same either as to each 
recipient or as to the total amount payable for each year of the balance 
of such period, and
    (b) The requirements of subparagraph (2)(ii) of this paragraph are 
met.
    (iii) Sum certain stated as a fraction or percentage. The stated 
dollar amount may be expressed as a fraction or a percentage of the 
initial net fair market value of the property irrevocably passing in 
trust as finally determined for Federal tax purposes. If the stated 
dollar amount is so expressed and such market value is incorrectly 
determined by the fiduciary, the requirement of this subparagraph will 
be satisfied if the governing instrument provides that in such event the 
trust shall pay to the recipient (in the case of an undervaluation) or 
be repaid by the recipient (in the case of an overvaluation) an amount 
equal to the difference between the amount which the trust should have 
paid the recipient if the correct value were used and the amount which 
the trust actually paid the recipient. Such payments or repayments must 
be made within a reasonable period after the final determination of such 
value. Any payment due to a recipient by reason of such incorrect 
valuation shall be considered to be a payment required to be distributed 
at the time of such final determination for purposes of paragraph 
(d)(4)(ii) of Sec. 1.664-1. See paragraph (d)(4) of Sec. 1.664-1 for 
rules relating to the year of inclusion of such payments and the 
allowance of a deduction for such repayments. See paragraph (b) of this 
section for rules relating to future contributions. For rules relating 
to required adjustments for underpayments or overpayments of the amount 
described in this paragraph in respect of payments made during a 
reasonable period of administration, see paragraph (a)(5) of Sec. 
1.664-1. The application of the rule permitting the stated dollar amount 
to be expressed as a fraction or a percentage of the initial net fair 
market value of the property irrevocably passing in trust as finally 
determined for Federal tax purposes may be illustrated by the following 
example:

    Example. The will of X provides for the transfer of one-half of his 
residuary estate to a charitable remainder annuity trust which

[[Page 135]]

is required to pay to W for life an annuity equal to 5 percent of the 
initial net fair market value of the interest passing in trust as 
finally determined for Federal tax purposes. The annuity is to be paid 
on December 31 of each year computed from the date of X's death. The 
will also provides that if such initial net fair market value is 
incorrectly determined, the trust shall pay to W, in the case of an 
undervaluation, or be repaid by W, in the case of an overvaluation, an 
amount equal to the difference between the amount which the trust should 
have paid if the correct value were used and the amount which the trust 
actually paid. X dies on March 1, 1971. The executor files an estate tax 
return showing the value of the residuary estate as $250,000 before 
reduction for taxes and expenses of $50,000. The executor paid to W 
$4,192 ([$250,000- $50,000]x1/2x5 percentx306/365) on December 31, 1971. 
On January 1, 1972, the executor transfers one-half of the residue of 
the estate to the trust. The trust adopts the calendar year as its 
taxable year. The value of the residuary estate is finally determined 
for Federal tax purposes to be $240,000 ($290,000-$50,000). Accordingly, 
the amount which the executor should have paid to W is $5,030 ( 
[$290,000-$50,000]x 1/2x5 percentx306/365). Consequently, an additional 
amount of $838 ($5,030-$4,192) must be paid to W within a reasonable 
period after the final determination of value for Federal tax purposes.

