April 14, 2005 | Read Time: 1 minute
The Internal Revenue Service has issued regulations that clarify how payments from charitable remainder trusts should be taxed in light of changes to capital-gains rates Congress made in 2003.
A charitable remainder trust enables a donor to designate a gift to charity, take a tax deduction, and receive regular income payments from the gift. Upon the death of the beneficiary of the trust, the remainder of the trust goes to charity.
Often, a donor uses an appreciated asset, such as stock, to create the trust. Once that asset is sold, the difference between the asset’s original value and its selling price generally is subject to capital-gains taxes.
Before 2003, the capital-gains tax rates were 28 percent, 25 percent, 20 percent, or 18 percent, depending on the type of asset and how long it had been held.
In 2003, Congress temporarily suspended the 20-percent and 18-percent rates, replacing them with a new 15-percent rate. The 15-percent rate will expire on December 31, 2008.
The new IRS regulations spell out how charitable remainder trusts should apply the 15-percent rate.
The IRS added that, in the future, any time Congress changes a tax on income or creates a new tax, the new tax rate will apply to income from a charitable remainder trust as well.
The final rules, which took effect last month, were published in the March 16 issue of the Federal Register, and are available at http://www.gpoaccess.gov/fr/index.html.
