Important Year-End Net Investment Income Surtax Planning for Charitable Remainder Trusts

Important Year-End Net Investment Income Surtax Planning for Charitable Remainder Trusts

Article posted in Investing on 10 December 2012| comments
audience: National Publication | last updated: 10 December 2012


Recently issued proposed Treasury regulations create an important, but urgent planning opportunity for charitable remainder trusts. The regulations provide that income received by a CRT before the end of the year will not be subject to the 3.8% medicare surtax when received by trust beneficiaries regardless of when it is distributed. Writing for Leimberg Information Services, Robert S. Keebler, CPA, MST, AEP suggests that planners should accelerate CRT gains and income into 2012 and defer losses into 2013 and later years.



On Friday, November 30, 2012 the Treasury issued proposed regulations for the 3.8% surtax. Prop. Reg. Section 1411-3(c)(2) addresses the application of the surtax to charitable remainder trusts.

Planning Opportunity

The proposed regulations confirm that there is an urgent and immediate planning opportunity for existing charitable reminder trusts. A CRT is not taxed directly, but distributions from a CRT are taxed to beneficiaries under the four-tier accounting rules of IRC § 664. Distributions from CRTs may also be subject to the 3.8% surtax.

Prop. Reg. § 1.1411-3(c)(2)(i) provides that the net investment income (NII) of a CRT beneficiary attributable to the beneficiary’s unitrust or annuity distributions is the lesser of:

(1) The total amount of distributions for that year, or

(2) The current and accumulated NII of the CRT.

Prop.  Reg. § 1.1411-3(c)(2)(iii) provides that the accumulated NII of a CRT is the total amount of NII received by a CRT only for years beginning after 2012.

Thus, income realized by a CRT in 2012 is never subject to the surtax regardless of when it is distributed to beneficiaries. After the income goes into effect in 2013, such income can be neither current income for the CRT nor accumulated income. Accordingly, having a CRT harvest gains and income in calendar year 2012 will likely reduce the tax burden on future distributions. Deferring losses and expenses until 2013 will also reduce the tax burden on distributions.

Action Steps for a CRT

  • Harvest long-term capital gains in 2012
  • Accelerate interest, dividends and other income into 2012
  • Defer harvesting losses into 2013
  • Defer expenses into 2013


The Smith CRT has a total value of $3,000,000; including accrued interest of $100,000, unrecognized capital gains of $400,000 that would be treated as net investment income after 2012 and unrecognized losses of $100,000. If the CRT recognizes the $400,000 of income in 2012, this amount will not be treated as net investment income by the beneficiaries when they are treated as receiving it in a later year under the tier rules.  This will save the beneficiaries $15,200 (.038 x $400,000). Pushing the losses into 2013 and later years will save an additional $3,800, for a total of $19,000.



LISI Charitable Planning Newsletter #197 (December 4, 2012), at Copyright Leimberg Information Services, Inc. (LISI) 2012. Used by permission. Reproduction in Any Form or Forwarding to Any Person without Express Permission is prohibited.


Prop. Reg. § 1.1411-3(c)(2); IRC § 664

Bob Keebler provides members with commentary on what he describes as “an important but urgent planning opportunity for charitable remainder trusts” that has been created by the recently released proposed regulations dealing with the 3.8% surtax. Members should look for Bob’s 60 Second Planner addressing the planning opportunities created by the proposed regulations distributed by Leimberg Information Services .

Robert S. Keebler, CPA, MST, AEP (Distinguished) is a partner with Keebler & Associates, LLP and is a 2007 recipient of the prestigious Accredited Estate Planners (Distinguished) award from the National Association of Estate Planning Counsels. He has been named by CPA Magazine as one of the Top 100 Most Influential Practitioners in the United States and one of the Top 40 Tax Advisors to Know During a Recession. His practice includes family wealth transfer and preservation planning, charitable giving, retirement distribution planning, and estate administration. Mr. Keebler frequently represents clients before the National Office of the Internal Revenue Service (IRS) in the private letter ruling process and in estate, gift and income tax examinations and appeals, and he has received more than 150 favorable private letter rulings including several key rulings of “first impression”. He is the author of over 100 articles and columns and is the editor, author or co-author of many books and treatises on wealth transfer and taxation.

Bob is a co-author with Jonathan Blattmachr and Marty Shenkman of 2012 Estate Planning: Tax Planning Steps to Take Now. As we said in a previous newsletter, this is – literally – THE Estate Planning Book of the Year. You can get it as an e-book at, or if you prefer a download of a PDF instead of an e-book on Kavesh is selling PDFs from his For hard copy, call Bob Keebler’s office: office 920-593-1701, ask for Emily.

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