[Federal Register Volume 65, Number 66 (Wednesday, April 5, 2000)]
[Proposed Rules]
[Pages 17835-17839]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7522]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 20, and 25

[REG-100291-00]
RIN 1545-AX74


Lifetime Charitable Lead Trusts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: These proposed regulations relate to the definitions of a 
guaranteed annuity interest and a unitrust interest for purposes of the 
income, gift, and estate tax charitable deductions. The proposed 
regulations will affect taxpayers who make transfers to charitable lead 
trusts. The purpose of these proposed regulations is to restrict the 
permissible terms for charitable lead trusts in order to eliminate the 
potential for abuse. This document also provides notice of a public 
hearing.

DATES: Written and electronic comments must be received by June 23, 
2000. Outlines of topics to be discussed at the public hearing 
scheduled for June 29, 2000, must be received by June 8, 2000.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-100291-00), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may also be hand delivered Monday 
through Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R 
(REG-100291-00), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may 
submit comments electronically via the Internet by selecting the ``Tax 
Regs'' option on the IRS Home Page, or by submitting comments directly 
to the IRS Internet site at http://www.irs.gov/tax__regs/regslist.html. 
The public hearing will be held in room 4718, Internal Revenue Service 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Scott S. Landes, (202) 622-3090; concerning submissions of comments, 
the hearing, and/or to be placed on the building access list to attend 
the hearing, Guy R. Traynor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    In general, if interests in the same property are transferred for 
both charitable and noncharitable purposes, the charitable interest 
will qualify for the charitable deduction for federal income, gift, and 
estate tax purposes only if the interest is in one of certain 
prescribed forms. If the charitable interest is not a remainder 
interest, sections 170, 2522, and 2055 of the Internal Revenue Code 
(Code) require that the charitable interest be in the form of either a 
guaranteed annuity interest or a fixed percentage of the annual fair 
market value of the property (unitrust interest). In addition, an 
income tax charitable deduction is available only if the grantor is 
treated as the owner of the entire trust under subpart E, part I of 
subchapter J of the Code.
    The requirement that a nonremainder interest passing to charity be 
in the form of a guaranteed annuity interest or a unitrust interest was 
added to the Code by the Tax Reform Act of 1969. That Act also added 
the requirement that a remainder interest passing to charity must 
generally be in the form of a charitable remainder unitrust or annuity 
trust or a pooled income fund. The statutory provisions for charitable 
remainder trusts and pooled income funds specifically state the 
permissible terms for these entities. Section 664(d)(1)(A) and 
(d)(2)(A) provide that the permissible term for a charitable remainder 
trust is a period of years (not to exceed 20 years) or the life or 
lives of individuals who are living at the creation of the trust. 
Similarly, section 642(c)(5)(A) provides that the permissible term for 
the noncharitable income interest in a pooled income fund is the life 
of one or more beneficiaries living at the time of the transfer.
    Unlike the statutory provisions for charitable remainder trusts and 
pooled income funds, neither the statute nor the legislative history 
sets forth the permissible term for which a charitable guaranteed 
annuity interest or a unitrust interest must be paid. Rather, the 
permissible term for these interests is set forth in the regulations as 
either a specified term of years, or the life or lives of an individual 
or individuals, each of whom must be living at the date of the transfer 
and can be ascertained at such date.
    The IRS and the Treasury Department are aware of situations in 
which taxpayers attempt to take advantage of the regulations by using 
an unrelated individual's measuring life, as the term of a charitable 
lead trust, to artificially inflate the charitable deduction. Taxpayers 
select as a measuring life an individual who is seriously ill but not 
``terminally ill'' within the meaning of the section 7520 regulations. 
Because the individual is not ``terminally ill'' as defined in the 
regulations, the charitable interest is valued based on the actuarial 
tables. These tables take into account the life expectancies of all 
individuals of the same age as the individual who is the measuring 
life, even though such individual has been carefully chosen because he 
or she likely will not live to an average life expectancy. When the 
seriously ill individual dies prematurely, the amount the charity 
actually receives will be significantly less than the amount on which 
the gift or estate tax charitable deduction was based. Conversely, the 
amount of the actual transfer to the remainder beneficiaries will be 
significantly greater than the amount subject to gift or estate tax.
    These charitable lead trusts are being marketed in a package which 
includes the name of a seriously ill individual and access to the 
individual's medical records. A token payment is made to the ill 
individual who is serving as a measuring life. Sometimes the individual 
is led to believe that a charitable organization interested in the 
individual's particular illness will receive some benefit from the 
transaction. In the words of one author, ``[t]his technique (which is 
not strictly speaking wealth transfer planning for the terminally ill, 
but rather wealth transfer planning using the terminally ill) falls 
somewhere between ghoulish and grotesque.'' Marketing schemes that 
exploit the misfortunes of some for the benefit of others are contrary 
to public policy.
    The IRS and the Treasury Department believe that this scheme is 
abusive and frustrates the Congressional purpose in limiting the 
charitable deduction to specific types of split-interest transfers.

