Form 5227 Reporting: Charitable Split-Interest Trusts, NIIT Calculations, and More

Transcription

1 Form 5227 Reporting: Charitable Split-Interest Trusts, NIIT Calculations, and More THURSDAY, AUGUST 20, 2015, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

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3 Form 5227 Reporting Aug. 20, 2015 Ted R. Batson, Jr., Executive Vice President Renaissance Joe Carter, Director of Planned Giving Oklahoma City Community Foundation

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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31 Preparing Form 5227 Renaissance Administration Ted R. Batson, Jr, J.D., M.B.A., CPA, CFP August 20, 2015

32 Substantiation Rules Transfers to CRTs and CLTs are exempt from the contemporaneous written acknowledgment rules that normally apply to charitable gifts By regulation, a statement must be attached to return on which a donor claims a gift for a transfer to a CRT showing the computation of the present value of a remainder interest Prudence dictates a similar approach should be taken for a CLT This statement is not required to be provided by the trustee, but rather is the responsibility of the settlor However, many charities and administrators own the software to produce this statement and will do so 32

33 What is Form 5227? An information return No tax due with the return For split-interest trusts Charitable remainder trusts Charitable lead trusts Pooled income funds Other trusts for which a deduction was allowed for an amount transferred in trust after May 26, 1969 by one of the sections listed in IRC 4947(a)(2) Sections 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522 Split-interests trusts have not been required to file Form 1041-A since

34 Subject to Public Inspection Form 5227 is subject to public inspection Information about trusts that filed Form 5227 has been included in the IRS Business Master File Commercial companies downloaded this list and created publicly searchable databases Search for your client s CRT, CLT, or PIF on Google! Consider not using the client s name in the name of the trust But note that the trustee s name and address are disclosable Portions of the return are not disclosable Trust agreement (including amendments), Schedule A, Schedules(s) K-1, attachments referencing contributor info 34

35 When and Where to File Due April 15 Trusts that file Form 5227 must use a calendar year Make sure distributions are paid before filing the return Use Form 8868 to request an extension of time to file An automatic extension is available to July 15 IRS may grant a second, non-automatic extension to October 15 TRAP: Forms 4720 and 8870 may be required and require their own extension The need to file an extension request may not be apparent until after April 15 File using this address Department of the Treasury Internal Revenue Service Ogden, UT

36 Attaching a Copy of the Trust Instrument Attach a copy of the trust instrument to the return in the first year Include a declaration signed under penalty of perjury that the copy is a true and complete copy Attach a copy of any amendments to the trust instrument to the return covering the year in which the amendment is made 36

37 Consequences of Failing to File The general rule is a daily delinquency penalty of $20 per day up to a maximum of $10,000 Exception: If the trust s gross income exceeds $250,000, the penalty is $100 per day up to a maximum of $50,000 The penalty is imposed on the trust Exception: Knowingly failing to file the return results in the additional imposition of the penalty on the person who knowingly failed to file and they are personally liable for this additional penalty For 2015 and beyond, the penalty amounts described above are indexed for inflation Amounts of $5,000 or more will increase in $500 increments Amounts less than $5,000 will increase in $5 increments 37

38 Common Mistakes Failing to read the trust agreement Misidentifying the type of trust Incorrectly computing the amount of required distributions Paying the fixed percentage unitrust amount instead of the lesser of that amount and TAI Not reviewing the document for relevant TAI provisions Failing to note that excess income is to be distributed in a CLT Completing parts that aren t required or omitting parts that are required See roadmap in Appendix A Filing a Form 1041 when not required 38

39 Form Overview Part I Income and Deductions Part II Schedule of Distributable Income Part IIIA Distributions of Principal for Charitable Purposes Part IIIB Accumulated Income Set Aside and Income Distributions for Charitable Purposes Part IV Balance Sheet Part V CRAT and CRUT Information Part VI Statements Regarding Activities (including those for Which Form 4720 May Be Required ) Part VII Questionnaire for CLTs, PIFs, and CRTs 39

40 Qualified Dividends The Internal Revenue Code includes CRTs among the list of entities for which investment firms are not required to issue Forms 1099 See IRC 6042 and 6049(b)(4)(L)(i) We ve specifically encountered this issue with American Funds Is anyone in the group familiar with other investment firms that follow this practice? The AICPA has submitted a legislative proposal to address this issue 40

41 Four-Tier Rules The Four-Tiers are an accumulation schedule Four-tier accounting only apply to CRTs Accumulated balances are used to characterize distributions to trust beneficiaries The face of the form is insufficient to fully track and maintain the four-tier balances Tax prep software helps But a separate workpaper may be required to fully track the interaction of the four-tiers 41

