Estate Planning Vault

CRTs and Excess Exclusion Income

Revenue Ruling 2006-58 addresses the following: If a charitable remainder trust (CRT) is an investor in a real estate investment trust (REIT) or partner in a partnership, and if the REIT (or partnership) has “excess exclusion income” from having a “residual interest” in a real estate mortgage investment conduit (REMIC), does the CRT have unrelated business taxable income (UBTI), resulting in the CRT forfeiting its tax exemption? Additionally must the REIT (or partnership) pay a “pass-thru entity tax?”

After analysis of applicable laws, lead author of the ruling, Anna Kim, concluded excess inclusion income owed to a CRT is not considered UBTI, consequently, the CRT’s tax exemption remains intact for the taxable year. However, “a pass-thru entity that has excess inclusion income allocable to a [CRT] is subject to the pass-thru entity tax under section 860E(e)(6)(A).” Further, the ruling concluded the CRT is a “disqualified organization” related to section 860E.

Source: IRB 2006-46, 11-13-06