    (iv) Computation of annuity amount in certain circumstances--(a) 
Short taxable years. The governing instrument provides that, in the case 
of a taxable year which is for a period of less than 12 months other 
than the taxable year in which occurs the end of the period specified in 
subparagraph (5) of this paragraph, the annuity amount determined under 
subdivision (i) of this subparagraph shall be the amount otherwise 
determined under that subdivision multiplied by a fraction the numerator 
of which is the number of days in the taxable year of the trust and the 
denominator of which is 365 (366 if February 29 is a day included in the 
numerator).
    (b) Last taxable year of period. The governing instrument provides 
that, in the case of the taxable year in which occurs the end of the 
period specified in subparagraph (5) of this paragraph, the annuity 
amount which must be distributed under subdivision (i) of this 
subparagraph shall be the amount otherwise determined under that 
subdivision multiplied by a fraction the numerator of which is the 
number of days in the period beginning on the first day of such taxable 
year and ending on the last day of the period specified in subparagraph 
(5) of this paragraph and the denominator of which is 365 (366 if 
February 29 is a day included in the numerator). See subparagraph (5) of 
this paragraph for a special rule allowing termination of payment of the 
annuity amount with the regular payment next preceding the termination 
of the period specified therein.
    (2) Minimum annuity amount--(i) General rule. The total amount 
payable under subparagraph (1) of this paragraph is not less than 5 
percent of the initial net fair market value of the property placed in 
trust as finally determined for Federal tax purposes.
    (ii) Reduction of annuity amount in certain cases. A trust will not 
fail to meet the requirements of this subparagraph by reason of the fact 
that it provides for a reduction of the stated amount payable upon the 
death of a recipient or the expiration of a term of years provided that:
    (a) A distribution is made to an organization described in section 
170(c) at the death of such recipient or the expiration of such term of 
years, and
    (b) The total amounts payable each year under subparagraph (1) of 
this paragraph after such distribution are not less than a stated dollar 
amount which bears the same ratio to 5 percent of the initial net fair 
market value of the trust assets as the net fair market value of the 
trust assets immediately after such distribution bears to the net fair 
market value of the trust assets immediately before such distribution.
    (iii) Rule applicable to inter vivos trust which does not provide 
for payment of minimum annuity amount. In the case where the grantor of 
an inter vivos trust underestimates in good faith the initial net fair 
market value of the property placed in trust as finally determined for 
Federal tax purposes and specifies a fixed dollar amount for the annuity 
which is less than 5 percent of the initial net fair market value of the 
property placed in trust as finally determined for Federal tax purposes, 
the trust will be deemed to have met the 5 percent requirement if the 
grantor or

[[Page 136]]

his representative consents, by appropriate agreement with the District 
Director, to accept an amount equal to 20 times the annuity as the fair 
market value of the property placed in trust for purposes of determining 
the appropriate charitable contributions deduction.
    (3) Permissible recipients--(i) General rule. The amount described 
in subparagraph (1) of this paragraph is payable to or for the use of a 
named person or persons, at least one of which is not an organization 
described in section 170(c). If the amount described in subparagraph (1) 
of this paragraph is to be paid to an individual or individuals, all 
such individuals must be living at the time of the creation of the 
trust. A named person or persons may include members of a named class 
provided that, in the case of a class which includes any individual, all 
such individuals must be alive and ascertainable at the time of the 
creation of the trust unless the period for which the annuity amount is 
to be paid to such class consists solely of a term of years. For 
example, in the case of a testamentary trust, the testator's will may 
provide that an amount shall be paid to his children living at his 
death.
    (ii) Power to alter amount paid to recipients. A trust is not a 
charitable remainder annuity trust if any person has the power to alter 
the amount to be paid to any named person other than an organization 
described in section 170(c) if such power would cause any person to be 
treated as the owner of the trust, or any portion thereof, if subpart E, 
part 1, subchapter J, chapter 1, subtitle A of the Code were applicable 
to such trust. See paragraph (a)(4) of this section for a rule 
permitting the retention by a grantor of a testamentary power to revoke 
or terminate the interest of any recipient other than an organization 
described in section 170(c). For example, the governing instrument may 
not grant the trustee the power to allocate the annuity among members of 
a class unless such power falls within one of the exceptions to section 
674(a).
    (4) Other payments. No amount other than the amount described in 
subparagraph (1) of this paragraph may be paid to or for the use of any 
person other than an organization described in section 170(c). An amount 
is not paid to or for the use of any person other than an organization 
described in section 170(c) if the amount is transferred for full and 
adequate consideration. The trust may not be subject to a power to 
invade, alter, amend, or revoke for the beneficial use of a person other 
than an organization described in section 170(c). Notwithstanding the 
preceding sentence, the grantor may retain the power exercisable only by 
will to revoke or terminate the interest of any recipient other than an 
organization described in section 170(c). The governing instrument may 
provide that any amount other than the amount described in subparagraph 
(1) of this paragraph shall be paid (or may be paid in the discretion of 
the trustee) to an organization described in section 170(c) provided 
that in the case of distributions in kind, the adjusted basis of the 
property distributed is fairly representative of the adjusted basis of 
the property available for payment on the date of payment. For example, 
the governing instrument may provide that a portion of the trust assets 
may be distributed currently, or upon the death of one or more 
recipients, to an organization described in section 170(c).
    (5) Period of payment of annuity amount--(i) General rules. The 
period for which an amount described in subparagraph (1) of this 
paragraph is payable begins with the first year of the charitable 
remainder trust and continues either for the life or lives of a named 
individual or individuals or for a term of years not to exceed 20 years. 
Only an individual or an organization described in section 170(c) may 
receive an amount for the life of an individual. If an individual 
receives an amount for life, it must be solely for his life. Payment of 
the amount described in subparagraph (1) of this paragraph may terminate 
with the regular payment next preceding the termination of the period 
described in this subparagraph. The fact that the recipient may not 
receive such last payment shall not be taken into account for purposes 
of determining the present value of the remainder interest. In the case 
of an amount payable for a term of years, the length of the term of 
years shall be

