Thursday April 25, 2024
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8.2.3 Forms 5227
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Form 5227
Charitable remainder trusts (CRT) are tax-exempt trusts and do not have to pay income taxes. As a result, a CRT does not have to pay capital gain tax when it sells appreciated property. In addition, CRTs enjoy tax-free growth on their investments. These two benefits provide donors with excellent opportunities to diversify and invest for the future in a tax efficient manner.
Keep in mind, however, that a CRT is fully taxable on unrelated business income (UBI). For example, a CRT that owns and operates a gas station may generate UBI. If there is UBI inside the CRT, then the CRT must pay income tax. This could result in an enormous tax liability and significant depletion of the trust principal. Furthermore, this would likely result in very unhappy donors and potential trustee liability. Therefore, it is extremely important for a trustee to avoid any investments or activities that produce UBI.
CRT Filing Requirements
CRT trustees must file certain tax forms each and every year. Additional tax forms may be necessary depending on the trust's investments and activities. Part one of this article will address the most commonly filed tax forms and the deadlines for such tax forms.
Trustee's Quick Checklist
The following checklist shows the IRS forms the trustee must file with the IRS.
| Form 5227 | Split Interest Trust Information Return |
| Form 1041 | Income Tax Return for Estates and Trusts |
| Form 1041-ES | Estimated Income Tax for Estates and Trusts |
| Form 4720 | Return for Certain Excise Taxes |
| Form 56 | Notice Concerning Fiduciary Relationship |
| Form 8868 | Application for Extension of Time to File |
| Form 8822 | Change of Address |
Form 5227 - Split Interest Trust Information Return
A CRT trustee must file Form 5227 each year to report the financial activities of the trust. This form must be filed on or before April 15th following the close of the trust's tax year. CRTs have a calendar tax year which means December 31st is the end of the trust's tax year. An automatic three-month extension to file is available to trustees who file Form 8868. An additional three-month extension may be requested (but is not automatic) using Form 8868.
Form 1041 and Schedule K-1
Although a CRT is generally not taxable, it may nevertheless file several trust tax forms normally associated with taxable trusts. A CRT trustee must file Form 1041 Income Tax Return for Trusts and Estates if the CRT has UBI. This form must be filed by April 15th.
Form 1041 Schedule K-1 Beneficiary's Share of Income, Deductions, etc. must be filed and sent to each CRT income beneficiary. The deadline for filing Form 1041 Schedule K-1 is also April 15th. This short but important form provides essential tax information to income beneficiaries. In particular, this form describes the tax character of the CRT payouts. For example, assume an income beneficiary received $50,000 last year, the K-1 may state that $15,000 was dividends and that $35,000 was long-term capital gain income. With the K-1 in hand, the income beneficiary can now properly report the $50,000 on his or her Form 1040.
Form 4720 Return for Certain Excise Taxes
In certain situations, a CRT trustee must file Form 4720. Form 4720 applies to excise taxes set forth in Secs. 4941-4945. For example, a CRT trustee must file Form 4720 to report acts of self-dealing prohibited by Sec. 4941. Acts of self-dealing are subject to an excise tax of 5% of the amount involved. If the act is not corrected, then a 200% rate of tax may apply.
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