[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: 26CFR1.664-3]

[Page 139-147]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.664-3  Charitable remainder unitrust.

    (a) Description. A charitable remainder unitrust 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 unitrust amount--(i) Payment of fixed 
percentage at least annually--(a) General rule. The governing instrument 
provides that the trust will pay not less often than annually a fixed 
percentage of the net fair market value of the trust assets determined 
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. This paragraph (a)(1)(i)(a) is applicable for 
taxable years ending after April 18, 1997.
    (b) Income exception. Instead of the amount described in (a) of this 
subdivision (i), the governing instrument may provide that the trust 
shall pay for any year either the amount described in (1) or the total 
of the amounts described in (1) and (2) of this subdivision (b).
    (1) The amount of trust income for a taxable year to the extent that 
such amount is not more than the amount required to be distributed under 
paragraph (a)(1)(i)(a) of this section.
    (2) An amount of trust income for a taxable year that is in excess 
of the amount required to be distributed under paragraph (a)(1)(i)(a) of 
this section for such year to the extent that (by reason of paragraph 
(a)(1)(i)(b)(1) of this section) the aggregate of the amounts paid in 
prior years was less than the aggregate of such required amounts.
    (3) For purposes of this paragraph (a)(1)(i)(b), trust income 
generally means income as defined under section 643(b) and the 
applicable regulations. However, trust income may not be determined by 
reference to a fixed percentage of the annual fair market value of the 
trust property, notwithstanding any contrary provision in applicable 
state law. Proceeds from the sale or exchange of any assets contributed 
to the trust by the donor must be allocated to principal and not to 
trust income at least to the extent of the fair market value of those 
assets on the date of their contribution to the trust. Proceeds from the 
sale or exchange of any assets purchased by the trust must be allocated 
to principal and not to trust income at least to the extent of the 
trust's purchase price of those assets. Except as provided in the two 
preceding sentences, proceeds from the sale or exchange of any assets 
contributed to the trust by the donor or purchased by the trust may be 
allocated to income, pursuant to the terms of the governing instrument, 
if not prohibited by applicable local law. A discretionary power to make 
this allocation may be granted to the trustee under the terms of the 
governing instrument but only to the extent that the state statute 
permits the trustee to make adjustments between income and principal to 
treat beneficiaries impartially.
    (4) The rules in paragraph (a)(1)(i)(b)(1) and (2) of this section 
are applicable for taxable years ending after April 18, 1997. The rule 
in the first sentence of paragraph (a)(1)(i)(b)(3) is applicable for 
taxable years ending after April 18, 1997. The rules in the second, 
fourth, and fifth sentences of paragraph (a)(1)(i)(b)(3) are applicable 
for taxable years ending after January 2, 2004. The rule in the third 
sentence of paragraph (a)(1)(i)(b)(3) is applicable for sales or 
exchanges that occur after April 18, 1997. The rule in the sixth 
sentence of paragraph (a)(1)(i)(b)(3) is applicable for trusts created 
after January 2, 2004.
    (c) Combination of methods. Instead of the amount described in 
paragraph (a)(1)(i)(a) or (b) of this section, the governing instrument 
may provide that the trust will pay not less often than annually the 
amount described in paragraph (a)(1)(i)(b) of this section for an 
initial period and then pay the amount described in paragraph

[[Page 140]]

