Common questions about split-interest charitable trusts and pooled income funds in Lacerte

Split-interest means the interest in the property is split into two parts: the income interest and the remainder interest. Both interests can be assigned to a charity or charities, one or more non-charitable beneficiaries, or both, depending on the type of trust.

The most common type of split-interest charitable trust is the charitable remainder trust. A charitable remainder trust will pay the income portion of the split interest trust to one or more non-charitable beneficiaries, with the remainder interest going to charity at the end of the trust life.  

A charitable remainder trust can be established either by will or by an inter vivos transfer. If the amount that should be distributed to the income beneficiary is greater than trust accounting income, then the trust must pay the difference out of corpus.

Under a charitable lead trust, the charity is the income beneficiary and the non-charitable beneficiaries receive the remainder interest. The IRS has very specific rules on how these trusts should be created and maintained. A charitable lead trust can be either an annuity trust or a unitrust. 

The program only calculates Form 5227 for charitable remainder trusts and won't compute for charitable lead trusts. Charitable lead trusts will usually not generate Schedule K-1s, because charities don't receive K-1s.

Under a charitable remainder unitrust, the income beneficiary receives an amount equal to at least 5% but not more than 50% of the fair market value of the trust assets determined each year at a specified time. Upon termination of the trust, the charity will receive the corpus and any undistributed income.  

1. Go to Screen 49, Balance Sheet.
2. Enter the fair market value for each applicable item in the FMV column.
3. Go to Screen 8, Annuity/Unitrust Distribution.
4. Enter the appropriate percentages for each applicable beneficiary.

A percentage amount will only generate on Form 5227, Part VI, line 4(a) if both of the following requirements are met:

1. You've entered at least one beneficiary on Screen 6, Beneficiary/Grantor Information.
2. You've entered a distribution percentage on Screen 8, Annuity/Unitrust Distribution.

The program doesn't carry the fair market value from the balance sheet to Item C because the fair market value from the balance sheet isn't required to be a year-end figure. Instead, it may be determined on any one day or by utilizing the average of evaluations made on more than one date during the taxable year of the trust. Item C is a separate input item.   

Follow these steps to enter the Item C amount on Form 5227, Page 1:

1. Go to Screen 48.1, Form 5227.
2. Locate the Form 5227 section.
3. Enter the Fair market value of assets at year end.

1. Go to Screen 48.1, Form 5227.
2. Scroll down to the Part V-B Charitable Remainder Unitrusts section.
3. Enter a 1 in 1=current distribution must makeup for any prior distribution deficiencies (NIMCRUT).
4. Enter the Prior year's accrued distribution deficiencies.
   • This must be a positive amount for the Current Distributions Schedule to generate.
   • Amounts should now display on Form 5227, Part II-A, Current Distributions Schedule.

The input can be found on Screen 29.1, Charitable Payee. 

In addition to the Charitable Payee Information, enter the amount in Distributed in current year from prior year's income (1041-A, line 17 or 5227, part III, line 7) . 

This should generate the amount on line 7 and a corresponding statement.  

Under a charitable remainder annuity trust, the income beneficiary will receive a set amount every year for the life of the trust. The charity won't receive any income during the life of the trust but will receive the corpus and any undistributed income when the trust closes. The amount distributed each year must be set at the creation of the trust to be at least 5% of the initial fair market value of the trust assets.

1. Go to Screen 48.1, Form 5227.
2. Scroll down to the Part V-A Charitable Remainder Annuity Trusts section.
3. Enter the Initial fair market value placed in trust.
4. Go to Screen 8, Annuity/Unitrust Distribution.
5. Enter the appropriate percentages for each applicable beneficiary.

A pooled income fund has the charity as both the trustee and the charitable beneficiary. The donor will donate property specifying that the income from the property will go to himself and/or other person(s). Upon their death, the corpus will be distributed to the charity. 

It's called a pooled income fund because the charity will "pool" the donations from a number of different donors into one fund. This avoids the expenses of maintaining different trusts, as the charity is usually the trust creator. The trust must distribute all of the income currently, not just a set amount or percentage. If the pooled income fund doesn't distribute all of its income, then the excess will be taxed at the regular trust tax rates.

Lacerte handles the distribution order for charitable remainder trust based on IRS Section 664(b) and IRS Regulation 1.664-1(d). The order of distribution is:

1. Ordinary income
2. Short-term capital gains
3. Long-term capital gains (in decreasing order of tax rate)
4. Other income (including tax-exempt income)
5. Corpus

1. Go to Screen 48.1, Form 5227.
2. Scroll down to the Schedule of Distributable Income (Section 664 Trust Only) section.
3. Locate the  Part II - A Current Distributions Schedule subsection.
4. Enter the applicable information for each item.

1. Go to Screen 48.1, Form 5227.
2. Scroll down to Part VI Charitable Remainder Unitrusts section.
3. Enter 1 in 1= required distribution determined with reference to accounting income (NICRUT).
4. Enter 1 in 1= current distribution must makeup for any prior distribution deficiencies (NIMCRUT).

The program uses the smaller of...

1. The sum of total accrued distribution deficiencies and the product of net assets and the unitrust fixed percentage to be paid, or
2. The trust accounting income for the current year

... to determine the current year's distributions.

For tax year 2020 and prior Part VI was Part V-B.