[[Page 17836]]

Congress enacted the provisions regarding guaranteed annuity interests, 
unitrust interests, charitable remainder trusts, and pooled income 
funds in order to ensure that the amount the taxpayer claims as a 
charitable deduction reasonably correlates to the amount ultimately 
passing to the charitable organization. H.R. Rep. No. 413 (Part 1), 
91st Cong., 1st Sess. 61 (1969); S. Rep. No. 552, 91st Cong., 1st Sess. 
93 (1969). In this scheme, taxpayers choose a measuring life that 
ensures the amount passing to charity will be substantially less than 
the allowable charitable deduction. This kind of adverse selection of 
an unrelated measuring life to artificially inflate the charitable 
deduction is contrary to Congressional intent.

Explanation of Provisions

    Under the proposed regulations, the permissible term for guaranteed 
annuity interests and unitrust interests is either a specified term of 
years, or the life of certain individuals living at the date of the 
transfer. Only one or more of the following individuals may be used as 
measuring lives: the donor, the donor's spouse, and a lineal ancestor 
of all the remainder beneficiaries. However, this limitation regarding 
permissible measuring lives does not apply in the case of a charitable 
guaranteed annuity interest or unitrust interest payable under a 
charitable remainder trust described in section 664. An interest 
payable for a specified term of years can qualify as a guaranteed 
annuity or unitrust interest even if the governing instrument contains 
a ``savings clause'' intended to ensure compliance with a rule against 
perpetuities. The savings clause must utilize a period for vesting of 
21 years after the deaths of measuring lives who are selected to 
maximize, rather than limit, the term of the trust. For example, a 
guaranteed annuity or unitrust interest that will terminate on the 
earlier of 30 years or 21 years after the death of the last survivor of 
the descendants of any grandparent of the donor living on the date of 
the creation of the interest will be treated as payable for a specified 
term of years.
    The proposed regulations will allow the use of an individual's 
measuring life when appropriate for estate planning purposes. Thus, the 
regulations permit the donor, the donor's spouse, or an individual who 
is an ancestor of the remainder beneficiaries to be used as the 
measuring life. A transfer using the donor or the donor's spouse as the 
measuring life is a substitute for a testamentary disposition to the 
remainder beneficiaries. In other situations, the donor may desire to 
benefit an individual's heirs only after the death of the individual 
currently providing their support. For example, a donor may establish a 
charitable lead trust for the life of the donor's sibling with the 
sibling's children named as the remainder beneficiaries. A measuring 
life unrelated to the remainder beneficiaries is not appropriate for 
estate planning purposes and therefore is not permitted under the 
proposed regulations.
    The proposed regulations apply to transfers to inter vivos 
charitable lead trusts made on or after April 4, 2000. In addition, the 
proposed regulations apply to transfers made pursuant to wills or 
revocable trusts where the decedent dies on or after April 4, 2000. Two 
exceptions from the application of the proposed regulations are 
provided in the case of transfers pursuant to a will or revocable trust 
executed on or before April 4, 2000. One exception is for a decedent 
who dies on or before the date that is 6 months after the date these 
regulations are published as final regulations without having 
republished the will (or amended the trust) by codicil or otherwise. 
The other exception is for a decedent who was on April 4, 2000 under a 
mental disability to change the disposition of the decedent's property, 
and either does not regain competence to dispose of such property 
before the date of death, or dies prior to the later of: 90 days after 
the date on which the decedent first regains competence, or 6 months 
after the date these regulations are published as final regulations 
without having republished the will (or amended the trust) by codicil 
or otherwise.
    The IRS will not disallow the charitable deduction where the 
charitable interest is payable for the life of an individual, other 
than one permitted under the proposed regulations, if the interest is 
reformed into a lead interest payable for a specified term of years. 
The term of years must be determined by taking the factor for valuing 
the annuity or unitrust interest for the named individual's measuring 
life and identifying the term of years (rounded up to the next whole 
year) that corresponds to the equivalent term of years factor for an 
annuity or unitrust interest. For example, in the case of an annuity 
interest payable for the life of an individual age 40 at the time of 
the transfer, assuming an interest rate of 7.4% under section 7520, the 
annuity factor from column 1 of Table S(7.4), contained in Publication 
1457, Book Aleph, for the life of an individual age 40 is 12.0587. 
(Publication 1457 is available from the Superintendent of Documents, 
U.S. Government Printing Office, Washington, DC 20402.) Based on Table 
B(7.4), contained in Publication 1457, Book Aleph, the factor 12.0587 
corresponds to a term of years between 31 and 32 years. Accordingly, 
the annuity interest must be reformed into an interest payable for a 
term of 32 years. In the case of inter vivos transfers, a judicial 
reformation must be commenced prior to the later of: (1) The date that 
is 6 months after the date these regulations are published as final 
regulations; or (2) October 15th of the year following the year in 
which the transfer is made. In the case of testamentary transfers, a 
judicial reformation must be commenced prior to the later of: (1) The 
date that is 6 months after the date these regulations are published as 
final regulations; or (2) the date prescribed by section 
2055(e)(3)(C)(iii). Any judicial reformation must be completed within a 
reasonable time after it is commenced. A non-judicial reformation is 
permitted if effective under state law, provided it is completed by the 
date on which a judicial reformation must be commenced.
    An alternative to reformation may be available for any transfer 
made on or after April 4, 2000 and on or before the date that is 60 
days after the date these regulations are published as final 
regulations. If a court, in a proceeding that is commenced within 6 
months after these regulations are published as final regulations, 
declares the transfer null and void ab initio, the Service will treat 
such transfer in a manner similar to that described in section 
2055(e)(3)(J).

