Probate and Trust Article
SPLIT-INTEREST TRUST RESULTS IN
DENIAL OF CHARITABLE DEDUCTION
By Jim Roberts
The Third Circuit recently addressed the issue of a split-interest trust in the case of Edmond C. Galloway v. United States. The decision was handed down on June 21, 2007, and deals with an appeal of a case from federal district court seeking a refund. James Galloway, the decedent, created a trust that, on his death, continued until 2016. There were four beneficiaries of the trust, two of which were charities. The trust contained no provisions for dividing the trust at his death, and, as a result, the payments to the charitable and non-charitable beneficiaries came from the same items of trust corpus.
This whole case turned on the lack of the abusive provisions normally thought to be associated with pre-2055(e) split interest trusts i.e. where a non-charitable beneficiary gets first crack at the trust assets, resulting in little or no assets remaining for the charity, but with the decedent’s estate claiming a charitable deduction for the supposed value of the remainder. The Court recited the history of the spit-interest trust arena leading up to the passage of 2055(e).
Basically, after the passage of 2055(e), the value of any amount that might pass to a charity in a trust, where charitable and non-charitable beneficiaries share an interest in trust corpus, is deductible only if the trust takes certain prescribed forms. Those forms are: (a) when the charity is getting a remainder interest, the split-interest trust must be either a charitable remainder annuity trust or a charitable remainder unitrust; and (b) if the charity’s interest is any other kind of interest, the charity must get a form of guaranteed annuity or a fixed percentage distributed yearly of the fair market value of the trust property determined on an annual basis.
In this case, the charity was not to receive a remainder, but was to receive distributions at the same time as the non-charitable beneficiaries. Under 2055(e), they should have been either in the form of a guaranteed annuity or as a fixed percentage distributed yearly. In this case, they were neither. There were only two distributions, one in 2006 and another in 2016, with the first being half the trust assets, and the later one being the rest, each distribution being divided equally among the four beneficiaries.
The Court was asked by the estate to determine that 2055(e) is ambiguous in that it does not clearly define what a split-interest trust is. The Court rejected the argument, stating that the statute is clear. The Court said, “In so saying, we recognize the unfortunate result in this case. Section 2055(e) was passed to protect against abuses that resulted most frequently from non-charitable beneficiaries exploiting their life interest in an estate and leaving a charitable beneficiary with a shadow of what was bequeathed to it. In this instance, there is little chance that the same sort of abuse would take place.” But the Court had to conclude that the trust simply did not meet the requirements of 2055(e) and that the result is clearly spelled out in the statute – no charitable deduction.
99 AFTR2s 2007-3412 (3rd Circuit 2007)