42 Four-Tier Rules (continued) The four-tier rules are described at Treas. Reg (d)(1) and (2) Maintain four categories (Tiers) Ordinary Income Capital Gains Other (Nontaxable) Income Principal, or Corpus Special capital gain netting rules apply These are described in the regs A special guidance is provided in the instructions for applying the netting rules 42

43 Four-Tier Rules (continued) Within the tiers maintain Classes based on highest potentially applicable tax rate Pre-2013 dollars are maintained in classes that do not include the net investment income tax (Excluded) Post-2012 dollars are maintained in classes that include the net investment income tax Income types within each class (e.g., U.S. Gov t interest, corporate bond interest, nonqualified dividends, qualified dividends) When preparing each beneficiary s Schedule K-1, relieve the categories in highest to lowest tax rate order Similarly, relieve tax rate classes in highest to lowest tax rate order 43

44 Part IV- Balance Sheet Column (c) Fair Market Value All forms of CRUTs (CRUT, NICRUT, NIMCRUT, Flip-CRUT) must complete column (c) Use the value on the date used to compute the unitrust (fixed percentage) amount Make sure to read the Trust Agreement to determine the relevant date(s) 44

45 Net Investment Income Tax A CRT is not subject to the Net Investment Income Tax Beneficiaries are subject to the tax to the extent their distributions include NII amounts Undistributed amounts from prior to 2013 are not included in NII A CLT and a PIF are not exempt from the tax But amounts of income distributed to charitable and noncharitable beneficiaries carry out NII and reduce the trust s taxable amount For PIFs the deduction for long-term capital gains permanently set aside for charitable purposes reduces the trust s taxable amount These deductions often reduce the trust s taxable amount below the threshold amount 45

46 Net Investment Income Tax (continued) Two methods are allowed for CRTs to capture Net Investment Income Tax information Section 664 Method: This method integrates with the category and class system to create tax rate classes that are the sum of the income tax rate and the 3.8% net investment income tax rate Then as each tax rate class is drawn from, net investment income taxable amounts flow out to the beneficiary 46

47 47 Section 664 Method Illustrated

48 Net Investment Income Tax (continued) 48 Simplified Method: This method operates outside the category/class structure Cumulative totals of net investment income and non-net investment income buckets are maintained Only post-2012 amounts are treated as net investment income Each year the amount of the distribution that is net investment income is determined by First looking to the cumulative, undistributed net investment income If the distribution is larger than the cumulative, undistributed net investment income, then look to the cumulative, undistributed non-net investment income For trusts created prior to 2013, the Simplified Method had to be adopted on the 2013 return. The Simplified Method can be elected on an amended return so long as the year to be amended and all intervening years for both the CRT and the beneficiaries are open

49 Net Investment Income Tax (continued) For trusts created after 2012, the Simplified Method must be elected the first year the trust is required to file Form

50 Unrelated Business Taxable Income (UBTI) Just $1 of UBTI triggers a tax The tax on UBTI is 100% of the UBTI amount Report the tax using IRS Form 4720 Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code Use Form 990-T as an attachment to provide relevant details Common sources of UBTI? Publicly Traded Partnerships (see Box 20, Code V) Unrelated debt financed income Trading on margin Mortgaged Property Remember the $1,000 specific deduction in arriving at taxable UBTI IRC 512(b)(12) 50

51 Self-Dealing and Other Chapter 42 Excise Taxes Split-Interest trusts are prohibited from Engaging in self-dealing IRC 4941 Purchase from, sale to, loan to/from, lease to/from, use of income or assets of trust by a disqualified person (see IRC 4946) Possessing excess business holdings IRC 4943 See exception for CRTs IRC 4947(b)(3)(B) See exception for certain CLTs IRC 4947(b)(3)(A) Purchasing jeopardizing investments IRC 4944 See exception for CRTs IRC 4947(b)(3)(B) See exception for certain CLTs IRC 4947(b)(3)(A) Making taxable expenditures IRC

52 Self-Dealing and Other Chapter 42 Excise Taxes (continued) Compliance (or lack of compliance) with these prohibited activities is self-reported in Part VI-B Exercise care in completing this portion of the return the trustee signs the return under penalty of perjury 52

53 Thank You Ted R. Batson, Jr., J.D., M.B.A., CPA, CFP Executive Vice President Renaissance 6100 W. 96 th St., Ste. 100 Indianapolis, IN ext