Charitable Remainder Trusts: TB-64 – Issued June 29, 2009 | Tax: Gross Income Tax | New Jersey Division of Taxation

The New Jersey Gross Income Tax Act and Trust Taxation (Reformatted by ChatGPT for clarity)

Under the New Jersey Gross Income Tax Act (N.J.S.A. 54A:2-1), tax is imposed on the gross income of every trust, with the exception of charitable trusts or trusts forming part of a pension or profit-sharing plan. This Act does not exempt any other types of trusts from tax.

Definition of a Charitable Trust (CT)

For the purposes of the New Jersey Gross Income Tax, a “charitable trust” is defined as a trust operated exclusively for religious, charitable, scientific, literary, or educational purposes. To be deemed a charitable trust, it must be operated exclusively for these purposes during all taxable years in question. It must serve a public interest, as opposed to a private interest, and, as per the governing instrument, there should be no possibility that a noncharitable beneficiary will receive gains or income. This is supported by the case Burke, Clare and Hill, Trustees, v. Director, 11 N.J. Tax 29 (1990).

Charitable Remainder Trusts (CRT)

In contrast, a Charitable Remainder Trust (CRT) is established to pay income to one or more noncharitable beneficiaries. The donor contributes property or money to the CRT while retaining the use of the property, receiving income, and/or providing for beneficiaries. After a specified period, the CRT allocates the entire remainder amount to a charity or uses it for a charitable purpose, as specified in the governing instrument.

There are three types of CRTs, treated similarly for New Jersey Gross Income Tax purposes:

1. Charitable Remainder Annuity Trust (CRAT) - Pays a fixed dollar amount annually.
2. Charitable Remainder Unitrust (CRUT) - Pays a fixed percentage of the trust’s value annually.
3. Charitable pooled income fund - Set up by the charity, allowing multiple donors to contribute. (Refer to Internal Revenue Code section 664.)

Tax Exemption and CRTs

Only trusts that are exclusively charitable qualify for income tax exemption under the New Jersey Gross Income Tax Act. A Charitable Remainder Trust, having “noncharitable” beneficiaries and not operating exclusively for charitable purposes, does not qualify as an exclusively “charitable trust.” Therefore, it is not exempt from New Jersey income tax under N.J.S.A. 54A:2-1. Income that is not distributed and which is not deemed to be permanently and irrevocably set aside or credited to a charitable beneficiary is taxable income to the trust.