[[Page 137]]

ascertainable with certainty at the time of the creation of the trust, 
except that the term may be terminated by the death of the recipient or 
by the grantor's exercise by will of a retained power to revoke or 
terminate the interest of any recipient other than an organization 
described in section 170(c). In any event, the period may not extend 
beyond either the life or lives of a named individual or individuals or 
a term of years not to exceed 20 years. For example, the governing 
instrument may not provide for the payment of an annuity amount to A for 
his life and then to B for a term of years because it is possible for 
the period to last longer than either the lives of recipients in being 
at the creation of the trust or a term of years not to exceed 20 years. 
On the other hand, the governing instrument may provide for the payment 
of an annuity amount to A for his life and then to B for his life or a 
term of years (not to exceed 20 years), whichever is shorter (but not 
longer), if both A and B are in being at the creation of the trust 
because it is not possible for the period to last longer than the lives 
of recipients in being at the creation of the trust.
    (ii) Relationship to 5 percent requirement. The 5 percent 
requirement provided in subparagraph (2) of this paragraph must be met 
until the termination of all of the payments described in subparagraph 
(1) of this paragraph. For example, the following provisions would 
satisfy the above rules:
    (a) An amount equal to at least 5 percent of the initial net fair 
market value of the property placed in trust to A and B for their joint 
lives and then to the survivor for his life;
    (b) An amount equal to at least 5 percent of the initial net fair 
market value of the property placed in trust to A for life or for a term 
of years not longer than 20 years, whichever is longer (or shorter);
    (c) An amount equal to at least 5 percent of the initial net fair 
market value of the property placed in trust to A for a term of years 
not longer than 20 years and then to B for life (provided B was living 
at the date of creation of the trust);
    (d) An amount to A for his life and concurrently an amount to B for 
his life (the amount to each recipient to terminate at his death) if the 
amount given to each individual is not less than 5 percent of the 
initial net fair market value of the property placed in trust; or
    (e) An amount to A for his life and concurrently an equal amount to 
B for his life, and at the death of the first to die, the trust to 
distribute one-half of the then value of its assets to an organization 
described in section 170(c), if the total of the amounts given to A and 
B is not less than 5 percent of the initial net fair market value of the 
property placed in trust.
    (6) Permissible remaindermen--(i) General rule. At the end of the 
period specified in subparagraph (5) of this paragraph the entire corpus 
of the trust is required to be irrevocably transferred, in whole or in 
part, to or for the use of one or more organizations described in 
section 170(c) or retained, in whole or in part, for such use.
    (ii) Treatment of trust. If all of the trust corpus is to be 
retained for such use, the taxable year of the trust shall terminate at 
the end of the period specified in subparagraph (5) of this paragraph 
and the trust shall cease to be treated as a charitable remainder trust 
for all purposes. If all or any portion of the trust corpus is to be 
transferred to or for the use of such organization or organizations, the 
trustee shall have a reasonable time after the period specified in 
subparagraph (5) of this paragraph to complete the settlement of the 
trust. During such time, the trust shall continue to be treated as a 
charitable remainder trust for all purposes, such as sections 664, 
4947(a)(2), and 4947(b)(3)(B). Upon the expiration of such period, the 
taxable year of the trust shall terminate and the trust shall cease to 
be treated as a charitable remainder trust for all purposes. If the 
trust continues in existence, it will be subject to the provisions of 
section 4947(a)(1) unless the trust is exempt from taxation under 
section 501(a). For purposes of determining whether the trust is exempt 
under section 501(a) as an organization described in section 501(c)(3), 
the trust shall be deemed to have been created at the time it ceases to 
be treated as a charitable remainder trust.

