CRT safe harbor for spousal rights extended - waivers not required.

In response to requests by the AICPA (https://tax.aicpa.org/NIVrdonlyres/5F4E82A543BO-48F5-B155-136D99BSE13C/ O/dean_rev_proc_2005_24_letter.doc) and others, the IRS has provided, in recently issued Notice 2006-15, an extension of the June 28, 2005 safe-harbor grandfather date (from Rev. Proc. 2005-24), which applies to certain charitable remainder annuity trusts (CRATs) or charitable remainder unitrusts (CRUTs). The revenue procedure deals with the effect of a spousal right of election on a trust's qualification as a CRAT or CRUT. The extended safe-harbor date is effective until further guidance is issued by the IRS. Until then, the IRS will disregard an existing spousal right of election, even without a waiver as described in Rev. Proc. 2005-24, but only if the surviving spouse does not exercise the right of election. In a recent letter to the IRS (https://tax.aicpa.org/Resources/Trust+Estate+and+Gift/Trusts/), the AICPA thanked the Service for this notice and for responding to its concerns and adopting (until further study) its recommendation of extending the safe harbor to all trusts regardless of the creation date. Also, because a spousal waiver requirement could potentially affect all CRTs, the AICPA suggested that any future guidance in this area be published in proposed form, thereby allowing practitioners an opportunity to comment on its feasibility before it becomes effective.

As noted in the May 2, 2005 e-alert (https://tax.aicpa.org/NR/rdonlyres/ 9014F454-5AC6-4A26-B50C-D3AA76ADB726/O/EAlert050205.pdf) and in News Notes, Thorne and Sherr, "Rev. Proc. 2005-24 Requires Spousal Waiver to Avoid CRT Disqualification," TTA, July 2005, p. 385, Rev. Proc. 2005-24 provided a safe-harbor procedure for trusts created after June 28, 2005 that disregarded the right of a spousal election for determining whether the CRAT or CRUT is tax exempt, but only if the spouse irrevocably waived the right of election. For trusts created before June 28, 2005, the revenue procedure (and now Notice 2006-15 for all CRTs, whether created before or after June 28, 2005, until further guidance is issued) states that the IRS will disregard the right of election, even without a waiver, if the spouse does not exercise the right. The AICPA and others told the IRS of Rev. Proc. 2005-24's undue burden on taxpayers and trustees seeking to comply with the safe-harbor rule. They requested a withdrawal of the revenue procedure, an extension of the safe-harbor treatment to all CRTs, and consideration of alternative safe-harbor rules. As a result, the IRS and Treasury are now reconsidering the approach of Rev. Proc. 2005-24 (including the safe-harbor rule), as well as alternative safe-harbor rules.

AICPA Tax Division members with clients owning or interested in CRTs should read the new notice and earlier revenue procedure carefully to identify situations in which they may need to act. The Tax Division's Trust, Estate, and Gift Tax Technical Resource Panel's CRT Task Force continues to analyze the procedure and notice and to discuss the effect of this guidance with the IRS and Treasury.

Eileen Sherr, CPA, MT, AICPA Technical Manager--Taxation, Washington, DC, and Frances Shafer, J.D., KPMG LLP, Washington, DC