Part III. Current Distributions — 2025 Inst 5227 (PDF)

You must give each recipient listed in Part III a Schedule K-1 (Form 1041) that reflects that recipient's current distribution. The following rules and worksheets will help you figure the type of income a recipient receives from the trust's distributions. Also, attach a copy of each Schedule K-1 to Form 5227. See the Instructions for Schedule K-1 (Form 1041) for more information.

Column (b). Recipient's Identifying Number As a payer of income, the trust is required under section 6109 to request and provide a proper identifying number for each recipient of income. Enter the recipient's number on the respective Schedule K-1. Individuals and business recipients are responsible for giving you their taxpayer identification

numbers (TINs) upon request. You may use Form W-9, Request for Taxpayer Identification Number and Certification, to request the recipient's identifying number.

Penalty

The trust may incur a penalty under section 6723 if it fails to provide the TIN of each recipient or income beneficiary identified on Schedule A. The penalty is $50 for each failure to provide a required TIN, unless reasonable cause can be established for the failure. If you are unable to provide the TIN for any recipient or income beneficiary, explain the circumstances in a signed affidavit and attach it to this return.

Substitute Forms

You don't need prior IRS approval for a substitute Schedule K-1 if it is an exact copy of the IRS statement. The boxes must use the same numbers and titles and must be in the same order and format as on the comparable IRS Schedule K-1. The substitute schedule must include the OMB number. You must request IRS approval to use other substitute Schedules K-1. To request approval, write to:

Internal Revenue Service Attention: Substitute Forms Program SE:W:CAR:MP:P:TP 5000 Ellin Road, C6-440 Lanham, MD 20706

Caution: You may be subject to a penalty if you file a Schedule K-1 that does not conform to the specifications in Pub. 1167, General Rules and Specifications for Substitute Forms and Schedules.

For updates on the Substitute Forms Program after this publication went to print, go to the product page for Pub. 1167 at IRS.gov/Pub1167 .

Inclusion of Amounts in Recipients' Income

If there are two or more recipients, each will be treated as receiving their pro rata share of the various classes of income or corpus.

Amounts distributed by a CRAT or a CRUT have the following characteristics in the hands of the recipients.

First, as ordinary income to the extent of ordinary income for the current year and undistributed ordinary income for prior years of the trust. Ordinary income is computed without regard to any NOL deductions under section 172. See Ordering Rules for Ordinary Income, later.
Second, as capital gains to the extent of the trust's undistributed capital gains. Undistributed capital gains of the trust are determined on a cumulative net basis without regard to any capital loss carrybacks and carryovers. See Netting Rules, Ordering Rules for Capital Gains and Losses, and Carryover Rules, later, for capital gains.
Third, as nontaxable income to the extent of the trust's nontaxable income for the current year and undistributed nontaxable income for prior years.
Fourth, as a distribution of trust corpus. For this purpose, trust corpus means the net FMV of the trust assets less the total undistributed income (but not loss) in each of the above categories.

Instructions for Form 5227 13

Column (j). NII

If the CRT has not made a SNIIC election, then enter the total amount of NII allocated to each recipient in column (j) that is included in columns (d) through (g) for that recipient.

If the CRT has made a SNIIC election, then, for each recipient, multiply the amount in column (c) of Part II by the percentage reported in column (c) of line 4 of Part III of Schedule A, and enter the amount in column (j) for each recipient.

For each recipient, enter the difference between the amount in column (j) and the sum of the amounts in columns (d) through (f) using code H in box 14 of the Schedule K-1 (Form 1041).

If the amount in column (j) is less than the sum of the amounts in columns (d) through (f), enter the difference as a

Ordering Rules for Ordinary Income

negative amount under code H in box 14 of the Schedule K-1 (Form 1041).

If the amount in column (j) is greater than the sum of the amounts in columns (d) through (f), enter the difference as a positive amount under code H in box 14 of the Schedule K-1 (Form 1041).

Ordering rules for ordinary income. Ordinary income is composed of two classes for purposes of characterizing and ordering distributions: (a) qualified dividends, and (b) all other ordinary income. If the trust has both classes of ordinary income, distributions are treated as made first from all the other ordinary income class, and second from the qualified dividends class.

The following chart highlights the difference in ordering rules depending on whether the CRT elects to use the SNIIC method.

Section 664 Method SNIIC Election Method

Distributions of all other ordinary income:

First, ordinary income that is NII (40.8% rate), then

All ordinary income class Ordinary income that is Excluded Income (37% rate)

Distributions from the qualified dividends class:

First, qualified dividends that are NII (23.8% rate), then

All qualified dividends Qualified dividends that are Excluded Income (20% rate)

Additional rules for capital gains and losses. The following charts highlight the difference in netting and ordering rules for capital gains and losses depending on whether the CRT elects to use the SNIIC method. In general, if the CRT elects to use the SNIIC method, the netting and ordering rules will be essentially the same as those applicable before the 2013 tax year; every dollar distributed will carry out the CRT’s NII, to the extent of the CRT’s accumulated NII, without regard to the class or category of that distribution for regular tax purposes. If the CRT uses the

Netting Rules

section 664 method for calculating NII and Excluded Income, the netting and ordering rules are expanded to take into account additional classes within the ordinary income and capital gain categories that are created due to the imposition of an additional 3.8% tax on NII but not on Excluded Income.

