Charitable Remainder Trust (CRT) Drafting Prompt

You are tasked with drafting a comprehensive Charitable Remainder Trust (CRT) document that complies with Internal Revenue Code Section 664 and applicable state law. This irrevocable trust instrument must satisfy all technical requirements for tax-exempt status while clearly articulating the rights of income beneficiaries and the charitable remainder interest. Your draft should be suitable for execution by sophisticated clients working with estate planning counsel and must reflect current IRS regulations, Treasury guidelines, and best practices in charitable gift planning.

Declaration of Trust and Trust Establishment

Begin with a formal declaration establishing this instrument as an irrevocable charitable remainder trust under IRC Section 664. Identify the settlor (grantor) by full legal name and address, designate the initial trustee(s) with complete identifying information, and name both the non-charitable income beneficiaries and the qualified charitable remainder beneficiaries. The declaration must explicitly state the trust's dual purpose: providing income to non-charitable beneficiaries for a specified term while ensuring a meaningful remainder interest passes to qualified charitable organizations. Include precise effective date language and a statement that the trust is intended to qualify as either a charitable remainder annuity trust (CRAT) or charitable remainder unitrust (CRUT) as applicable. Reference the specific IRS revenue procedures and sample trust provisions that govern CRT formation, ensuring the declaration incorporates all mandatory language required for tax qualification.

Irrevocability Clause and Initial Funding Provisions

Draft clear and unambiguous language establishing that this trust is irrevocable and may not be amended, modified, or revoked by the settlor, beneficiaries, or any other party except as specifically permitted under IRC Section 664 regulations. Detail the initial funding of the trust by describing the assets being transferred, including:

• Specific identification of cash, securities, real property, or other assets with sufficient detail for title transfer
• Valuation methodology and date of valuation for initial trust assets
• Representations regarding the settlor's ownership and right to transfer the assets
• Acknowledgment that additional contributions may or may not be permitted depending on trust type (CRAT vs. CRUT)
• Provisions addressing the acceptance of assets by the trustee and any restrictions on acceptable asset types

Ensure the funding provisions align with IRS requirements that prohibit certain assets (such as debt-encumbered property or S corporation stock in most cases) and include language preserving the trust's tax-exempt status if problematic assets are inadvertently contributed.

Income Beneficiary Rights and Distribution Formula

Articulate with mathematical precision the payout mechanism for non-charitable income beneficiaries, specifying whether this is a charitable remainder annuity trust (fixed annuity amount) or charitable remainder unitrust (percentage of annual fair market value). For a CRAT, state the exact dollar amount or fixed percentage of initial fair market value to be paid annually. For a CRUT, specify the exact percentage (minimum 5%, maximum 50%) of the net fair market value of trust assets as determined annually. Include:

• The frequency of distributions (annual, semi-annual, quarterly, or monthly)
• The valuation date for determining annual trust value in a CRUT
• Whether the trust includes a net income limitation (NICRUT) or net income with makeup provision (NIMCRUT)
• The duration of the income interest, whether for the life or lives of named individuals or for a term of years not exceeding twenty years
• Provisions addressing the 10% minimum remainder interest requirement under IRC Section 664(d)

Cite the specific Treasury Regulation sections (§1.664-1 through §1.664-4) that govern these payout requirements and include calculation examples if the trust structure is complex. Ensure the distribution provisions cannot be modified in any manner that would disqualify the trust's tax-exempt status.

Charitable Remainder Beneficiary Designation and Distribution Terms

Designate the qualified charitable remainder beneficiaries with specificity, naming either specific IRC Section 501(c)(3) organizations or creating a mechanism for selection among qualified charities. If naming specific charities, include their full legal names, addresses, and tax identification numbers. If granting discretion to select among charities, clearly delineate who holds that power and the standards governing selection. Address contingencies if a named charity ceases to qualify under Section 501(c)(3) or ceases to exist, including:

• Automatic substitution provisions favoring organizations with similar charitable purposes
• Authority for the trustee or another party to designate replacement charities
• Cy pres provisions ensuring the charitable intent is fulfilled
• Requirements that all remainder beneficiaries must be qualified organizations at the time of distribution

Include language confirming that the charitable remainder interest is irrevocable and vested, though the specific charitable recipients may be subject to selection. Specify the timing and manner of distribution to charitable beneficiaries upon termination of the income interest, including whether distribution will be in cash, in-kind assets, or at trustee discretion.

