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I have a snooty attorney who did a poor job of drafting a trust agreement for a CRUT. The trustor donated real property to the trust. Most CRUTS usually have a provision where you are to distribute the lesser of net accounting income or the CRUT % and then you have an income makeup provision. This trust doesn't have any such provision.
Oridnarily this trust would distribute the CRUT % (pro-rated for the first year) to the beneficiary in principal because there was no income. However, this trust is illiquid and has no such cash. We suggested setting up a liability account to the beneficiary, whereby the beneficiary will be paid what is owed him when the property sells.
The attorney says we are not allowed to carry this liability and the trustor must now deposit more cash into the CRUT and then take it back out as a distribution. I know you are allowed to contribute additional assets to CRUTS (but not to CRATS), and you pro-rate the income from the date of the additional contribution. This would mean that we must calculate the distribution on the original real property that was contributed, and also calculate the distribution on the additional amount contributed to make a distribution to the beneficiary.
Does anybody know if you absolutely are precluded from setting up a "due to beneficiary" account in the trust, instead of going through this headache?
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Member
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Last Login: 10/4/2007 4:49:42 PM
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As you say, this was not the correct type of trust to hold an illiquid asset, but since this is what your client has to deal with, he needs to operate according to the trust agreement. One way to operate would be for client to make an additional contribution and then take it out as a distribution, as attorney recommended. Client's 2006 1040 would report another charitable contribution deduction for the remainder interest in the contribution and no income from the distribution as the trust had no income in 2006 - presumably. Another solution would be for the trust to make the distribution in the form of an undivided interest in the property in the amount of the required distribution. The problem with doing nothing is that client runs the risk that IRS would review the first year return sometime before the 3-year statute of limitations runs and see that no required distribution was made and possibly disqualify the trust. If this were the case, then if the land were sold in a subsequent year after disqualification then the gain would be taxable to the client.
Carol Ach
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Member
Group: Forum Members
Last Login: 12/1/2009 12:47:02 PM
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does the trust allow for an undiversified portfolio? is the property for sale?
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