Netting rules. Gains and losses are netted within each class to arrive at a net gain or loss for that class. After you net within a class, the following additional netting rules apply to the capital gains category.

Section 664 Method SNIIC Election Method

Among the long-term capital gain and loss classes:

(a) A net loss from the 28% long-term capital gain class that is NII (31.8% rate) reduces net gains in the following order:

First, gain from the section 1250 long-term capital gain class that is NII (28.8% rate), then

Net gain from the 28% long-term capital gain class that is Excluded Income (28% rate), then

Gain from the section 1250 long-term capital gain class that is Excluded Income (25% rate), then

Net gain from all the other long-term capital gain class that is NII (23.8% rate), and finally

Net gain from all the other long-term capital gain class that is Excluded Income (20% rate).

Not Applicable

(b) A net loss from the 28% long-term capital gain class that is Excluded Income (28% rate) reduces net gains in the following order:

First, net gain from the 28% long-term capital gain class that is NII (31.8% rate), then First, gain from the section 1250 long-term capital Gain from the section 1250 long-term capital gain class that is NII (28.8% rate), then gain class, then

Gain from the section 1250 long-term capital gain class that is Excluded Income (25% rate), then Net gain from all the other Net gain from all the other long-term capital gain class that is NII (23.8% rate), and finally long-term capital gain class.

Net gain from all the other long-term capital gain class that is Excluded Income (20% rate).

(c) A net loss from all the other long-term capital gain class that is NII (23.8% rate) reduces net gains in the following order:

14 Instructions for Form 5227

Section 664 Method			SNIIC Election Method
		First, net gain from the 28% long-term capital gain class that is NII (31.8% rate), then	Not Applicable
		Gain from the section 1250 long-term capital gain class that is NII (28.8% rate), then
		Net gain from the 28% long-term capital gain class that is Excluded Income (28% rate), then
		Gain from the section 1250 long-term capital gain class that is Excluded Income (25% rate), and finally
		Net gain from all the other long-term capital gain class that is Excluded Income (20% rate).
	(d)	A net loss from all the other long-term capital gain class that is Excluded Income (20% rate) reduces net gains in the following order:	A net loss from all the other long-term capital gain class that is Excluded Income (20% rate) reduces net gains in the following order:
		First, net gain from the 28% long-term capital gain class that is NII (31.8% rate), then	First, net gain from the 28% long-term capital gain class, then
		Gain from the section 1250 long-term capital gain class that is NII (28.8% rate), then
		Net gain from the 28% long-term capital gain class that is Excluded Income (28% rate), then	Gain from the section 1250 long-term capital gain class.
		Gain from the section 1250 long-term capital gain class that is Excluded Income (25% rate), and finally
		Net gain from all the other long-term capital gain class that is NII (23.8% rate).
2.	Among the short-term and long-term gain and loss classes:	Among the short-term and long-term gain and loss classes:	Among the short-term and long-term gain and loss classes:
	(a)	A net short-term capital loss that is NII (40.8% rate) is applied to reduce the net short-term and net long-term capital gain classes as follows:	A net short-term capital loss that is NII (40.8% rate) is applied to reduce the net short-term and net long-term capital gain classes as follows:
		First, short-term capital gain class that is Excluded Income (37% rate), then	First, net gain from the 28% long-term capital gain class, then
		Net gain from the 28% long-term capital gain class that is NII (31.8% rate), then
		Gain from the section 1250 long-term capital gain class that is NII (28.8% rate), then	Gain from the section 1250 long-term capital gain class, and finally
		Net gain from the 28% long-term capital gain class that is Excluded Income (28% rate), then
		Gain from the section 1250 long-term capital gain class that is Excluded Income (25% rate), then
		Net gain from all the other long-term capital gain class that is NII (23.8% rate), and finally	Net gain from all the other long-term capital gain class.
		Net gain from all the other long-term capital gain class that is Excluded Income (20% rate).
	(b)	A net short-term capital loss that is Excluded Income (37% rate) is applied to reduce the net short-term and net long-term capital gain classes as follows:	A net short-term capital loss that is Excluded Income (37% rate) is applied to reduce the net short-term and net long-term capital gain classes as follows:
		First, short-term capital gain class that is NII (40.8% rate), then
		Net gain from the 28% long-term capital gain class that is NII (31.8% rate), then	First, net gain from the 28% long-term capital gain class, then
		Gain from the section 1250 long-term capital gain class that is NII (28.8% rate), then
		Net gain from the 28% long-term capital gain class that is Excluded Income (28% rate), then	Gain from the section 1250 long-term capital gain class, and finally
		Gain from the section 1250 long-term capital gain class that is Excluded Income (25% rate), then
		Net gain from all the other long-term capital gain class that is NII (23.8% rate), and finally	Net gain from all the other long-term capital gain class.
		Net gain from all the other long-term capital gain class that is Excluded Income (20% rate).
3.	An overall net long-term capital loss reduces any net short-term capital gain as follows:	An overall net long-term capital loss reduces any net short-term capital gain as follows:	An overall net long-term capital loss reduces any net short-term capital gain as follows:
		First, any net short-term capital gain that is NII (40.8% rate), then	Overall net long-term capital loss reduces any net short-term capital gain.
		Any net short-term capital gain that is Excluded Income (37% rate).