Trustee Authority, Fiduciary Duties, and Administrative Provisions

Enumerate the trustee's powers and responsibilities in administering this charitable remainder trust, emphasizing both the fiduciary obligations owed to income beneficiaries and the duty to preserve the charitable remainder interest. Grant the trustee comprehensive investment authority consistent with the prudent investor rule while prohibiting any act of self-dealing or transactions that would constitute prohibited acts under IRC Section 4941. Specific provisions should address:

• Investment discretion including authority to retain, sell, exchange, or invest in any property or asset class
• Duty to maintain the trust's tax-exempt status and avoid unrelated business taxable income
• Authority to employ attorneys, accountants, investment advisors, and other professionals
• Accounting and reporting obligations to income beneficiaries and charitable remaindermen
• Compensation provisions for trustees, whether individual or corporate

Include mandatory language prohibiting the trustee from engaging in any act of self-dealing, retaining excess business holdings, making jeopardizing investments, or making taxable expenditures as defined in IRC Sections 4941-4945. Address the trustee's authority to make the annual valuation of trust assets for CRUT purposes and establish procedures for determining income versus principal. Specify whether the trustee has authority to allocate receipts and expenses under state principal and income acts or whether the trust establishes its own allocation rules.

Governing Law, Amendment Limitations, and Trust Termination

Specify that the trust shall be governed by and construed according to the laws of the designated state, while acknowledging that federal tax law under IRC Section 664 supersedes state law to the extent of any conflict. Establish the exclusive venue for any trust-related litigation and specify which state's laws govern trust administration, fiduciary duties, and interpretation. Address the limited circumstances under which the trust may be amended:

• Amendments necessary to maintain tax qualification under IRC Section 664 are permitted
• Amendments to correct scrivener's errors or ambiguities that do not affect beneficial interests
• Prohibition on any amendment that would alter the income beneficiaries' interests or the charitable remainder
• Court reformation provisions if necessary to conform to tax qualification requirements

Detail the termination provisions, specifying that the trust terminates upon the death of the last income beneficiary (for life interest trusts) or at the end of the specified term of years. Include provisions for early termination only if permitted under applicable regulations, such as when the trust value falls below the minimum amount making continued administration uneconomical. Require final accounting to all interested parties and specify the procedure for distributing the remainder interest to charitable beneficiaries upon termination.

Execution, Acknowledgment, and Attestation Requirements

Conclude the trust instrument with properly formatted signature blocks for the settlor(s) and trustee(s), including full legal names, dates, and acknowledgment that each party understands their respective rights and obligations. Include notarial acknowledgment language compliant with the designated state's requirements for real property transfers if real estate is being contributed to the trust. Provide for:

• Settlor signature with acknowledgment of irrevocability and understanding of tax consequences
• Trustee signature accepting the fiduciary appointment and responsibilities
• Notary public acknowledgment with seal, commission expiration, and proper venue
• Witness signatures if required by state law for testamentary or trust instruments
• Acceptance of charitable remainder beneficiaries if required for vesting of their interests

Ensure the execution formalities satisfy both state law requirements for trust validity and any heightened requirements for charitable trusts or trusts holding real property. Include a statement that the settlor has been advised to seek independent legal and tax counsel regarding the consequences of establishing this irrevocable charitable remainder trust.

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Final Instruction: Draft a complete, execution-ready Charitable Remainder Trust document incorporating all sections above with appropriate legal formality, precise technical language, and full compliance with IRC Section 664 requirements. The document should be professionally formatted with appropriate article and section numbering, include all necessary definitions, and be suitable for review by the client's tax and legal advisors prior to execution.