(a)(1)(i)(a) of this section (calculated using the same fixed 
percentage) for the remaining years of the trust only if the governing 
instrument provides that--
    (1) The change from the method prescribed in paragraph (a)(1)(i)(b) 
of this section to the method prescribed in paragraph (a)(1)(i)(a) of 
this section is triggered on a specific date or by a single event whose 
occurrence is not discretionary with, or within the control of, the 
trustees or any other persons;
    (2) The change from the method prescribed in paragraph (a)(1)(i)(b) 
of this section to the method prescribed in paragraph (a)(1)(i)(a) of 
this section occurs at the beginning of the taxable year that 
immediately follows the taxable year during which the date or event 
specified under paragraph (a)(1)(i)(c)(1) of this section occurs; and
    (3) Following the trust's conversion to the method described in 
paragraph (a)(1)(i)(a) of this section, the trust will pay at least 
annually to the permissible recipients the amount described only in 
paragraph (a)(1)(i)(a) of this section and not any amount described in 
paragraph (a)(1)(i)(b) of this section.
    (d) Triggering event. For purposes of paragraph (a)(1)(i)(c)(1) of 
this section, a triggering event based on the sale of unmarketable 
assets as defined in Sec. 1.664-1(a)(7)(ii), or the marriage, divorce, 
death, or birth of a child with respect to any individual will not be 
considered discretionary with, or within the control of, the trustees or 
any other persons.
    (e) Examples. The following examples illustrate the rules in 
paragraph (a)(1)(i)(c) of this section. For each example, assume that 
the governing instrument of charitable remainder unitrust Y provides 
that Y will initially pay not less often than annually the amount 
described in paragraph (a)(1)(i)(b) of this section and then pay the 
amount described in paragraph (a)(1)(i)(a) of this section (calculated 
using the same fixed percentage) for the remaining years of the trust 
and that the requirements of paragraphs (a)(1)(i)(c)(2) and (3) of this 
section are satisfied. The examples are as follows:

    Example 1. Y is funded with the donor's former personal residence. 
The governing instrument of Y provides for the change in method for 
computing the annual unitrust amount as of the first day of the year 
following the year in which the trust sells the residence. Y provides 
for a combination of methods that satisfies paragraph (a)(1)(i)(c) of 
this section.
    Example 2. Y is funded with cash and an unregistered security for 
which there is no available exemption permitting public sale under the 
Securities and Exchange Commission rules. The governing instrument of Y 
provides that the change in method for computing the annual unitrust 
amount is triggered on the earlier of the date when the stock is sold or 
at the time the restrictions on its public sale lapse or are otherwise 
lifted. Y provides for a combination of methods that satisfies paragraph 
(a)(1)(i)(c) of this section.
    Example 3. Y is funded with cash and with a security that may be 
publicly traded under the Securities and Exchange Commission rules. The 
governing instrument of Y provides that the change in method for 
computing the annual unitrust amount is triggered when the stock is 
sold. Y does not provide for a combination of methods that satisfies the 
requirements of paragraph (a)(1)(i)(c) of this section because the sale 
of the publicly-traded stock is within the discretion of the trustee.
    Example 4. S establishes Y for her granddaughter, G, when G is 10 
years old. The governing instrument of Y provides for the change in 
method for computing the annual unitrust amount as of the first day of 
the year following the year in which G turns 18 years old. Y provides 
for a combination of methods that satisfies paragraph (a)(1)(i)(c) of 
this section.
    Example 5. The governing instrument of Y provides for the change in 
method for computing the annual unitrust amount as of the first day of 
the year following the year in which the donor is married. Y provides 
for a combination of methods that satisfies paragraph (a)(1)(i)(c) of 
this section.
    Example 6. The governing instrument of Y provides that if the donor 
divorces, the change in method for computing the annual unitrust amount 
will occur as of the first day of the year following the year of the 
divorce. Y provides for a combination of methods that satisfies 
paragraph (a)(1)(i)(c) of this section.
    Example 7. The governing instrument of Y provides for the change in 
method for computing the annual unitrust amount as of the first day of 
the year following the year in which the noncharitable beneficiary's 
first child is born. Y provides for a combination of methods that 
satisfies paragraph (a)(1)(i)(c) of this section.
    Example 8. The governing instrument of Y provides for the change in 
method for computing the annual unitrust amount as of the first day of 
the year following the year in

[[Page 141]]

which the noncharitable beneficiary's father dies. Y provides for a 
combination of methods that satisfies paragraph (a)(1)(i)(c) of this 
section.
    Example 9. The governing instrument of Y provides for the change in 
method for computing the annual unitrust amount as of the first day of 
the year following the year in which the noncharitable beneficiary's 
financial advisor determines that the beneficiary should begin receiving 
payments under the second prescribed payment method. Because the change 
in methods for paying the unitrust amount is triggered by an event that 
is within a person's control, Y does not provide for a combination of 
methods that satisfies paragraph (a)(1)(i)(c) of this section.
    Example 10. The governing instrument of Y provides for the change in 
method for computing the annual unitrust amount as of the first day of 
the year following the year in which the noncharitable beneficiary 
submits a request to the trustee that the trust convert to the second 
prescribed payment method. Because the change in methods for paying the 
unitrust amount is triggered by an event that is within a person's 
control, Y does not provide for a combination of methods that satisfies 
paragraph (a)(1)(i)(c) of this section.