following rules apply to undistributed long-term capital gains on assets held more than 1 year. If, in any tax year of the trust, the trust has both undistributed short-term capital gain

capital gain is deemed distributed before any long-term capital gain.

Ordering Rules for Capital Gains and Losses

Section 664 Method	Section 664 Method	Section 664 Method	SNIIC Election Method
1. Any short-term capital gains are deemed to be distributed in the following order:
	First, short-term capital gain class that is NII (40.8% rate), then	Short-term capital gains	Short-term capital gains
	Short-term capital gain class that is Excluded Income (37% rate).
2. Any long-term capital gains are deemed to be distributed in the following order:
	The 28% long-term capital gain class that is NII (31.8% rate) is deemed distributed, then	The 28% long-term capital gain class is deemed distributed, then	The 28% long-term capital gain class is deemed distributed, then
	The section 1250 long-term capital gain class that is NII (28.8% rate) is deemed distributed, then

Instructions for Form 5227 15

Section 664 Method SNIIC Election Method

The 28% long-term capital gain class that is Excluded Income (28% rate) is deemed distributed, then The section 1250 long-term

The section 1250 long-term capital gain class that is Excluded Income (25% rate) is deemed distributed, then

capital gain class is deemed distributed, and

finally

All the other long-term capital gain class that is NII (23.8% rate) is deemed distributed, and finally All the other long-term

All the other long-term capital gain class is deemed distributed. capital gain class.

Carryover Rules

Section 664 Method	Section 664 Method	SNIIC Election Method
1. If the trust has capital losses in excess of capital gains for any tax year:
	The excess of the 40.8% rate net short-term capital loss over the net long-term capital gain for that year is a 40.8% rate short-term capital loss carryover to the next tax year.	The excess of the net short-term capital loss over the net long-term capital gain for that year is a short-term capital loss carryover to the next tax year.
	The excess of the 37% rate net short-term capital loss over the net long-term capital gain for that year is a 37% rate short-term capital loss carryover to the next tax year.
	The excess of the 23.8% net long-term capital loss over the net short-term capital gain for that year is a 23.8% long-term capital loss carryover to the next tax year.	The excess of the net long-term capital loss over the net short-term capital gain for that year is a long-term capital loss carryover to the next tax year.
	The excess of the 20% net long-term capital loss over the net short-term capital gain for that year is a 20% long-term capital loss carryover to the next tax year.
2. If the trust has capital gains in excess of capital losses for any tax year:
	The excess of the 40.8% rate net short-term capital gain over the net long-term capital loss for that year is, to the extent not deemed distributed, a 40.8% rate short-term capital gain carryover to the next tax year.	The excess of the net short-term capital gain over the net long-term capital loss for that year is, to the extent not deemed distributed, a short-term capital gain carryover to the next tax year.
	The excess of the 37% rate net short-term capital gain over the net long-term capital loss for that year is, to the extent not deemed distributed, a 37% rate short-term capital gain carryover to the next tax year.
	The excess of the 31.8% rate net long-term capital gain over the net short-term capital loss for that year is, to the extent not deemed distributed, a 31.8% rate long-term capital gain carryover to the next tax year.	The excess of the net long-term capital gain over the net short-term capital loss for that year is, to the extent not deemed distributed, a long-term capital gain carryover to the next tax year.
	The excess of the 28.8% rate net long-term capital gain over the net short-term capital loss for that year is, to the extent not deemed distributed, a 28.8% rate long-term capital gain carryover to the next tax year.
	The excess of the 28% rate net long-term capital gain over the net short-term capital loss for that year is, to the extent not deemed distributed, a 28% rate long-term capital gain carryover to the next tax year.
	The excess of the 25% rate net long-term capital gain over the net short-term capital loss for that year is, to the extent not deemed distributed, a 25% rate long-term capital gain carryover to the next tax year.
	The excess of the 23.8% rate net long-term capital gain over the net short-term capital loss for that year is, to the extent not deemed distributed, a 23.8% rate long-term capital gain carryover to the next tax year.
	The excess of the 20% rate net long-term capital gain over the net short-term capital loss for that year is, to the extent not deemed distributed, a 20% rate long-term capital gain carryover to the next tax year.

16 Instructions for Form 5227