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these proposed regulations, and 
because these proposed regulations do not impose a collection of 
information on small entities, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis 
is not required. Pursuant to section 7805(f) of the Code, the proposed 
regulations will be submitted to the Small Business Administration for 
comment on their impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any

[[Page 17837]]

written (a signed original and eight (8) copies) or electronic comments 
that are submitted timely (in the manner described in the ADDRESSES 
portion of this preamble) to the IRS. The IRS and the Treasury 
Department request comments on the clarity of the proposed regulations 
and how they may be made easier to understand. All comments will be 
available for public inspection and copying.
    A public hearing has been scheduled for June 29, 2000, at 10 a.m., 
room 4718, Internal Revenue Building, 1111 Constitution Avenue, NW., 
Washington, DC. Due to building security procedures, visitors must 
enter at the 10th Street entrance, located between Constitution and 
Pennsylvania Avenues, NW. In addition, all visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 15 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit comments by 
June 23, 2000, and submit an outline of the topics to be discussed and 
the time to be devoted to each topic (signed original and eight (8) 
copies) by June 8, 2000.
    A period of 10 minutes will be allotted to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for receiving outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Scott S. 
Landes, Office of the Chief Counsel, IRS. Other personnel from the IRS 
and the Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 20

    Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 25

    Gift taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 20, and 25 are proposed to be amended 
as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
a new entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.170A-6 also issued under 26 U.S.C. 170(f)(4); 26 
U.S.C. 642(c)(5). * * *

    Par. 2. Section 1.170A-6 is amended as follows:
    1. Paragraph (c)(2)(i)(A) is amended as follows:
    a. In the first sentence, the comma is removed.
    b. In the second sentence, the language ``of years'' is added after 
the word ``term'', the language ``an individual or individuals'' is 
removed, and ``certain individuals'' is added in its place.
    c. The third sentence is removed, and four new sentences are added 
in its place.
    d. In the sentence beginning ``For example, the amount'', the 
language ``of years'' is added after the word ``term'', the language 
``an individual'' is removed, and ``the donor'' is added in its place.
    2. Paragraph (c)(2)(ii)(A) is amended as follows:
    a. In the fifth sentence, the language ``of years'' is added after 
the word ``term'', ``an individual or individuals'' is removed, and 
``certain individuals'' is added in its place.
    b. The last sentence is removed, and four new sentences are added 
in its place.
    3. Paragraph (e) is amended by adding four sentences to the end of 
the paragraph.
    4. The authority citation at the end of the section is removed.
    The additions read as follows:


Sec. 1.170A-6  Charitable contributions in trust.

