Split-Interest Charitable Trusts

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Split-Interest Charitable Trusts

A split-interest trust is a trust that:

  • Is not exempt from tax under section 501(a);
  • Has some unexpired interests that are devoted to purposes other than religious, charitable, or similar purposes described in section 170(c)(2)(B); and
  • Has amounts transferred in trust after May 26, 1969, for which a deduction was allowed under one of the Code sections listed in section 4947(a)(2).

A split-interest trust is subject to many of the same requirements and restrictions that are imposed on private foundations. A split-interest charitable trust must file a calendar year return. Fiscal year accounting periods are not allowed. Four categories of Split-Interest Charitable Trusts based on method and timing of distributions are as follows:

  • Charitable Lead Trusts
  • Charitable Remainder Annuity Trusts
  • Charitable Remainder Unitrusts
  • Pooled Income Fund

When to File Split Interest Charitable Trusts

  • File by the 15th day of the 4th month after the end of the tax year
  • Extension: Form 8868, 3 months automatic. The due date can be extended for up to 6 months using Form 8868 after the first 3 month extension

Charitable Lead Trusts

A charitable lead trust is a trust that pays a fixed annuity or unitrust amount to a charitable organization for a fixed number of years. Upon terminations of the payments, the remainder interest is transferred to a noncharitable beneficiary.

What is Filed

For the year in which the donor takes a charitable deduction on their personal return for donation to the trust, the Charitable Lead Trust files Form 1041, pages 1 and 2 only, with a Grantor Statement on page 1 and an accompanying Grantor Letter. Forms 1041-A and 5227 are also filed. For the year in which the donor does NOT make charitable contributions to the trust, Forms 5227 and 1041-A should be filed.

Charitable Lead Trusts whose charitable interests involve only war veterans' posts or cemeteries described in sections 170(c)(3) and 170(c)(5), respectively, are not required to complete Parts VI and VII of Form 5227

How the Trust is Established

  • As a testamentary trust; i.e. by a will
  • As an inter vivos trust; i.e. by gift during the donor's life

Other Information

Under a Charitable Lead Trust, the charity is the income beneficiary and the non-charitable beneficiaries receive the remainder interest. Charitable Lead Trusts must be either annuity trusts or unitrusts. Annuity Trusts pay out a set sum every year which is equal to at least 5% of the FMV of the initial trust assets. Unitrusts pay out at least 5% of the FMV of trust assets.

External Links

Charitable Lead Trusts (CLT) - article by GiftLaw

PGDC article on Charitable Lead Trusts

Charitable Remainder Annuity and Unitrusts

Regulations Section 1.664-1, "Generally, a charitable remainder trust is a trust which 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 for a term of years, with an irrevocable remainder interest to be held for the benefit of, or paid over to, charity. The specified distribution to be paid at least annually must be a sum certain which is not less than 5 percent of the initial net fair market value of all property placed in trust" "or a fixed percentage which is not less than 5 percent of the net fair market value of the trust assets, valued annually." If the amounts that is determined that should be distributed to the income beneficiary is greater than TAI, then the trust MUST pay the difference out of corpus. A charitable remainder trust created after July 31, 1969, is exempt from all of the taxes imposed by subtitle A of the Code for any taxable year of the trust except a taxable year in which it has unrelated business taxable income.

What is Filed

Forms 5227 and 1041-A are filed. Form 1041 is also filed if there is any Unrelated Business Taxable Income.

How Charitable Remainder Trusts are Established

  • As a testamentary trust; i.e. by a will
  • As an inter vivos trust; i.e. by gift during the donor's life

Charitable Remainder Annuity Trust

Under a Charitable Remainder Annuity Trust, the income beneficiary will receive a set amount every year for the life of the trust. If the TAI is not sufficient to cover the distribution, then the distribution will come out of corpus. The charity will not receive any income during the life of the trust, but will receive the corpus and any undistributed income when the trust closes. The amount distributed each year must be set at the creation of the trust to be at least 5% of the initial FMV of the trust assets.

Charitable Remainder Unitrust

Under a Charitable Remainder Unitrust, the income beneficiary receives an amount equal to at least 5% of the FMV of the trust assets determined each year at a specified rate. The percentage due the income beneficiary can be higher than 5%, but it cannot be lower. Upon trust termination the charity will receive the corpus and any undistributed income.

Unitrust Distribution

The unitrust distribution is determined on Part V-B of Form 5227. In this section, the unitrust fixed percentage must first be stated. Then the FMV Total Liabilities (Line 43) of Part IV, Balance Sheet, of Form 5227 must be subtracted from the FMV Total Assets (Line 37). The unitrust fixed percentage is then applied to the difference between the total FMV assets and liabilities resulting in the Unitrust Amount. The Unitrust Amount is then compared to the Trust Accounting Income for the current year and the smaller of the two numbers is the Unitrust Distribution for the current year. However, if a unitrust's governing instrument provides for current distributions to make up for any distribution deficiencies in previous years due to the trust income limit (Regulations section 1.664-3(a)(1)(i)(b)(2)), then the unitrust distribution for the current year will be the smaller of the Trust Accounting Income for the current year or the sum of the Unitrust Amount and the total accrued distribution deficiencies from previous years.


External Links

Charitable Remainder Unitrusts (CRUT)

Charitable Remainder Unitrust Applications

Analysis of New Sample CRUT Forms

PGDC article on Charitable Remainder Trusts

Charitable Remainder Annuity Trusts (CRAT)

Pooled Income Fund

Under a Pooled Income Fund the charity is BOTH the trustee AND the charitable beneficiary. The donor will donate property specifying that the income from the property will go to himself and/ot other person(s) and upon their death, the corpus will be distributed to the charity. It is called a pooled income fund, because the charity will "pool" the donations from a number of different donors into one fund. This avoids the expenses of maintaining different trusts, as the charity is usually the trust creator. The biggest difference is that the trust must distribute ALL of the income currently, not just a set amount or set percentage. If it does not distribute all of its income then the excess will be taxed at the regular trust tax rates.

What is Filed

Forms 5227, 1041-A and Form 1041 are filed.

External Links

Pooled Income Fund - Article from the Planned Giving Design Center

Pooled Income Fund - Article from GiftLaw

Form 1041-A U.S. Information Return Trusts Accumulation of Charitable Amounts

Form 1041-A is used as an information return only to report the accumulation of charitable amounts. Only calendar year returns can be filed on Form 1041-A as fiscal year charitable trusts are not allowed. The income section of Form 1041-A (lines 1-8) does not need to be completed if the total income is $25,000 or less. In addition, The Balance Sheet does not always have to be completely filled out. If line 9 (Total Income) on Page 1 of Form 1041-A is $25,000 or less, complete only lines 38, 42, and 45.

Form 5227 Split-Interest Trust Information Return

Form 5227 is used as an information return on the activities of the split-interest trust during the year. There is no such thing as "passive" income on a Form 5227. The trust will pass out passive income and losses but the trust itself is not subject to the passive rules.

Unrelated Business Income of Charitable Trusts

Interest, dividends and capital gains generated by a charitable trust will be non-taxable to the trust. Other income sources are considered Unrelated Business Taxable Income. If there is any UBTI, then all of the income is subject to taxation at the regular trust rates. Rental Income is generally NOT UBTI. If UBTI is present, then the trust will have to file a Form 1041 for the year in addition to the 5227 and 1041-A.

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