As reported by Accounting Today and Bloomberg BNA Daily Tax Report (subscription required), the IRS yesterday issued Revenue Procedure 2016-42 (available through Bloomberg BNA) to provide some relief for donors desiring to create a charitable remainder annuity trust (CRAT) but frustrated because low interest rates make it difficulty to do so. The articles explain that CRATs are subject to a “probability of exhaustion” test (described in Revenue Rulings 70-452 and 77-374) that requires there be no more than a 5 percent chance that there is no remainder to go to the designated charity or charities. When interest rates are low, as they are now, it can be difficult to satisfy this requirement and also the requirement under Internal Revenue Code section 664(d) that a CRAT pay out a minimum 5 percent annuity to the trust beneficiary. The Revenue Procedure permits CRATs to include an early termination provision that ends the CRAT and causes the distribution of the remainder to the designated charity or charities when the trust corpus minus the annual payment and multiplied by a discount factor falls below 10 percent of the initial trust corpus; if the sample provision is included in a CRAT, then the probability of exhaustion test will not apply.
The Revenue Procedure will be published in Internal Revenue Bulletin 2016-34, which will be dated August 22nd.
Lloyd Mayer
