About Processing 5227 Returns
Split-interest trusts provide distributions to charitable and income beneficiaries (referred to as recipients in ONESOURCE Trust Tax) while providing tax benefits to their donor. Form 5227, Split-Interest Trust Information, is an information return that is filed annually with the IRS to report the financial activities of the trust and to determine if the trust should be treated as a private foundation. In ONESOURCE Trust Tax, split-interest trusts are identified using the following categories:
- Charitable Lead Trust (CLT)-A trust that makes annual distributions of a fixed dollar amount or a fixed percentage of the fair market value (FMV) of the trust's assets to a charitable recipient. Upon termination of the lead interest, the remaining interest either reverts to the donor or is paid to the income recipients.
- CLTs can take a variety of forms (such as grantor CLT, nongrantor CLT or charitable income trust), which result different tax consequences for the trust. Regardless of the form, all CLTs are required to file Form 1041 in addition to Form 5227. For Form 1041 purposes, CLTs are allowed a charitable deduction. Capital gains are taxable to the trust and are reported on Form 1041.
- A grantor CLT is not subject to the Net Investment Income Tax (NIIT) at the trust level, but the tax may apply at the grantor level. A nongrator CLT is subject to the NIIT for any undistributed net investment income exceeding the threshold amount that applies to trust.
- Charitable Remainder Annuity Trust (CRAT)-A trust that makes fixed periodic payments to the income recipients. When the income interest expires, the income and principal are distributed to the charitable recipient.
- A CRAT is not subject to income tax (unless it has unrelated business income), and is not subject to the 3.8% NIIT. Distributions from the trust to the income recipients are taxed at the recipient level and may consist of net investment income. The tier system of allocating distributions provides the ordering rules for characterizing distributions to the income recipients. Under the tier system, distributions are considered to come first out of ordinary income, then from capital gains, then from other income, and finally from principal.
- Charitable Remainder Unitrust (CRUT)-A trust that makes periodic payments (referred to as the unitrust amount) equal to a fixed percentage of the FMV of the trust's assets to the income recipients. The FMV is redetermined annually. Upon termination, the trust's remaining assets are distributed to the charitable recipient.
- Since the unitrust amount can increase or decrease based on the trust's value, a CRUT may provide for another acceptable periodic payment method (referred to as income exception methods). These payment methods further classify a CRUT as one of the following:
- Net Income Charitable Remainder Unitrust (NICRUT)-This trust limits the income recipient's payment to the amount of the trust's income when the amount is less than the required distribution.
- Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT)-This trust is the same as a NICRUT but includes a provision to allow the payments to income recipients to increase in subsequent years to compensate for a prior year deficiency.
- FLIP-CRUT-This trust is a NICRUT that converts to a fixed percentage method of payment when a specific date or event occurs.
- Regardless of its classification, a CRUT is not subject to income tax (unless it has unrelated business income), and is not subject to the 3.8% NIIT. Distributions from the trust to the income recipients are taxed at the recipient level and may consist of net investment income, which may subject the recipient to the NIIT. The tier system of allocating distributions provides the ordering rules for characterizing distributions to the income recipients. Under the tier system, distributions are considered to come first out of ordinary income, then from capital gains, then from other income, and finally from principal.
- Pooled Income Funds (PIFs)-A trust that is established and maintained by a public charity. A PIF allows donors to contribute assets to the charity while retaining an income interest in the transferred property. After the income interest expires, the remainder passes to the charity.
- A PIF is required to file Form 1041 in addition to Form 5227. Generally, a PIF is not subject to income tax and is not subject to the NIIT (unless the trust has short-term capital gains allocated to principal). Distributions from the fund to the income recipient may be subject to the NIIT. A PIF is allowed a charitable deduction for long-term capital gains set aside for charitable purposes.
- Other-For use only when the type of split-interest trust cannot be determined.
Using ONESOURCE Trust Tax, you can process federal and state 5227 returns for filing with the appropriate taxing authorities. When a 5227 processing request is submitted, the federal and state 5227 return and applicable related federal filings, supporting detail, and state Attorney General filing are generated. If you need to request an extension of time to file, ONESOURCE Trust Tax allows you to process Form 8868 (Application for Extension of Time to File an Exempt Organization Return).
note
For CLTs and PIFs, you need to submit two separate tax return processing requests: one to process the Form 5227, and one to process the Form 1041. When processing the Form 1041, you can process the federal and state return together or process them individually.