    (f) Effective date--(1) General rule. Paragraphs (a)(1)(i)(c), (d), 
and (e) of this section are applicable for charitable remainder trusts 
created on or after December 10, 1998.
    (2) General rule regarding reformations of combination of method 
unitrusts. If a trust is created on or after December 10, 1998, and 
contains a provision allowing a change in calculating the unitrust 
amount that does not comply with the provisions of paragraph 
(a)(1)(i)(c) of this section, the trust will qualify as a charitable 
remainder unitrust only if it is amended or reformed to use the initial 
method for computing the unitrust amount throughout the term of the 
trust, or is reformed in accordance with paragraph (a)(1)(i)(f)(3) of 
this section. If a trust was created before December 10, 1998, and 
contains a provision allowing a change in calculating the unitrust 
amount that does not comply with the provisions of paragraph 
(a)(1)(i)(c) of this section, the trust may be reformed to use the 
initial method for computing the unitrust amount throughout the term of 
the trust without causing the trust to fail to function exclusively as a 
charitable remainder unitrust under Sec. 1.664-1(a)(4), or may be 
reformed in accordance with paragraph (a)(1)(i)(f)(3) of this section. 
Except as provided in paragraph (a)(1)(i)(f)(3) of this section, a 
qualified charitable remainder unitrust will not continue to qualify as 
a charitable remainder unitrust if it is amended or reformed to add a 
provision allowing a change in the method for calculating the unitrust 
amount.
    (3) Special rule for reformations of trusts that begin by June 8, 
1999. Notwithstanding paragraph (a)(1)(i)(f)(2) of this section, if a 
trust either provides for payment of the unitrust amount under a 
combination of methods that is not permitted under paragraph 
(a)(1)(i)(c) of this section, or provides for payment of the unitrust 
amount under only the method prescribed in paragraph (a)(1)(i)(b) of 
this section, then the trust may be reformed to allow for a combination 
of methods permitted under paragraph (a)(1)(i)(c) of this section 
without causing the trust to fail to function exclusively as a 
charitable remainder unitrust under Sec. 1.664-1(a)(4) or to engage in 
an act of self-dealing under section 4941 if the trustee begins legal 
proceedings to reform by June 8, 1999. The triggering event under the 
reformed governing instrument may not occur in a year prior to the year 
in which the court issues the order reforming the trust, except for 
situations in which the governing instrument prior to reformation 
already provided for payment of the unitrust amount under a combination 
of methods that is not permitted under paragraph (a)(1)(i)(c) of this 
section and the triggering event occurred prior to the reformation.
    (g) Payment under general rule for fixed percentage trusts. When the 
unitrust amount is computed under paragraph (a)(1)(i)(a) of this 
section, 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 unitrust amount is paid after the close of the

[[Page 142]]

taxable year if such payment is made within a reasonable time after the 
close of such taxable year and the entire unitrust 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 unitrust amount by distributing property 
(other than cash) that it owned at the close of the taxable year, 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 unitrust 
amount is due;
    (2) The trust pays the unitrust 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 unitrust 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 unitrust amount is due.
    (h) Special rule for fixed percentage trusts created before December 
10, 1998. When the unitrust amount is computed under 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 unitrust 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 fixed 
percentage to be paid each year as the unitrust amount is 15 percent or 
less of the net fair market value of the trust assets as determined 
under paragraph (a)(1)(iv) of this section.
    (i) Example. The following example illustrates the rules in 
paragraph (a)(1)(i)(g) of this section:

    Example. X is a charitable remainder unitrust that calculates the 
unitrust amount under paragraph (a)(1)(i)(a) of this section. X was 
created after December 10, 1998. The prorated unitrust amount payable 
from X for Year 1 is $100. The trustee does not pay the unitrust amount 
to the recipient by the end of the 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 unitrust recipient a capital 
asset with a $5 fair market value and a $2 adjusted basis to pay the 
$100 unitrust 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 unitrust 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)(g) of this section.

