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How to File a Charitable Remainder Trust Tax Return

How to File a Charitable Remainder Trust Tax Return

December 15, 2023

Taxes are one of the most complex aspects of financial planning, and charitable remainder trust (CRT) tax returns are no exception. The good news is that you can file a CRT tax return with more ease when you know exactly what and when to file. 

If you need help with your charitable remainder trust tax return, here is what you need to do to manage taxes as a CRT trustee and as a beneficiary of the payouts of the trust.  

How to File a Charitable Remainder Trust Tax Return 

A charitable remainder trust requires its own separate tax documents at the end of each year. The form required for a CRT is Form 5227 also known as the Split-Interest Trust Information Return to document your finances. This form accomplishes several important pieces of data, including all financial activities for the reporting year. 

Form 5227 accounts for both the current year and accumulated trust income. If you have any documented deductions, this is where they will be recorded. Using this form, the IRS determines whether you will owe any excise taxes for a prohibited transaction within your CRT.

It also accounts for any distributions that have been made from the trust, though the beneficiaries will be responsible for paying their own income taxes and filing their own tax documents. Each tax return should have a Schedule K-1 attached to report any distributions made to beneficiaries. 

You may want the help of a financial and tax planning firm like Magellan to help you sort out the ins and outs of filing taxes as a CRT trustee, donor, or beneficiary.

Other Tax Considerations for CRTs 

Of course, there are other tax considerations to keep in mind when it comes to forming a trust of this kind. Beneficiaries will want to take note of how they can file their taxes and make the most of the financial legacy gifted to them. Here is what you need to know about other tax issues and how to file them at the end of the fiscal year. 

Beneficiaries and Personal Income Tax

As touched on briefly, there will be other tax considerations for CRTs and beneficiaries. Not only is there an attachment to Form 5227, but the beneficiaries will also need to report distributions from the trust separately on their own personal income tax returns. They would file a Schedule K-1 that comes from the CRT. 

Because they are the ones receiving the distributions as income, these CRT distributions could be taxed as income on their personal tax returns, depending on the tax characterization of the income received from the trust.

Unfortunately, there is no real way around this as there can be for gift taxes. It is simply part of the process of taxing what comes out of the trust and sharing their piece with the government. After all, up until this point, no taxes have been due at all. And if the trustee (or the appointee) does a good job, the tax burden to the beneficiaries can be mitigated.

Gift Taxes

Beneficiaries other than yourself or your spouse might also be on the hook for gift taxes when you give them a share of the charitable remainder trust. The present value of the future payments they receive over the trust term will be subject to a gift tax, but you can help to minimize this burden for them.  

Instead of taking the full tax deduction, you can use some of your credit to offset the gift tax and help your beneficiary to more fully benefit from the distributions. 

This might be beneficial if you want to ensure that your beneficiary receives the full benefit of your generosity without having to be on the hook for taxes related to your gift. In most cases, however, grantors often have enough of a gift credit to avoid actually having to write a check.

Estate Taxes

Wondering whether you will also owe estate taxes on your CRT? Charitable remainder trusts are not a part of your taxable estate and are not taxable, even though someone may be receiving income throughout their lifetime or for a set term. Instead, a CRT is considered a separate entity from your estate and from the estate of your named beneficiary.

The irrevocable trust protects it from creditors, bankruptcy, and even divorce. As well as being a powerful tool in estate planning, this is one of the largest tax benefits of creating a charitable remainder trust and making the most of your taxes. 

Filing Your Tax Return

Are you feeling overwhelmed by the prospect of filing a tax return for your charitable remainder trust? Unfortunately, it can be a bit complex to ensure that you keep up with everything the IRS requires of you as a trustee. Whether you need a little bit of help or a lot of help, Magellan is here to help you through the complex process of taxes. 

Magellan is your one-stop shop for all things related to estate, financial, and tax planning so that you can make the most of your wealth. We handle everything you need to maintain your CRT at tax time with professionalism, expertise, and attention to detail. If you are ready to maximize your money and create a financial legacy for your beneficiaries, contact Magellan today!

This material provided by Kevin Meaders and written by Axle Eight a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.