USE OF TAX CREDITS BY TRUSTS

WHY YOU USE THEM

Trusts can vary in their purpose, but the primary trust of interest for our purposes is the living trust in which the Tax Credits and other benefits pass through to the individual(s). The reasons for a living trust to invest in Tax Credits are the same as an individual. There is, however, a major consideration to be given to the fact that at the time of transfer, the future Tax Credits pledged by the government add value to the trust without necessarily adding an equal tax liability.

HOW YOU USE THEM

If the passive activity rules apply at the trust level, then the Tax Credit will be a passive credit and can be claimed by the trust to only offset taxes attributable to passive income.

If the passive activity rules apply at the beneficiary level, then the Tax Credits will pass through to the beneficiary level. The ability of the beneficiary to use the Tax Credits would then depend on the type of beneficiary (i.e., individual, personal service corporation, etc.).

For purposes of the Federal Housing Tax Credit, Congress has explained that the amount of Credit is apportioned between beneficiaries and the trust based on the income allocated to each.