    (j) Payment under income exception. When the unitrust amount is 
computed under paragraph (a)(1)(i)(b) of this section, 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 payment of the unitrust 
amount is made after the close of the taxable year if such payment is 
made within a reasonable time after the close of such taxable year.
    (k) Reasonable time. For paragraphs (a)(1)(i) (g), (h), and (j) of 
this section, a reasonable time will not ordinarily extend beyond the 
date by which the trustee is required to file Form 5227, ``Split-
Interest Trust Information Return,'' (including extensions) for the 
taxable year.
    (l) Effective date. Paragraphs (a)(1)(i) (g), (h), (i), (j), and (k) 
of this section are applicable for taxable years ending after April 18, 
1997. Paragraphs (a)(1)(i)(g)(2) and (3) apply only to distributions 
made on or after January 5, 2001.

[[Page 143]]

    (ii) Definition of fixed percentage. The fixed percentage may be 
expressed either as a fraction or as a percentage and must be payable 
each year in the period specified in subparagraph (5) of this paragraph. 
A percentage is fixed if the percentage is the same either as to each 
recipient or as to the total percentage payable each year of such 
period. For example, provision for a fixed percentage which is the same 
every year to A until his death and concurrently a fixed percentage 
which is the same every year to B until his death, the fixed percentage 
to each recipient to terminate at his death, would satisfy the rule. 
Similarly, provision for a fixed percentage to A and B for their joint 
lives and then to the survivor would satisfy the 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 fixed percentage payable 
after such distribution Provided That:
    (a) The reduced fixed percentage 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) Rules applicable to incorrect valuations. The governing 
instrument provides that in the case where the net fair market value of 
the trust assets is incorrectly determined by the fiduciary, 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 additional contributions.
    (iv) Rules applicable to valuation. In computing the net fair market 
value of the trust assets there shall be taken into account all assets 
and liabilities without regard to whether particular items are taken 
into account in determining the income of the trust. The net fair market 
value of the trust assets may be determined on any one date during the 
taxable year of the trust, or by taking the average of valuations made 
on more than one date during the taxable year of the trust, so long as 
the same valuation date or dates and valuation methods are used each 
year. If the governing instrument does not specify the valuation date or 
dates, the trustee must select such date or dates and indicate the 
selection on the first return on Form 5227, ``Split-Interest Trust 
Information Return,'' that the trust must file. The amount described in 
subdivision (i)(a) of this subparagraph which must be paid each year 
must be based upon the valuation for such year.
    (v) Computation of unitrust 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:
    (1) The amount determined under subdivision (i)(a) 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),
    (2) The amount determined under subdivision (i)(b) of this 
subparagraph shall be computed by using the amount determined under 
subdivision (a)(1) of this subdivision (v), and
    (3) If no valuation date occurs before the end of the taxable year 
of the trust, the trust assets shall be valued as of the last day of the 
taxable year of the trust.
    (b) Last taxable year of period. (1) The governing instrument 
provides that, in

[[Page 144]]

the case of the taxable year in which occurs the end of the period 
specified in subparagraph (5) of this paragraph:
    (i) The unitrust amount which must be distributed under subdivision 
(i)(a) 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),
    (ii) The amount determined under subdivision (i)(b) of this 
subparagraph shall be computed by using the amount determined under 
(b)(1)(i) of this subdivision (v), and
    (iii) If no valuation date occurs before the end of such period, the 
trust assets shall be valued as of the last day of such period.
    (2) See subparagraph (5) of this paragraph for a special rule 
allowing termination of payment of the unitrust amount with the regular 
payment next preceding the termination of the period specified therein.
    (2) Minimum unitrust amount--(i) General rule. The fixed percentage 
described in subparagraph (1)(i) of this paragraph with respect to all 
beneficiaries taken together is not less than 5 percent.
    (ii) Reduction of unitrust 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 fixed percentage 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 of the percentage payable under subparagraph (1) of 
this paragraph after such distribution is not less than 5 percent.
    (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 creation of the trust. A 
named person or persons may include members of a named class except 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 unitrust 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 the required 
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 unitrust 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 fixed percentage 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

[[Page 145]]

