North Carolina Estate Planning Blog

Last-Minute 2012 Financial Move to Avoid 3.8% Surtax in CRTs

Last week the United States Treasury proposed new regulations for Charitable Remainder Trusts (CRTs), which affects the tax liability of distributions in 2013. CRTs are a common type of trust that allows assets to be donated to a charity while the donor receives income for the specified trust period. Trust grantors take advantage of income and estate tax deductions.

Starting January 1, 2013, the Net Investment Income Tax (NIIT) will be 3.8%. The surtax applies to individuals, estate and trusts with incomes exceeding limits set by the IRS. CRTs are exempt from the surtax; however distributions of income after December 31, 2012 will be taxable.
 
To avoid the 3.8% surtax, income and capital gains must be recognized prior to December 31, 2012. This is not the only way for taxpayers to reduce their tax liability. Another strategy for year-end estate and financial planning is to sell the CRT. With only a few weeks remaining in the year, consult an estate planning attorney immediately to choose the best financial move based on your current assets and liabilities. 
 
Here are actions you can take and an example of how the NIIT 3.5% surtax affects CRTs, courtesy of Robert S. Keebler CPA, MST and Peter J. Melcher JD, MBA, LLM. Harvesting gains and income in calendar year 2012 will likely reduce the surtax burden on future CRT distributions. Likewise, deferring losses and expenses until 2013 will also reduce the tax burden on distributions.
 
ACTION STEPS
 
  1. Harvest long-term capital gains in 2012
  2. Accelerate interest, dividends and other income into 2012
  3. Defer harvesting losses into 2013
  4. Defer expenses into 2013
 
EXAMPLE OF CRT TAX LIABILITY
 
The Smith CRT has a total value of $2,800,000; including accrued interest of $75,000 and unrecognized gains of $325,000 and unrecognized losses of $100,000. The total of the income, gain and losses totals $500,000 (on a gross basis). By harvesting the gains and income and by deferring losses the trustee shifts gain and income into 2012 and defers substantial losses into 2013. The net savings will be 3.8% of $500,000 for a total saving of $19,000. 
 

 

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