Charitable Remainder Trust

Charitable Remainder Trust Accumulation and Distributions Schedules

Character of Distributions in the Charitable Remainder Trust Accumulation and Distributions Schedules

(Regulations Section 1.664-1, February 23, 2005 and Form 5227 instructions revised as of 12/20/2004) The income (both current and cumulative undistributed income) of a charitable remainder trust for purposes of determining the character of distributions is reported in one of three categories:

1. Ordinary Income;
2. Capital gains and losses, and
3. Nontaxable income.

Annuity and unitrust amounts shall be treated as having the above characteristics in the hands of the recipients (whether or not the trust is exempt).

Order of Distributions in the Charitable Remainder Trust Accumulation and Distributions Schedules

The determination of the character of amounts distributed shall be made as of the end of the taxable year of the trust. Amounts treated as paid from the ordinary income, capital gain, or other income categories shall be treated as consisting of the same proportion of each class of items included in such category as the total of the current and accumulated income of each class of items bears to the total of the current and accumulated income for that category. A loss in one of such categories may not be used to reduce a gain in any other category. However, a loss in any one category may be used to reduce undistributed gain for earlier years within that same category, and any excess may be carried forward to reduce gain in future years within that same category.

Ordinary Income

Ordinary income is ordinary income to the extent of the sum of the trust’s ordinary income for the taxable year of the trust and its undistributed ordinary income for prior years. Any ordinary loss for the current year shall be used to reduce undistributed ordinary income for prior years and any excess shall be carried forward indefinitely to reduce ordinary income for future years.

Ordinary income is composed of two classes for purposes of characterizing and ordering distributions: (a) qualified dividends, and (b) all other ordinary income. If the trust has both classes of ordinary income, distributions are treated as made first from the all other ordinary income class, and second from the qualified dividends class.

Capital Gain

Capital gain is capital gain to the extent of the trust’s undistributed capital gains. Undistributed capital gains of the trust are determined on a cumulative net basis under the rules of this subdivision without regard to the provisions of Section 1212.

The following rules apply to undistributed long-term capital gains on assets held more than one year:

If, in any tax year of the trust, the trust has both undistributed short-term capital gain and undistributed long-term capital gain, the short-term capital gain is deemed distributed before any long-term capital gain.

If the trust has for any taxable year capital losses in excess of capital gains, any excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss in the succeeding taxable year and any excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss in the succeeding taxable year. Per Treasury Decision 9190, 3/15/2005, IRC Sec. 664, the gains and losses of the long-term capital gain classes shall be netted prior to netting the short-term capital loss against any class of long-term capital gain.

If the trust has for any taxable year capital gains in excess of capital losses, any excess of the net short-term capital gain over the net long-term capital loss for such year shall be, to the extent not deemed distributed, a short-term capital gain in the succeeding taxable year and any excess of the net long-term capital gain over the net short-term capital loss for such year shall be, to the extent not deemed distributed, a net long-term capital gain in the succeeding taxable year.

Gains and losses are netted within each class to arrive at a net gain or loss for that class. After netting within a class, the following additional netting rules apply to the capital gains category:

1. Among the long-term capital gain and loss classes:

a. A net loss from the 28% long-term capital gain class reduces net gains in the following order:

• First, gain from the section 1250 long-term capital gain class, then
• Net gain from the all other long-term capital gain class, and finally
• Gain from the qualified 5-year long-term capital gain class.

b. A net loss from the all other long-term capital gain class reduces net gains in the following order:

• First, net gain from the 28% long-term capital gain class, then
• Gain from the section 1250 long-term capital gain class, and finally
• Gain from the qualified 5-year long-term capital gain class.

2. A net short term capital loss is applied to reduce the net long-term capital gain classes as follows:

• First, net gain from the 28% long-term capital gain class, then
• Gain from the section 1250 long-term capital gain class, then
• Net gain from the all other long-term capital gain class, and finally
• Gain from the qualified 5-year long-term capital gain class.

3. An overall net long-term capital loss reduces any net short-term capital gain.

Other Income

This category of income includes other income to the extent of the sum of the trust’s other income for the taxable year and its undistributed other income for prior years. A loss in this category for the current year shall be used to reduce undistributed income in such category for prior years and any excess shall be carried forward indefinitely to reduce such income for future years.

Corpus

This category is a distribution of trust corpus. In this situation, the term “corpus” means the net fair market value of the trust assets less the total undistributed income (but not loss) in each of the above categories.

Allocation of Deductions in the Charitable Remainder Trust Accumulation and Distributions Schedules

Deductions are to be allocated as follows:

1. Items of deduction of the trust for a taxable year of the trust which are deductible in determining taxable income which are directly attributable to one or more classes of items within a category of income or to corpus shall be allocated to such items of income of to corpus.

2. All other allowable deductions for such taxable year which are not directly attributable to one or more classes of items within a category of income or to corpus shall be allocated among the classes of items within the category on the basis of the gross income of such classes for such taxable year reduced by the deductions allocated thereto under #1 above but in no event shall the amount of expenses allocated to any class of items exceed such income of such class for the taxable year.

3. Deductions not allocated under either 1 or 2 above may be allocated in any manner.

No deduction is ever allowed for:

• The personal exemption under section 642(b),
• Charitable contributions under section 642(c),
• Net operating losses under section 642(d),
• Income distribution deductions under section 661,
• Capital loss carryforwards under section 1212,
• Federal income taxes, or
• Federal excise taxes under Chapter 42.

Any expense that is not deductible in determining taxable income and not allocated to nontaxable income must be allocated to corpus. All federal income taxes for which the split-interest trust is liable because it has unrelated business taxable income, and all taxes imposed by Chapter 42 of the Internal Revenue Code (relating to private foundations) are allocated to corpus.