          
          
          
          Taxation of CRT Income Payouts:
          
          
               This tax discussion raises an important point
          constantly to be kept in mind: cash distributions to
          beneficiaries of a CRT are taxable under a special
          three-tier income tax provision: first, as ordinary
          income to the beneficiary, if the trust has ordinary
          income; second, as a capital gain to the extent the
          trust has such a gain not taxed previously to the
          beneficiaries; and, third, as tax-free income, or a
          return of principal, if the distribution is in excess
          of ordinary income or capital gain.
               Imposition of these beneficiary payout taxes
          suggests there may be an advantage to selling an
          appreciated asset first, then donating the cash
          proceeds to the CRT, thus assuring all future trust
          income will be tax free to the donor.  When a CRT sells
          appreciated property, every subsequent annual
          distribution to beneficiaries in excess of ordinary
          income will be taxed as a capital gain, until the
          entire amount of the beneficiaries' original capital
          gain is paid.  This means you may not escape some of
          the capital gains tax, but any payments are delayed and
          on the installment plan, and contingent on the type and
          amount of income the trust has.
               The obvious solution is to fund the CRT with cash
          or non-appreciated assets allowing the trustee to
          invest in municipal bonds or securities that provide
          little or no current income, so there will be no
          immediate capital gains tax.
               As you shall see in discussion that follows, there
          are several ways of structuring trust investments and
          income to minimize the beneficiary's income tax on
          annual payouts.
          
          
          