* * * * *
    (c) * * *
    (2) * * *
    (i) * * * (A) * * * Only one or more of the following individuals 
may be used as measuring lives: the donor, the donor's spouse, and a 
lineal ancestor of all the remainder beneficiaries. However, this 
limitation regarding permissible measuring lives does not apply in the 
case of a charitable guaranteed annuity interest payable under a 
charitable remainder trust described in section 664. An interest 
payable for a specified term of years can qualify as a guaranteed 
annuity interest even if the governing instrument contains a savings 
clause intended to ensure compliance with a rule against perpetuities. 
The savings clause must utilize a period for vesting of 21 years after 
the deaths of measuring lives who are selected to maximize, rather than 
limit, the term of the trust. * * *
* * * * *
    (ii) * * * (A) * * * Only one or more of the following individuals 
may be used as measuring lives: the donor, the donor's spouse, and a 
lineal ancestor of all the remainder beneficiaries. However, this 
limitation regarding permissible measuring lives does not apply in the 
case of a charitable unitrust interest payable under a charitable 
remainder trust described in section 664. An interest payable for a 
specified term of years can qualify as a unitrust interest even if the 
governing instrument contains a savings clause intended to ensure 
compliance with a rule against perpetuities. The savings clause must 
utilize a period for vesting of 21 years after the deaths of measuring 
lives who are selected to maximize, rather than limit, the term of the 
trust.
* * * * *
    (e) Effective date. * * * In addition, the rule in paragraphs 
(c)(2)(i)(A) and (ii)(A) of this section that guaranteed annuity 
interests and unitrust interests, respectively, may be payable for a 
specified term of years or for the life or lives of only certain 
individuals, applies to transfers made on or after April 4, 2000. If a 
transfer is made to a trust on or after April 4, 2000 that uses an 
individual other than one permitted in paragraphs (c)(2)(i)(A) and 
(ii)(A) of this section, the trust may be reformed to satisfy this 
rule. As an alternative to reformation, rescission may be available for 
a transfer made on or before the date that is 60 days after the date 
these regulations are published as final regulations. See 
Sec. 25.2522(c)-3(e) of this chapter for the requirements concerning 
reformation or possible rescission of these interests.

PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 
1954

    Par. 3. The authority citation for part 20 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 4. Section 20.2055-2 is amended as follows:
    1. Paragraph (e)(2)(vi)(a) is amended as follows:

[[Page 17838]]

    a. In the third sentence, the language ``of years'' is added after 
the word ``term'', the language ``an individual or individuals'' is 
removed, and ``certain individuals'' is added in its place.
    b. The fourth sentence is removed, and four new sentences are added 
in its place.
    c. In the sentence beginning ``For example, the amount'', the 
language ``of years'' is added after the word ``term'', the language 
``an individual'' is removed, and ``the decedent's spouse'' is added in 
its place.
    2. Paragraph (e)(2)(vii)(a) is amended as follows:
    a. In the sixth sentence, the language ``of years'' is added after 
the word ``term'', the language ``of an individual or individuals'' is 
removed, and ``of certain individuals'' is added in its place.
    b. The last sentence is removed, and four new sentences are added 
in its place.
    3. Paragraph (e)(3) is amended as follows:
    a. The period at the end of paragraph (e)(3)(ii)(c) is removed, a 
comma is added and the word ``and'' is added after the comma.
    b. A new paragraph (e)(3)(iii) is added.
    The additions read as follows:


Sec. 20.2055-2  Transfers not exclusively for charitable purposes.

