IRS Establishes Ordering Rules For Estates and Trusts

The IRS established a new provision that requires a trust or a will to indicate the sources of income from any amount that the taxpayer will use for a charitable purpose. According to the IRS, the source must have an independent economic effect; therefore, income tax purposes cannot be the only purpose for the contribution. If it does not have an independent economic effect, then “income distributed for a purpose specified in Section 642(c) will consist of the same proportion of each class of the items of income as the total of each class bears to the total of all classes.” (T.D. 9582)

The purpose of this provision is to better regulate charitable lead trusts. These are trusts that are established with an ordering provision to allocate funds from taxable income to non-taxable income. The purpose of the trust is to take advantage of the status of the income. The trust establishes that the first beneficiaries to receive the income are charitable organizations, after which non-charitable organizations can take under the trust. So the trust disposes of taxable income tax-free to the charities, while retaining non-taxable income for normal beneficiaries.

See Sally Schreiber, IRS Finalizes Regulations On Section 642(c) Ordering Rules For Estates and Trusts, Journal of Accountancy, Apr. 13, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.