You can look to Code section 664 and the corresponding Regulations for guidance on this, but as I understand CRT taxation, the consequences should be as follows:
Since the unitrust distribution is $100,000, the distribution recipient(s) will get taxed on the accumulated income/gain based on the tier system prescribed in the Code. As a general rule, the income/gain with the highest tax rate is considered distributed "first," with the rest of any accumulated income/gain distributed later in order of tier. Therefore, even if the income inuring to the CRT this year is capital gain, the recipient of the unitrust distribution might actually be taxed at a higher rate depending on whether the CRT historically realized ordinary income (or capital income taxed at a higher rate, such as income from the sale of collectibles or depreciation recapture under sections 1245 or 1250).
As you probably know, the CRT itself is tax-exempt under Code section 664. Therefore, the CRT itself will not pay any taxes on the extra $20,000 of income "accumulated" into principal because it has not been distributed to the non-charitable beneficiary(ies). The accountant, of course, must keep track of the character of the accumulated income and "charge" that income to the non-charitable beneficiary(ies) if and when the extra $20,000 is distributed to them.
Conceptually, of course, this makes sense: the non-charitable beneficiaries' interests may expire before they receive any future distributions, in which case the remaining trust property would go to charity. The government does not wish to tax property that may go to a charity. Instead, they will tax only the property that will definitively pass to the non-charitable recipients, i.e. only the property actually distributed to them.
SUMMARY:
--$100,000 taxed to the non-charitable beneficiary; character of the income depends on the history of the CRT's income and the tier system
--$20,000 not currently taxed under Code section 664, but if and when this $20,000 is actually distributed to the non-charitable beneficiary, the non-charitable beneficiary recognizes income/gain according to the tier system; this will depend on the CRT's history and what kind of income the CRT generates next year
More than happy to assist if you want to discuss further.
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Matthew E. Rappaport, Esq., LL.M.
(516) 558-3377
mer@merlawfirm.com
Original Message:
Sent: 06-14-2016 16:23
From: Kevin Bonanno
Subject: Charitable Remainder Trust
Dear Colleagues
A charitable remainder trust files a form 5227 split- interest trust information return. The trust pays distributions to its 100 % beneficiary according to the trust agreement and there is no distribution deficiency. Total distributions are $ 100,000. The income( dividends & capital gain) of the trust total $ 120,000. and therefore, exceed the distributions to the trust beneficiary by $ 20,000.
If the trust K-1 reflects dividend and capital gains of $ 100,000 ( amount actually distributed) what happens to the $ 20,000. of additional investment net income that was not distributed. It would increase the corpus of the trust. Is there any current or future tax treatment that needs to be considered for the $ 20,000.
Thanks in advance for any help regarding this matter.
Best regards,
Kevin Bonanno
Kevin Bonanno CPA
East Meadow, NY 11554
kevcpa53@aol.com
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Kevin Bonanno
CPA
KEVIN BONANNO, CPA
East Meadow NY
KEVCPA53@aol.com
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