* * * * *
    (e) * * *
    (2) * * *
    (vi) * * * (a) * * * Only one or more of the following individuals 
may be used as measuring lives: the donor, the donor's spouse, and a 
lineal ancestor of all the remainder beneficiaries. However, this 
limitation regarding permissible measuring lives does not apply in the 
case of a charitable guaranteed annuity interest payable under a 
charitable remainder trust described in section 664. An interest 
payable for a specified term of years can qualify as a guaranteed 
annuity interest even if the governing instrument contains a savings 
clause intended to ensure compliance with a rule against perpetuities. 
The savings clause must utilize a period for vesting of 21 years after 
the deaths of measuring lives who are selected to maximize, rather than 
limit, the term of the trust. * * *
* * * * *
    (vii) * * * (a) * * * Only one or more of the following individuals 
may be used as measuring lives: the donor, the donor's spouse, and a 
lineal ancestor of all the remainder beneficiaries. However, this 
limitation regarding permissible measuring lives does not apply in the 
case of a charitable unitrust interest payable under a charitable 
remainder trust described in section 664. An interest payable for a 
specified term of years can qualify as a unitrust interest even if the 
governing instrument contains a savings clause intended to ensure 
compliance with a rule against perpetuities. The savings clause must 
utilize a period for vesting of 21 years after the deaths of measuring 
lives who are selected to maximize, rather than limit, the term of the 
trust.
* * * * *
    (3) * * *
    (iii) The rule in paragraphs (e)(2)(vi)(a) and (vii)(a) of this 
section that guaranteed annuity interests or unitrust interests, 
respectively, may be payable for a specified term of years or for the 
life or lives of only certain individuals, is generally effective in 
the case of transfers pursuant to wills and revocable trusts where the 
decedent dies on or after April 4, 2000. Two exceptions from the 
application of the rule in paragraphs (e)(2)(vi)(a) and (vii)(a) of 
this section are provided in the case of transfers pursuant to a will 
or revocable trust executed on or before April 4, 2000. One exception 
is for a decedent who dies on or before the date that is 6 months after 
the date these regulations are published as final regulations without 
having republished the will (or amended the trust) by codicil or 
otherwise. The other exception is for a decedent who was on April 4, 
2000 under a mental disability to change the disposition of the 
decedent's property, and either does not regain competence to dispose 
of such property before the date of death, or dies prior to the later 
of: 90 days after the date on which the decedent first regains 
competence, or 6 months after the date these regulations are published 
as final regulations without having republished the will (or amended 
the trust) by codicil or otherwise. If a guaranteed annuity interest or 
unitrust interest created pursuant to a will or revocable trust where 
the decedent dies on or after April 4, 2000 uses an individual other 
than one permitted in paragraphs (e)(2)(vi)(a) and (vii)(a) of this 
section, and the interest does not qualify for this transitional 
relief, the interest may be reformed into a lead interest payable for a 
specified term of years. The term of years is determined by taking the 
factor for valuing the annuity or unitrust interest for the named 
individual measuring life and identifying the term of years (rounded up 
to the next whole year) that corresponds to the equivalent term of 
years factor for an annuity or unitrust interest. For example, in the 
case of an annuity interest payable for the life of an individual age 
40 at the time of the transfer, assuming an interest rate of 7.4% under 
section 7520, the annuity factor from column 1 of Table S(7.4), 
contained in IRS Publication 1457, Book Aleph, for the life of an 
individual age 40 is 12.0587. (Publication 1457 is available from the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402.) Based on Table B(7.4), contained in Publication 
1457, Book Aleph, the factor 12.0587 corresponds to a term of years 
between 31 and 32 years. Accordingly, the annuity interest must be 
reformed into an interest payable for a term of 32 years. A judicial 
reformation must be commenced prior to the later of the date that is 6 
months after the date these regulations are published as final 
regulations, or the date prescribed by section 2055(e)(3)(C)(iii). Any 
judicial reformation must be completed within a reasonable time after 
it is commenced. A non-judicial reformation is permitted if effective 
under state law, provided it is completed by the date on which a 
judicial reformation must be commenced. In the alternative, if a court, 
in a proceeding that is commenced on or before 6 months after these 
regulations are published as final regulations, declares any transfer 
made pursuant to a will or revocable trust where the decedent dies on 
or after April 4, 2000 and on or before the date that is 60 days after 
the date these regulations are published as final regulations, null and 
void ab initio, the Internal Revenue Service will treat such transfers 
in a manner similar to that described in section 2055(e)(3)(J).
* * * * *

PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954

    Par. 5. The authority citation for part 25 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 6. Section 25.2522(c)-3 is amended as follows:
    1. Paragraph (c)(2)(vi)(a) is amended as follows:
    a. In the third sentence, the language ``of years'' is added after 
the word ``term'', the language ``a named individual or individuals'' 
is removed, and ``certain individuals'' is added in its place.
    b. The fourth sentence is removed, and four new sentences are added 
in its place.
    c. In the sentence beginning ``For example, the amount'', the 
language ``of years'' is added after the word ``term'',

