What are the tax characteristics of funding a CRT with an Annuity?
The trust itself will pay no income taxes on the earnings and profit; rather, the tax characteristic of the income received by the trust is passed through to the income beneficiary. In other words, income earned by the trust which is ordinary income will be ordinary income to the income beneficiary of the trust. Tax-exempt interest earned by the trust will be tax-exempt interest to the income beneficiary. When the 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 trust and paid to the income beneficiaries is taxed in the order and the extent received as: 1. ordinary income, 2. capital gain, 3. tax-exempt income, and 4. return of principal.
Related Questions
- My attorney or tax advisor has never heard of a Private Annuity Trust or has heard of it and doesn think it is legal. How can they be assured that it is a legitimate Estate Planning strategy?
- As an income beneficiary, do I have to pay tax on the annuity/unitrust distributions I receive from the CRT?
- What are the tax characteristics of funding a charitable remainder trust with an Annuity?
