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Advice has been requested whether a deduction is allowable under section 2055(a) of the Internal Revenue Code of 1954 with respect to a charitable remainder interest in the situations described below.

Situation 1

The decedent died on May 1, 1977. By the terms of the decedent's will, executed January 1, 1977, the decedent devised and bequeathed the residuary estate in trust. The trust provides that the trustee is to pay monthly a sum certain in the amount of 10x dollars (which is not less than 5 percent of the initial fair market value of all the property placed in trust) for the care of the decedent's pet animal. At the death of the pet animal, the trust is to terminate and the remainder is to be transferred to or for the use of a specified charitable institution, as described in sections 170(c), 2055(a), and 2522(a) of the Code. The trust otherwise qualifies as a charitable remainder annuity trust described in section 664(d) of the Code.

The decedent was a resident of State X. The laws of State X specifically permit a bequest in trust for the lifetime of a pet animal where the funds are to be used for the care of a pet animal.

Situation 2

The facts are the same as those of Situation 1, except that the decedent was a resident of State Y instead of State X.

The trust has been funded and a distribution for the animal's care has been made. Under the laws of State Y, a trust for the care of a pet animal is valid but not enforceable because there is no one who, as beneficiary, can enforce the trust. Consequently, under the laws of State Y, the trustee can carry out the purpose of the testator if the trustee so desires. However, if the trustee chooses not to carry out the trust, the trustee will then hold the trust property for distribution to the remainder beneficiary.

Situation 3

The facts are the same as those of Situation 1, except that the decedent was a resident of State Z instead of State X. In State Z, the interest of an animal in a trust is void at its inception and a vested remainder designated to succeed the trust will be accelerated to a present interest. Under the laws of State Z, the accelerated present interest is deemed to have passed from the decedent directly to charity.

The specific question presented is whether, in each of the situations described above, a deduction for the bequest of a remainder interest to charity will be allowed under section 2055(a) and section 2055(e)(2) of the Code where the noncharitable payment is for the care of a pet animal during its life.

Section 2055(a) of the Code provides that, in determining the taxable estate of a decedent, there shall be deducted from the value of the gross estate the amount of all bequests, legacies, devises or transfers to be used exclusively for certain religious, charitable, scientific, literary, or educational purposes described in section 2055(a)(1) through section 2055(a)(4).

However, section 2055(e)(2)(A) provides that no charitable deduction is allowable where an interest in property passes or has passed from the decedent for a charitable purpose, and an interest in the same property passes or has passed for a noncharitable purpose, unless, in the case of a remainder interest passing to charity, such interest is in a charitable remainder annuity trust or a charitable remainder unitrust (described in section 664) or a pooled income fund (described in section 642(c)(5)).

Section 1.664-1(a)(1) of the Income Tax Regulations provides the general rule that a charitable remainder trust is a trust that provides for a specified distribution, at least annually, to one or more beneficiaries, at least one of which is not a charity, for life or a term of years, with an irrevocable remainder interest to be held for the benefit of, or paid over to, charity.

Section 1.664-1(a)(2) of the regulations provides that a trust is a charitable remainder trust only if it is either a charitable remainder annuity trust in every respect or a charitable remainder unitrust in every respect.

Section 1.664-2(a)(3) and 1.664-3(a)(3) of the regulations provide, with regard to charitable remainder annuity trusts and charitable remainder unitrusts, respectively, that [PAGE 296] distributions must be payable to or for the use of a named person or persons.

Section 7701(a)(1) of the Code defines the term “person” to mean and include an individual, a trust, estate, partnership, association, company, or corporation.

Where an interest in property is bequeathed to charity by a decedent, the nature of the charitable interest is determined at the time of the decedent's death. See, for example, Ithaca Trust Co. v. United States, 279 U.S. 151 (1929). When a transferred interest passes directly to charity upon the decedent's death, a deduction is permitted pursuant to section 2055(a). However, a transfer to charity that is a remainder interest at the time of the decedent's death must meet the requirements of section 2055(e)(2) before a deduction for the transfer will be allowed.

Accordingly, in the three situations described above, the following conclusions are reached:

Situation 1

Under the applicable laws of State X, the trust is a valid and enforceable trust. However, a trust for the care of the decedent's pet animal does not meet the mandatory requirements of section 664(d)(1) and section 2055(e)(2) since a pet animal is not a person for the purposes of the Code.

The term “person” or “persons” as used in section 1.664-2(a)(3) and 1.664-3(a)(3) of the regulations, and as defined in section 7701(a)(1), is specific and unambiguous. A pet animal does not fall within the meaning of the term “person” for the purposes of the Internal Revenue Code. See Rev. Rul. 76-486, 1976-2 C.B. 192, which concludes that animals do not fall within the definition of “person” under section 7701(a)(1), and concludes that an animal cannot be a “beneficiary” for the purposes of section 643(c). Therefore, no deduction is allowable with respect to a charitable remainder interest where the specified distribution of the trust is for the care of a pet animal.

Situation 2

In this situation, as in Situation 1, the trust is a valid charitable remainder trust at the time of the decedent's death. However, no deduction is allowable for the charitable remainder interest since, as in Situation 1, the annuity trust amount payable for the care of a pet animal does not meet the mandatory requirements of section 664(d)(1). Although the trustee is permitted under the laws of State Y to disregard the provisions for the care of the animal and convert the charitable remainder to a present interest, the conversion to a present interest would result from an independent election of the trustee to disregard the provisions for the care of the animal rather than from the transfer by the decedent at the decedent's death. Since the present interest would pass to charity only upon the exercise of the trustee's discretionary power, the present interest is not deemed to pass from the decedent. See, for example, Burdick v. Commissioner, 117 F. 2d 972 (2d Cir. 1941); Rev. Rul. 55-335, 1955-1 C.B. 455. Consequently, the original charitable remainder interest must satisfy the requirements of section 2055(e)(2) to be deductible.

Situation 3

Since the trust for the decedent's pet animal is void under the laws of State Z because the duration of the trust is measured by the life of an animal, the remainder interest is accelerated and a present interest is vested. The present interest, acquired under the laws of State Z, constitutes an interest inherited from the decedent for Federal tax purposes. Cf. Bel v. United States, 452 F. 2d 603 (5th Cir. 1971). Inasmuch as the interest passing to the charitable beneficiary at the death of the decedent is a present interest rather than a remainder interest, the requirements of section 2055(e)(2) are not applicable. Therefore, the value of the interest that passed directly from the decedent to the charity at the time of the decedent's death is allowed as a deduction under section 2055(a) of the Code.