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Charitable Remainder Trust and the 3.8% Medicare Surtax

The 3.8% Medicare surtax on net investment income is set to take effect on Jan. 1, 2013. How this surtax will affect those who are current beneficiaries of charitable remainder trusts is a hot financial planning topic. Robert Keebler explores planning for this new surtax and the Treasury Department's recently issued regulations addressing section 1411 of the Internal Revenue Code, the 3.8% Medicare surtax in his latest podcast. Download a free Medicare surtax chart and visit aicpa.org/PFP/YearEnd for free resources to help you get financial plans in place for your clients now.  

Charitable Remainder Trust and the 3.8% Medicare Surtax

Robert S. Keebler, CPA, MST, DEP, Partner, Keebler & Associates, LLP. Bob is a 2007 recipient of the prestigious Distinguished Estate Planners award from the National Association of Estate Planning counsels. From 2003 to 2006, Bob was named by CPA Magazine as one of the top 100 most influential practitioners in the United States. He is the past Editor-in-Chief of CCH's magazine, Journal of Retirement Planning and a member of CCH's Financial and Estate Planning Advisory Board. His practice includes family wealth transfer and preservation planning, charitable giving, retirement distribution planning, and estate administration.

This audio webcast was originally recorded Dec. 6, 2012.


On November 30, 2012, the US Treasury issued treasury regulations addressing section 1411 of the Internal Revenue Code, the new 3.8% healthcare surtax. These regulations are quite comprehensive, covering the basics of the tax as it applies to individuals, trusts and estates. 

In particular, there are two urgent planning opportunities that are important to CPAs and their clients. First, to the extent that income can be accelerated in 2012, this will save 3.8%. For example, harvesting gains, triggering accrued interest, income and dividends, accelerated rents and other royalties will all save on the surtax. Likewise, deferring investment expenses into 2013 will provide an income tax deduction against the surtax, saving an extra 3.8%. This savings does not include any savings that would occur by virtue of any increase in the base tax rate. 

The proposed regulations also confirmed that there is an urgent and immediate planning opportunity for existing charitable remainder trusts. A CRT is not taxed directly, but distributions from a CRT are taxed to beneficiaries under the four-tier accounting system of section 664, often called the WIFO, W-I-F-O, worst-in, first-out method of accounting. 

Distributions from charitable remainder trusts will be subject to a 3.8% surtax. Under the proposed regulations of a particular section, 1.1411-3(C)(2)(i), the distributions of net investment income from a CRT will be taxable to the beneficiaries. Under the regulations, however, income that was realized and recognized prior to December 31, 2012 will be grandfathered from the surtax. 

In many instances, when a charitable remainder trust has a payout that's higher than current year's capital gains and current year's dividends and interest, the trustee will look back when preparing the tax-reporting statements. Simply put, this means the trustee will draw funds from earlier years. When designed correctly -- when designed correctly, these distributions will not be subject to the 3.8% surtax. Thus income realized by a CRT in 2012 is never subject to the 3.8% surtax.

Deferring loss and expenses into 2013 will also reduce the tax burden on future distributions. The action steps needed for a charitable remainder trust are to harvest long-term capital gains in 2012, accelerate interest, dividends and other income in 2012, defer harvesting losses into 2013, and defer expenses into 2013. By taking these important steps you will likely reduce your clients’ future exposure to the 3.8% healthcare surtax.

On behalf of the PFP Division of the American Institute of Certified Public Accountants, this has been Bob Keebler. Thank you for joining us today.  


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