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RE: unitrust amount includes capital gains for crt

John R. Woodford — Sat, 31 Jan 2009 15:24:45 GMT

The fact that the trust is a NIMCRUT certainly helps. You need to look to the trust document to determine how fiduciary income is computed. Hopefully it explains how to treat gains and losses from the disposition of assets. Absent that you need to look the Uniform Principal And Income Act of the State in which your trust resides. It will determine how fiduciary income is computed. Most states have now adopted a "power to adjust" provision which will allow trustees to make allocations between principal and income to provide a reasonable return to the income beneficiary. There are some limitations. As far as the determination of DNI for the taxation of the distributions the net capital losses will reduce your capital gains pool on the Form 5227.

RE: unitrust amount includes capital gains for crt

John R. Woodford — Thu, 29 Jan 2009 19:53:31 GMT

All very interesting conversation. I would agree with Mary Kay that it is not clear from information provided what the actual terms of the trust are and if it is possibly a NIMCRUT. Normally for a trust to qualify as a CRT under Section 664 it is necessary to be able to value the remainder interest going to charity. Therefore there needs to be some reasonable structure on how the distributions to the current beneficiaries are determine so the remainder interest going to the Charity can be determined. Annual distributions for a CRT is normally determined by the value of the assets at time of creation or annually and not on the income generated by the trust. A partial exception to this would be a NIMCRUT. Under the IRC all distributions can carry out income. How that is computed is determined under the respective code sections which apply to the trust. I would refer the poster of this question to IRC Section 664 which deals with CRTs to determine the how his distribution is taxed. If you have a NIMCRUT your distribution could be determined under the Uniform Principal Income Act applicable to the state of jurisdiction of the trust. But what types of income that it carries out will be determined under Section 664.

RE: unitrust amount includes capital gains for crt

Mary Kay Foss — Wed, 28 Jan 2009 16:37:54 GMT

Are there capital gains from the initial funding of the trust?

Normally capital gains are not income and are not taken into account when you're paying out the lesser of net income or the % of assets. However, if the trust agreement describes them as income, the capital gains and losses are taken into account in determining the current year's income.

There are 2 issues here:

1. How much is distributed to the income beneficiary?

2. How much is taxable to the income beneficiary?

The capital loss cannot be "passed out" to the beneficiary on the Schedule K-1. It either offsets prior year undistributed gains or just carries forward. However, the loss could reduce the amount of cash that must be paid to the beneficiary.

RE: unitrust amount includes capital gains for crt

Mary Kay Foss — Fri, 23 Jan 2009 12:14:56 GMT

I'm confused by your terminology. Usually when someone starts a CRT they transfer an appreciated asset. The trustee then sells that asset and invests in something that's likely to pay out the unitrust percentage each year. The capital gain is not taxable currently but may become part of the unitrust distribution in the future.

When the unitrust amount is determined, it is paid first from dividends and interest. If those categories are not enough, then capital gains are the next source of income, after capital gains there is tax exempt interest.

If you assume that the unitrust amount is $10,000 and interest and dividends are $8,000; you would expect that the remaining $2,000 would be capital gain. If there are no prior or current capital gains, the extra $2,000 would still have been paid in cash to the beneficiary but it would not be taxable.

Some trust agreements only pay out the income if that is less than the unitrust amount. If there is uncertainty you should talk to the attorney that drafted the trust agreement to see what was intended.