As an income beneficiary, do I have to pay tax on the annuity/unitrust distributions I receive from the CRT?
A. Most likely, yes. Treasury Regulation 1.664-1(d)(1)(i) stipulates a four-tier system in which income must be distributed to non-charitable beneficiaries. Income passing through to beneficiaries from the CRT maintains the same tax character it was when earned by the trust. The Regulations require distributions to occur in the following order: ordinary income comes out first, then capital gains, then other income (often tax-exempt income) and finally trust corpus.
