How the 3.8% Medicare Surtax Affects CRTs
Net Investment Income (NII)
3.8% Surtax Imposed on Three Classes of Income:
- Gross income from interest, dividends, rents, royalties and annuities
- Gross income from:
1. Passive activity, or
2. Trade or business of trading in financial instruments or commodities
- Net gain
CRT NOT Subject to 3.8% Surtax
- CRT is exempt from income tax under §664
- Income earned by CRT before 1/1/2013 is exempt from surtax. Prop. Reg. 1.1411-3(c)(2)(iii); Prop. Reg. 1.1411-3(g).
CRT Income Beneficiaries ARE subject to Surtax
- Annuity and unitrust distributions may be net investment income to non-charitable beneficiary
- CRT income beneficiaries are subject to 3.8% surtax to extent distributions are considered NII. Prop. Reg. 1.1411-3(b)3
- NII of beneficiary attributable to beneficiary's annuity or unitrust distribution from CRT shall include amount equal to lesser of:
1. Total amount of distributions for taxable year, or
2. Current and accumulated net investment income of CRT. Prop. Reg. 1.1411-3(c)(2)(i)
Only NII realized by CRT after December 31, 2012 Included in CRT's NII
- Any NII realized by CRT in taxable year prior to January 1, 2013 never subject to 3.8% surtax regardless of when considered distributed to non- charitable beneficiaries. Prop. Reg. 1.1411-3(c)(2)(iii)
- Reportable NII apportioned between beneficiaries "based on respective shares of total annuity or unitrust amount paid by CRT for that taxable year". Prop. Reg. 1.1411-(c)(2)(ii)
Amount Includable in Beneficiary's NII
- Amount Subject to 3.8% Surtax is the LESSOR of:
1. Total amount distributed for year or
2. Current and accumulated NII of trust. Prop. Reg. 1.1411-3(c)(2)(i)
- The final regulations (IRC Section 1.1411-3(d)(2)) adopt the commentators' request to categorize and distribute net investment income based on the existing IRC Section 664 category and class system.
- The final regulations retain the concept of Accumulated Net Investment Income (ANII).
- The final regulations apply the IRC Section 664 category and class system to ANII by providing that the federal income tax rate applicable to an item of ANII, for purposes of allocating that item of ANII to the appropriate class within a category of income, as described in Reg. Section 1.664-1(d)(1), is the sum of the income tax rate imposed on that item under chapter 1 and the rate of the tax imposed under IRC Section 1411.
- Note: NII and ANII must be tracked within each class and category within the four-tier structure created for CRTs by IRC Section 664 and its regulations.
For questions on how the 3.8% Medicare Surtax affects your CRT, please call CRTPro at 800-422-3316.