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Charitable Remainder Trust (split interest trust)

December 09, 2016 • Jamie Castiel • Log In to Post Comments

Split interest trust sells low basis and high fair market value asset.

If the annuitant receives the profits and basis as an annuity, is this income taxable to the annuitant?

If so, which portion is taxable to the annuitant, and what portion is not taxable to the annuitant


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Jamie:

The annuity paid to the beneficiary of a CRT carries income out of the trust following a specific pecking order:  1) from ordinary income, 2) from capital gains, 3) from non-taxable income, and lastly from corpus.  So it depends on the amount of ordinary income whether the capital gain will be reported to the beneficiary on a K-1.

 still not clear.  if an individual contributes asset, to charitable remainder  trust,  with basis of 100 and fmv of 1,000.  When the trust sells it and receives $100.  The Trust pays the individual $90.00 and $10.00 goes to the charity.  Does the individual have taxable income on the $90.00? (assuming that there is no growth from the $100

 

Yikes the example above is incorrect.  The trust pays 900 to individual and $100.00 to charity

Your example is still incorrect because the trust doesn't pay $900 to the individual, it pays an annuity that will likely be around 5% based on the value in the trust.  So it would pay $50 to the individual in your example.  If there have been no ordinary earnings like interest or dividends, the $50 carries out part of the gain.  There would be $950 to invest in something the second year. The trust pays another $50 the second year (assuming this is a CRAT and not a CRUT) and that will carry out any ordinary income first and to the extent there wasn't $50 of earnings, another amount of the accumulated gains carries out.  And so on until the term of the trust ends.  Putl out a Form 5227 and play around with it, it will start to make sense.

Therefore the grantor of this  charitable annuity will eventually be taxed on sale of the asset plus any gains that the principal accretes (of course up to 90%)

is this correct?

No, that's certainly a possibility, but not a given.  Using your example and a 5% annuity, if there is interest or dividend income of $50 or more each year than the grantor would never pay tax on any capital gains.  In my experience, the gain rarely is fully taxed but there often is at least a small amount that carries out each year with ordinary income.

I understand the 5% part.  but if the sale had no earnings, theoretically the sale  would be taxed to grantor albeit in installments. Correct?

assuming that there were no earnings.  ie trust put the sale of the asset in checking account with no earnings

 

I don't know who would do that but I think we've pretty thoroughly covered this question.

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