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 unitrust 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 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 a unitrust 
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 a unitrust 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) A fixed percentage of at least 5 percent to A and B for their 
joint lives and then to the survivor for his life;
    (b) A fixed percentage of at least 5 percent to A for life or for a 
term of years not longer than 20 years, whichever is longer (or 
shorter);
    (c) A fixed percentage of at least 5 percent to A for life or for a 
term of years not longer than 20 years and then to B for life (provided 
B was living at the creation of the trust);
    (d) A fixed percentage to A for his life and concurrently a fixed 
percentage to B for his life (the percentage to each recipient to 
terminate at his death) if the percentage given to each individual is 
not less than 5 percent;
    (e) A fixed percentage to A for his life and concurrently an equal 
percentage 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 percentages 
is not less than 5 percent for the entire period described in this 
subparagraph.
    (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

[[Page 146]]

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 section 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.
    (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 
or retained for the use of one or more alternative organizations which 
are described in section 170(c) at such time. 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 either prohibits 
additional contributions to the trust after the initial contribution or 
provides that for the taxable year of the trust in which the additional 
contribution is made:
    (1) Where no valuation date occurs after the time of the 
contribution and during the taxable year in which the contribution is 
made, the additional property shall be valued as of the time of 
contribution; and
    (2) The amount described in paragraph (a)(1)(i)(a) of this section 
shall be computed by multiplying the fixed percentage by the sum of (i) 
the net fair market value of the trust assets (excluding the value of 
the additional property and any earned income from and any appreciation 
on such property after its contribution), and (ii) that proportion of 
the value of the additional property (that was excluded under 
subdivision (i) of this paragraph), which the number of days in the 
period which begins with the date of contribution and ends with the 
earlier of the last day of such taxable year or the last day of the 
period described in paragraph (a)(5) of this section bears to the number 
of days in the period which begins with the first day of such taxable 
year and ends with the earlier of the last day of such taxable year or 
the last day of the period described in paragraph (a)(5) of this 
section.

For purposes of this section, all property passing to a charitable 
remainder unitrust by reason of death of the grantor shall be considered 
one contribution. The application of the preceding rules may be 
illustrated by the following examples:

    Example 1. On March 2, 1971, X makes an additional contribution of 
property to a charitable remainder unitrust. The taxable year of the 
trust is the calendar year and the regular valuation date is January 1 
of each year. For purposes of computing the required payout with respect 
to the additional contribution for the year of contribution, the 
additional contribution is valued on March 2, 1971, the time of 
contribution. The property had a value on that date of $5,000. Income 
from such property in the amount of $250 was received on December 31, 
1971. The required

[[Page 147]]

payout with respect to the additional contribution for the year of 
contribution is $208 (5 percentx$5,000x305/365). The income earned after 
the date of the contribution and after the regular valuation date does 
not enter into the computation.
    Example 2. On July 1, 1971, X makes an additional contribution of 
$10,000 to a charitable remainder unitrust. The taxable year of the 
trust is the calendar year and the regular valuation date is December 31 
of each year. The fixed percentage is 5 percent. Between July 1, 1971, 
and December 31, 1971, the additional property appreciates in value to 
$12,500 and earns $500 of income. Because the regular valuation date for 
the year of contribution occurs after the date of the additional 
contribution, the additional contribution including income earned by it 
is valued on the regular valuation date. Thus, the required payout with 
respect to the additional contribution is $325.87 (5 
percentx[$12,500+$500]x183/365).

    (c) Calculation of the fair market value of the remainder interest 
of a charitable remainder unitrust. See Sec. 1.664-4 for rules relating 
to the calculation of the fair market value of the remainder interest of 
a charitable remainder unitrust.
    (d) Deduction for transfers to a charitable remainder unitrust. For 
rules relating to a deduction for transfers to a charitable remainder 
unitrust, see section 170, 2055, 2106, or 2522 and the regulations 
thereunder. The deduction allowed by section 170 for transfers to 
charity is limited to the fair market value of the remainder interest of 
a charitable remainder unitrusts regardless of whether an organization 
described in section 170(c) also receives a portion of the amount 
described in Sec. 1.664-3(a)(1). 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 (B)(i) and the regulations 
thereunder. For rules for postponing 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 16920, Aug. 23, 1972, as amended by T.D. 8791, 63 FR 
68192, Dec. 10, 1998; T.D. 8926, 66 FR 1038, Jan. 5, 2001; T.D. 9102, 69 
FR 20, Jan. 2, 2004]