To Earn Deduction, CRAT Rules Must Be Strictly Followed

The 11th Circuit Court of Appeals rules that a trust's failure to adhere to charitable remainder annuity trusts rules requiring disbursements warrants the complete denial of a charitable deduction. Estate of Atkinson v. Commissioner (11th Cir., No. 01-16536, Oct. 16, 2002).

Melvine B. Atkinson created a charitable remainder annuity trust (CRAT) that would provide a lifetime annuity to her and, at her death, would divide a similar annuity between four beneficiaries, provided that the beneficiaries agreed to pay their share of any estate taxes due at Ms. Atkinson''s death. After the death of the last beneficiary, any amount remaining in the annuity trust would be donated to charitable groups. However, no annuity payments were ever actually made to Ms. Atkinson from the assets of the annuity trust. On Ms. Atkinson's death, none of the non-charitable beneficiaries elected to accept the annuity under the terms of the trust.

Ms. Atkinson's estate claimed a charitable deduction of $3,894,535, representing the present value of the remainder interest in the annuity trust at Ms. Atkinson''s death. The Internal Revenue Service (IRS) found that the estate was not entitled to take any charitable deduction because the trust failed to comply with statutory procedures for CRATs. The U.S. Tax Court agreed and the estate appealed, arguing that the trust's failure to follow the CRAT rules to the letter was a minor mistake that should not result in a denial of a substantial charitable deduction.

The U.S. Court of Appeals for the Eleventh Circuit affirms, ruling that since the CRAT regulations were not scrupulously followed through the life of the trust, a charitable deduction is not appropriate. The court holds that CRAT rules must be adhered to in order to reap the significant benefits of allowing a present charitable deduction. 'It is not sufficient,' the court writes, 'to establish a trust under the CRAT rules, then completely ignore the rules during the trust''s administration, thereby defeating the policy interests advanced by Congress in enacting the rules themselves.'

For the full text of this decision, go to: https://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=case&court=11th&no=01-16536.