WHO TO CONTACT
For Additional Registrations:
-Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10)
For Assistance During the Program:
-On the web, use the chat box at the bottom left of the screen
If you get disconnected during the program, you can simply log in using your original instructions and PIN.
IMPORTANT INFORMATION
This program is approved for 2 CPE credit hours. To earn credit you must:
• Participate in the program on your own computer connection (no sharing) – if you need to register
additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford
accepts American Express, Visa, MasterCard, Discover.
• Listen on-line via your computer speakers.
• Respond to five prompts during the program plus a single verification code. You will have to write down
only the final verification code on the attestation form, which will be emailed to registered attendees.
• To earn full credit, you must remain connected for the entire program.
Form 5227 Reporting: Charitable Split-Interest
Trusts, NIIT Calculations, and More
THURSDAY, AUGUST 20, 2015, 1:00-2:50 pm Eastern
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FOR LIVE EVENT ONLY
Aug. 20, 2015
Form 5227 Reporting
Ted R. Batson, Jr., Executive Vice President
Renaissance
Joe Carter, Director of Planned Giving
Oklahoma City Community Foundation
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
© Renaissance Administration
LLC
Preparing Form 5227
Ted R. Batson, Jr, J.D., M.B.A., CPA, CFP®
August 20, 2015
• Transfers to CRTs and CLTs are exempt from the
contemporaneous written acknowledgment rules that normally
apply to charitable gifts
• By regulation, a statement must be attached to return on
which a donor claims a gift for a transfer to a CRT showing the
computation of the present value of a remainder interest
• Prudence dictates a similar approach should be taken for a
CLT
• This statement is not required to be provided by the trustee,
but rather is the responsibility of the settlor
– However, many charities and administrators own the
software to produce this statement and will do so
Substantiation Rules
32
• An information return
– No tax due with the return
• For split-interest trusts
– Charitable remainder trusts
– Charitable lead trusts
– Pooled income funds
– Other trusts for which a deduction was allowed for an amount transferred in trust after May 26, 1969 by one of the sections listed in IRC § 4947(a)(2)
• Sections 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522
• Split-interests trusts have not been required to file Form 1041-A since 2007
What is Form 5227?
33
• Form 5227 is subject to public inspection
• Information about trusts that filed Form 5227 has been included in the IRS Business Master File
– Commercial companies downloaded this list and created publicly searchable databases
– Search for your client’s CRT, CLT, or PIF on Google!
• Consider not using the client’s name in the name of the trust
– But note that the trustee’s name and address are disclosable
• Portions of the return are not disclosable
– Trust agreement (including amendments), Schedule A, Schedules(s) K-1, attachments referencing contributor info
Subject to Public Inspection
34
• Due April 15 – Trusts that file Form 5227 must use a calendar year
– Make sure distributions are paid before filing the return
• Use Form 8868 to request an extension of time to file – An automatic extension is available to July 15
– IRS may grant a second, non-automatic extension to October 15
• TRAP: Forms 4720 and 8870 may be required and require their own extension – The need to file an extension request may not be apparent until
after April 15
• File using this address – Department of the Treasury
Internal Revenue Service Ogden, UT 84201-0027
When and Where to File
35
• Attach a copy of the trust instrument to the return in
the first year
– Include a declaration signed under penalty of perjury that
the copy is a “true and complete copy”
• Attach a copy of any amendments to the trust
instrument to the return covering the year in which the
amendment is made
Attaching a Copy of the Trust Instrument
36
• The general rule is a daily delinquency penalty of $20 per day up to a maximum of $10,000
– Exception: If the trust’s gross income exceeds $250,000, the penalty is $100 per day up to a maximum of $50,000
• The penalty is imposed on the trust
– Exception: Knowingly failing to file the return results in the additional imposition of the penalty on the person who knowingly failed to file and they are personally liable for this additional penalty
• For 2015 and beyond, the penalty amounts described above are indexed for inflation
– Amounts of $5,000 or more will increase in $500 increments
– Amounts less than $5,000 will increase in $5 increments
Consequences of Failing to File
37
• Failing to read the trust agreement
– Misidentifying the type of trust
– Incorrectly computing the amount of required distributions
• Paying the fixed percentage unitrust amount instead of the lesser
of that amount and TAI
• Not reviewing the document for relevant TAI provisions
• Failing to note that excess income is to be distributed in a CLT
• Completing parts that aren’t required or omitting parts
that are required
– See roadmap in Appendix A
• Filing a Form 1041 when not required
Common Mistakes
38
• Part I – Income and Deductions
• Part II – Schedule of Distributable Income
• Part IIIA – Distributions of Principal for Charitable Purposes
• Part IIIB – Accumulated Income Set Aside and Income
Distributions for Charitable Purposes
• Part IV – Balance Sheet
• Part V – CRAT and CRUT Information
• Part VI – Statements Regarding Activities (including those
for Which Form 4720 May Be Required )
• Part VII – Questionnaire for CLTs, PIFs, and CRTs
Form Overview
39
• The Internal Revenue Code includes CRTs among the
list of entities for which investment firms are not
required to issue Forms 1099
– See IRC §§6042 and 6049(b)(4)(L)(i)
• We’ve specifically encountered this issue with
American Funds
• Is anyone in the group familiar with other investment
firms that follow this practice?