[[Page 17839]]

the language ``an individual'' is removed, and ``the donor'' is added 
in its place.
    2. Paragraph (c)(2)(vii)(a) is amended as follows:
    a. In the sixth sentence, the language ``of years'' is added after 
the word ``term'', the language ``an individual or individuals'' is 
removed, and ``certain individuals'' is added in its place.
    b. The last sentence is removed, and four new sentences are added 
in its place.
    3. Paragraph (e) is amended by adding nine new sentences to the end 
of the paragraph.
    The additions read as follows:


Sec. 25.2522(c)-3  Transfers not exclusively for charitable, etc., 
purposes in the case of gifts made after July 31, 1969.

* * * * *
    (c) * * * 
    (2) * * *
    (vi) * * * (a) * * * Only one or more of the following individuals 
may be used as measuring lives: the donor, the donor's spouse, and a 
lineal ancestor of all the remainder beneficiaries. However, this 
limitation regarding permissible measuring lives does not apply in the 
case of a charitable guaranteed annuity interest payable under a 
charitable remainder trust described in section 664. An interest 
payable for a specified term of years can qualify as a guaranteed 
annuity interest even if the governing instrument contains a savings 
clause intended to ensure compliance with a rule against perpetuities. 
The savings clause must utilize a period for vesting of 21 years after 
the deaths of measuring lives who are selected to maximize, rather than 
limit, the term of the trust.* * *
* * * * *
    (vii) * * * (a) * * * Only one or more of the following individuals 
may be used as measuring lives: the donor, the donor's spouse, and a 
lineal ancestor of all the remainder beneficiaries. However, this 
limitation regarding permissible measuring lives does not apply in the 
case of a charitable unitrust interest payable under a charitable 
remainder trust described in section 664. An interest payable for a 
specified term of years can qualify as a unitrust interest even if the 
governing instrument contains a savings clause intended to ensure 
compliance with a rule against perpetuities. The savings clause must 
utilize a period for vesting of 21 years after the deaths of measuring 
lives who are selected to maximize, rather than limit, the term of the 
trust.
* * * * *
    (e) Effective date. * * * In addition, the rule in paragraphs 
(c)(2)(vi)(a) and (vii)(a) of this section that guaranteed annuity 
interests or unitrust interests, respectively, may be payable for a 
specified term of years or for the life or lives of only certain 
individuals, applies to transfers made on or after April 4, 2000. If a 
transfer is made on or after April 4, 2000, that uses an individual 
other than one permitted in paragraphs (c)(2)(vi)(a) and (vii)(a) of 
this section, the interest may be reformed into a lead interest payable 
for a specified term of years. The term of years is determined by 
taking the factor for valuing the annuity or unitrust interest for the 
named individual measuring life and identifying the term of years 
(rounded up to the next whole year) that corresponds to the equivalent 
term of years factor for an annuity or unitrust interest. For example, 
in the case of an annuity interest payable for the life of an 
individual age 40 at the time of the transfer, assuming an interest 
rate of 7.4% under section 7520, the annuity factor from column 1 of 
Table S(7.4), contained in IRS Publication 1457, Book Aleph, for the 
life of an individual age 40 is 12.0587 (Publication 1457 is available 
from the Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402.). Based on Table B(7.4), contained in IRS 
Publication 1457, Book Aleph, the factor 12.0587 corresponds to a term 
of years between 31 and 32 years. Accordingly, the annuity interest 
must be reformed into an interest payable for a term of 32 years. A 
judicial reformation must be commenced prior to the later of the date 
that is 6 months after the date these regulations are published as 
final regulations, or October 15th of the year following the year in 
which the transfer is made and must be completed within a reasonable 
time after it is commenced. A non-judicial reformation is permitted if 
effective under state law, provided it is completed by the date on 
which a judicial reformation must be commenced. In the alternative, if 
a court, in a proceeding that is commenced on or before 6 months after 
these regulations are published as final regulations, declares any 
transfer, made on or after April 4, 2000 and on or before the date that 
is 60 days after the date these regulations are published as final 
regulations, null and void ab initio, the Internal Revenue Service will 
treat such transfers in a manner similar to that described in section 
2055(e)(3)(J).

Charles O. Rossotti,
Commissioner of Internal Revenue.
[FR Doc. 00-7522 Filed 4-4-00; 8:45 am]
BILLING CODE 4830-01-P