What are the tax characteristics of funding a charitable remainder trust with an Annuity?
The charitable remainder trust itself will pay no income taxes on the earnings and profit; rather the tax characteristic of the income received by the charitable remainder trust is passed through to the income beneficiary. In other words, income earned by the charitable remainder trust which is ordinary income will be ordinary income to the income beneficiary of the charitable remainder trust. Tax-exempt interest earned by the charitable remainder trust will be tax-exempt interest to the income beneficiary. When the charitable remainder trust earns income comprised of more than one tax characteristic, i.e., ordinary income as well as tax-exempt income, the rules of four-tier accounting apply. Under these rules, the income received by the charitable remainder trust and paid to the income beneficiaries is taxed in the order and the extent received as: • ordinary income, • capital gain, • tax-exempt income, and • return of principal.