• The AICPA has submitted a legislative proposal to
address this issue
Qualified Dividends
40
• The “Four-Tiers” are an accumulation schedule
– Four-tier accounting only apply to CRTs
– Accumulated balances are used to characterize
distributions to trust beneficiaries
• The face of the form is insufficient to fully track and
maintain the four-tier balances
• Tax prep software helps
• But a separate workpaper may be required to fully
track the interaction of the four-tiers
Four-Tier Rules
41
• The four-tier rules are described at Treas. Reg. § 1.664-1(d)(1) and (2)
• Maintain four categories (Tiers)
– Ordinary Income
– Capital Gains
– Other (Nontaxable) Income
– Principal, or Corpus
• Special capital gain netting rules apply
– These are described in the regs
– A special guidance is provided in the instructions for applying the netting rules
Four-Tier Rules (continued)
42
• Within the tiers maintain
– Classes based on highest potentially applicable tax rate
• Pre-2013 dollars are maintained in classes that do not include the net
investment income tax (Excluded)
• Post-2012 dollars are maintained in classes that include the net
investment income tax
– Income types within each class (e.g., U.S. Gov’t interest, corporate
bond interest, nonqualified dividends, qualified dividends)
• When preparing each beneficiary’s Schedule K-1, relieve the
categories in highest to lowest tax rate order
– Similarly, relieve tax rate classes in highest to lowest tax rate
order
Four-Tier Rules (continued)
43
• Column (c) Fair Market Value
– All forms of CRUTs (CRUT, NICRUT, NIMCRUT, Flip-CRUT)
must complete column (c)
– Use the value on the date used to compute the unitrust
(fixed percentage) amount
• Make sure to read the Trust Agreement to determine the relevant
date(s)
Part IV- Balance Sheet
44
• A CRT is not subject to the Net Investment Income Tax
– Beneficiaries are subject to the tax to the extent their distributions
include NII amounts
– Undistributed amounts from prior to 2013 are not included in NII
• A CLT and a PIF are not exempt from the tax
– But amounts of income distributed to charitable and non-
charitable beneficiaries carry out NII and reduce the trust’s
taxable amount
– For PIFs the deduction for long-term capital gains permanently set
aside for charitable purposes reduces the trust’s taxable amount
– These deductions often reduce the trust’s taxable amount
below the threshold amount
Net Investment Income Tax
45
• Two methods are allowed for CRTs to capture Net
Investment Income Tax information
– Section 664 Method: This method integrates with the
category and class system to create tax rate classes that
are the sum of the income tax rate and the 3.8% net
investment income tax rate
– Then as each tax rate class is drawn from, net investment
income taxable amounts flow out to the beneficiary
Net Investment Income Tax (continued)
46
– Simplified Method: This method operates outside the category/class structure
– Cumulative totals of net investment income and non-net investment income buckets are maintained
• Only post-2012 amounts are treated as net investment income
– Each year the amount of the distribution that is net investment income is determined by
• First looking to the cumulative, undistributed net investment income
• If the distribution is larger than the cumulative, undistributed net investment income, then look to the cumulative, undistributed non-net investment income
– For trusts created prior to 2013, the Simplified Method had to be adopted on the 2013 return.
• The Simplified Method can be elected on an amended return so long as the year to be amended and all intervening years for both the CRT and the beneficiaries are open
Net Investment Income Tax (continued)
48
– For trusts created after 2012, the Simplified Method must
be elected the first year the trust is required to file Form
5227
Net Investment Income Tax (continued)
49
• Just $1 of UBTI triggers a tax – The tax on UBTI is 100% of the UBTI amount
• Report the tax using IRS Form 4720 – Return of Certain Excise Taxes Under Chapters 41 and 42 of the
Internal Revenue Code
– Use Form 990-T as an attachment to provide relevant details
• Common sources of UBTI? – Publicly Traded Partnerships (see Box 20, Code V)
– Unrelated debt financed income • Trading on margin
• Mortgaged Property
• Remember the $1,000 specific deduction in arriving at taxable UBTI – IRC § 512(b)(12)
Unrelated Business Taxable Income (UBTI)
50
• Split-Interest trusts are prohibited from
– Engaging in self-dealing IRC § 4941
• Purchase from, sale to, loan to/from, lease to/from, use of income
or assets of trust by a disqualified person (see IRC § 4946)
– Possessing excess business holdings IRC § 4943
• See exception for CRTs IRC § 4947(b)(3)(B)
• See exception for certain CLTs IRC § 4947(b)(3)(A)
– Purchasing jeopardizing investments IRC § 4944
• See exception for CRTs IRC § 4947(b)(3)(B)
• See exception for certain CLTs IRC § 4947(b)(3)(A)
– Making taxable expenditures IRC § 4945
Self-Dealing and Other Chapter 42 Excise Taxes
51
• Compliance (or lack of compliance) with these
prohibited activities is self-reported in Part VI-B
• Exercise care in completing this portion of the return –
the trustee signs the return under penalty of perjury
Self-Dealing and Other Chapter 42 Excise Taxes
(continued)
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Thank You
Ted R. Batson, Jr., J.D., M.B.A., CPA, CFP®
Executive Vice President
Renaissance
6100 W. 96th St., Ste. 100
Indianapolis, IN 46278
800-479-5142 ext. 5286
www.reninc.com
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