[[Page 138]]

    (iii) Concurrent or successive remaindermen. Where interests in the 
corpus of the trust are given to more than one organization described in 
section 170(c) such interests may be enjoyed by them either concurrently 
or successively.
    (iv) Alternative remaindermen. The governing instrument shall 
provide that if an organization to or for the use of which the trust 
corpus is to be transferred or for the use of which the trust corpus is 
to be retained is not an organization described in section 170(c) at the 
time any amount is to be irrevocably transferred to or for the use of 
such organization, such amount shall be transferred to or for the use of 
one or more alternative organizations which are described in section 
170(c) at such time or retained for such use. Such alternative 
organization or organizations may be selected in any manner provided by 
the terms of the governing instrument.
    (b) Additional contributions. A trust is not a charitable remainder 
annuity trust unless its governing instrument provides that no 
additional contributions may be made to the charitable remainder annuity 
trust after the initial contribution. For purposes of this section, all 
property passing to a charitable remainder annuity trust by reason of 
death of the grantor shall be considered one contribution.
    (c) Calculation of the fair market value of the remainder interest 
of a charitable remainder annuity trust. For purposes of sections 170, 
2055, 2106, and 2522, the fair market value of the remainder interest of 
a charitable remainder annuity trust (as described in this section) is 
the net fair market value (as of the appropriate valuation date) of the 
property placed in trust less the present value of the annuity. For 
purposes of this section, valuation date means, in general, the date on 
which the property is transferred to the trust by the donor regardless 
of when the trust is created. In the case of transfers to a charitable 
remainder annuity trust for which the valuation date is after April 30, 
1989, if an election is made under section 7520 and Sec. 1.7520-2(b) to 
compute the present value of the charitable interest by use of the 
interest rate component for either of the 2 months preceding the month 
in which the transfer is made, the month so elected is the valuation 
date for purposes of determining the interest rate and mortality tables. 
For purposes of section 2055 or 2106, the valuation date is the date of 
death unless the alternate valuation date is elected in accordance with 
section 2032, in which event, and within the limitations set forth in 
section 2032 and the regulations thereunder, the valuation date is the 
alternate valuation date. If the decedent's estate elects the alternate 
valuation date under section 2032 and also elects, under section 7520 
and Sec. 1.7520-2(b), to use the interest rate component for one of the 
2 months preceding the alternate valuation date, the month so elected is 
the valuation date for purposes of determining the interest rate and 
mortality tables. The present value of an annuity is computed under 
Sec. 20.2031-7(d) of this chapter (Estate Tax Regulations) for 
transfers for which the valuation date is after April 30, 1999, or under 
Sec. 20.2031-7A (a) through (e) of this chapter, whichever is 
applicable, for transfers for which the valuation date is before May 1, 
1999. See, however, Sec. 1.7520-3(b) (relating to exceptions to the use 
of prescribed tables under certain circumstances).
    (d) Deduction for transfers to a charitable remainder annuity trust. 
For rules relating to a deduction for transfers to a charitable 
remainder annuity trust, see section 170, 2055, 2106, or 2522 and the 
regulations thereunder. Any claim for deduction on any return for the 
value of a remainder interest in a charitable remainder annuity trust 
must be supported by a full statement attached to the return showing the 
computation of the present value of such interest. The deduction allowed 
by section 170 is limited to the fair market value of the remainder 
interest of a charitable remainder annuity trust regardless of whether 
an organization described in section 170(c) also receives a portion of 
the annuity. For a special rule relating to the reduction of the amount 
of a charitable contribution deduction with respect to a contribution of 
certain ordinary income property or capital gain property, see section 
170(e)(1)(A) or 170(e)(1)(B)(i) and the regulations thereunder. For 
rules for postponing

[[Page 139]]

the time for deduction of a charitable contribution of a future interest 
in tangible personal property, see section 170(a)(3) and the regulations 
thereunder.

[T.D. 7202, 37 FR 16918, Aug. 23, 1972, as amended by T.D. 7955, 49 FR 
19983, May 11, 1984; T.D. 8540, 59 FR 30116, June 10, 1994; T.D. 8791, 
63 FR 68191, Dec. 10, 1998; T.D. 8819, 64 FR 23229, Apr. 30, 1999; T.D. 
8819, Mar. 9, 2000, 65 FR 12471; T.D. 8926, 66 FR 1037, Jan. 5, 2001]