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Year-End Planning for Charitable Remainder Trusts and the 3.8% Net Investment

Posted 12:00 AM by

Charitable remainder trusts (CRTs) might want to sell appreciated property before year-end to realize long-term capital gains in 2012 versus a later tax year. CRTs are generally not tax-paying entities. However, distributions from CRTs to CRT beneficiaries are taxable to beneficiaries to the extent of the CRT's current and accumulated income. If a CRT does not distribute all of its current income to the beneficiary, the excess is accounted for by the CRT as accumulated income and not currently taxed.

Distributions from CRTs to CRT beneficiaries may also be subject to the 3.8% surtax on net investment income (NII) for income realized in 2013 and later years. NII of a CRT beneficiary is the lesser of CRT distributions or the current and accumulated (after 2012) NII of the CRT. Income realized by a CRT in 2012 is not subject to the surtax, even if it is distributed to the CRT beneficiary after 2012. However, distributions of accumulated CRT income consist of post-2012 accumulated income first, and pre-2013 accumulated income second, for purposes of determining what income is NII and potentially subject to the surtax.

A CRT should wait until after 2012 to sell assets at a loss. Whether a CRT should sell appreciated assets before year-end depends on all of the facts and circumstances, such as the likelihood of the CRT beneficiary being subject to the 3.8% surtax. The surtax applies to joint filers with income over $250,000 or single filers with income over $200,000.

Contact your KSM advisor for more information.