Beginning with tax year 2022, the IRS offers e-filing of federal 5227 returns, extensions and amendments. ONESOURCE Trust Tax supports e-filing for federal 5227 returns, extensions and amendments. This includes accounts that file both 1041 and 5227 returns.
Beginning with tax year 2022, you can use ONESOURCE Trust Tax to e-file Massachusetts Form 2G for 5227 returns and New Jersey Form 1041 for 5227 returns. Consolidated Massachusetts Form 2G cannot be e-filed. Extensions cannot be e-filed for Massachusetts. For New Jersey Form 1041 for 5227 returns, e-filing of state extensions is available for tax year 2022 if the return has a balance due and is being paid electronically. E-filing for all other state 5227 returns is unavailable. They must be printed and paper-filed with the appropriate taxing authority.
Related Federal Filings for Split-Interest Trusts
The following table lists related federal filings, which may be in addition to Form 5227, for split-interest trusts:
note
ONESOURCE Trust Tax does not generate Form 4720 for 5227 accounts.
Trust Type | Form or Schedule | Details |
|---|---|---|
CLT | Form 1041 | Required. |
Form 4720 | Filed if any answer to the questions in Part VI-B of Form 5227 is Yes. | |
Form 8960 | Filed if a nongrantor CLT is subject to the NIIT because it has undistributed net investment income exceeding the applicable threshold amount for the tax year. Grantor CLTs are not subject to the NIIT, but the tax may apply at the grantor level. | |
CRAT and CRUT | Schedule K-1 (Form 1041) | Required. |
Form 4720 | Filed if the CRAT or CRUT has unrelated business income, or if any answer to the questions in Part VI-B of Form 5227 is Yes. | |
PIF | Form 1041 | Required. |
Form 4720 | Filed if any answer to the questions in Part VI-B of Form 5227 is Yes. | |
Form 8960 | Filed if the PIF is subject to the NIIT because it has undistributed short-term capital gains exceeding the NIIT threshold amount for the tax year. |
State Attorney General Filings
The table below lists the state Attorney General filings that are generated by a 5227 processing request. During processing, ONESOURCE Trust Tax evaluates the
Situs State
drop-down list under the Account
collapsible section on the Account Information page to determine the state Attorney General filing that is generated for a split-interest trust.State | State Attorney General Filing |
|---|---|
Illinois | AG990-IL Charitable Organization Annual Report |
Iowa | Charitable Trust Annual Report Form |
Oregon | Form CT-12S |
Tasks
The tasks listed below show you how to process federal and state 5227 returns for paper filing with the appropriate taxing authorities. The tasks include some information related to Form 1041 but, generally, do not include information specifically for preparing Form 1041. Complete the following tasks to process federal and state 5227 returns:
- Setting PAN or SuperBank Level Options -Includes information on setting options and overrides specific to 5227 returns.
- Setting Up and Reviewing Basic Account Information -Includes information on identifying the type of entity and type of 5227 trust. For a CLT or PIF, it also includes information on designating that the trust is subject to I.R.C Section 4947(a)(2) for purposes of Form 1041.
- Setting Up and Reviewing Recipient Information -Includes information on entering and reviewing recipient distribution information for a CRAT, CRUT, NICRUT or NIMCRUT.
- Reviewing Information Specific to Form 5227 -Includes information on using the base registers and the account binder's Form 5227 page to review information specific to Form 5227. See also The 5227 Roadmap, which identifies the Parts of Form 5227 that are applicable to each type of split-interest trust, where to find the information in ONESOURCE Trust Tax, and the applicable tasks.
- Processing 5227 Returns -Includes information on processing 5227 returns from a register and the account binder, and reviewing the processing results.
- Filing 5227 Returns-Includes information on filing 5227 returns with the appropriate taxing authority.
- Processing and Filing Amended 5227 Returns -Includes information on processing amended 5227 returns.