• Private Letter Ruling 201216045 (4/23/2012)
  • June 5, 2012
  • Law Firm: Proskauer Rose LLP - New York Office
  • In this PLR, the IRS, for the first time, specifically blessed the use of graduated charitable lead annuity trust ("CLAT") payments over a CLAT term.

    The decedent's revocable trust created a ten-year CLAT, the charitable beneficiary of which was a private foundation. The trust utilized a zeroed-out CLAT formula that read as follows: "Accounting from the beginning date, the annual annuity amount shall be an amount that will produce a present value under § 7520 of the Code for the non-charitable remainder interest equal to zero or as close to zero as possible without exceeding zero." Two items were missing from the formula: the annuity rate and the amount. The CLAT Trustees initiated a probate court construction proceeding and proposed an annuity percentage that would increase in successive years by 20%. The CLAT Trustees presented evidence to the probate court that the CLAT likely could not fully satisfy the annuity interest if it used a straight-line annuity. The probate court approved the graduated-rate annuity proposal.

    The IRS ruled that the trust terms, as construed by the probate court, satisfied the provisions of IRC § 2055(e)(2) for a guaranteed annuity interest, and that the property passing to the CLAT would qualify for a charitable deduction under § 2055(a). The IRS also ruled that the probate court's construction proceeding order would be treated as a settlement of a will contest and, therefore, the annuity amount was certain at the time the CLAT was to be funded. The IRS further ruled that (1) the CLAT would be allowed an annual § 642(c) deduction for each year that the annuity amount is paid to the charitable foundation, and (2) the CLAT terms, as construed by the probate court, do not violate any of the charitable foundation rules, such as the prohibition against self-dealing, that appear under IRC § 507, § 4941, § 4942, § 4943, § 4944 and § 4945.