In order to better regulate charitable trusts, a new provision requiring trusts or wills to indicate sources of income from any amount the taxpayer will use for charitable purposes has been established by the IRS.
The IRS determined that the source must have an independent economic effect. Basically saying that the only purpose for contribution cannot just be for tax purposes. If the source has no independent economic effect then 'income distributed for a purpose specified in Section 642(c) will consist of the same proportion of each class of items of income as the total of each class bears to the total of all classes.'
The main purpose of charitable trusts is to take advantage of the status of the income. The first beneficiaries that receive the income are the charities. After they receive their benefit, then non-charitable organizations can take theirs. This way the trust disposes of taxable income tax-free by giving to the charity first and normal beneficiaries retain the non-taxable income.
Please consult with a Trust Administration Attorney to find out how this new provision might have an effect on your existing or future will and/or trusts.
*This blog entry was not written by an Attorney and should not be constituted as professional legal advice.