Proper management of the cash flow of your perpetual care trust can maximize the ultimate benefit of the trust to your cemetery company or non-profit cemetery association, and your customers. In many cases, however, not enough attention is paid to ensure proper tax planning, which is sufficient to eliminate the tax burden of the trust earnings and maximize cemetery reimbursement for maintenance expenses. Here, we’ve summarized the key points related to perpetual care rules and taxes that you should be aware of.
What are perpetual care trusts?
When someone chooses a final resting place for themselves or their loved ones, they assume that their remains will be protected and maintained in perpetuity. To ensure this high level of care, most states require that cemeteries fund trusts called Perpetual or Endowment Care Trusts. These trusts are established for the purpose of investing funds so that the earnings can be used for the repair and overall maintenance of all that’s related to the cemetery, including the lots, graves, sewers systems, enclosures, and necessary buildings. The cemetery is required to deposit a portion of the proceeds from the sale of each cemetery lot into the trust.
The provisions of each trust are different for every state. For example, Virginia law requires that 10 percent of the receipts from the sale of graves and aboveground crypts and niches be deposited within 30 days after the close of the month in which the receipts are received.
Ultimately, they money from these trusts must be invested and overseen by a trust company or fiduciary, to ensure that they are properly invested. Each state has different requirements regarding who can serve in this capacity as well as their responsibilities and rights. As a result, there will be income, which can then be distributed to the cemetery company or association as reimbursement for qualifying maintenance expenses. The fiduciary is responsible for the prudent investment of these trusts as well as the tax filings.
Are you reviewing your perpetual care trust details?
Cemetery management should be involved in reviewing the earnings and the tax returns of the trust, to ensure that they are getting the maximum benefit. If the cemetery properly receives reimbursements for their incurred maintenance expenditures, they are more likely to have cash available to further improve and expand their operations. This is a win-win situation for both the customer and the cemetery owner or association.
How are perpetual care trusts taxed?
Perpetual care trusts are taxed as complex trusts for income tax purposes, because discretionary disbursement is allowed for reimbursement of care and maintenance. Perpetual care trusts can take a federal income tax deduction under 642(i) of the Internal Revenue Code of up to five dollars per grave space sold by the cemetery prior to the beginning of the taxable year of the trust. Paraphrasing slightly, 642(i) says that the amount of a deduction otherwise allowable for care fund distributions in any taxable year shall not exceed the portion of such distributions expended by the distributee cemetery corporation for the care and maintenance of gravesites before the end of the fund’s taxable year following the taxable year in which it makes the distributions.
This deduction reduces taxable income of the trust but only on the amount retained in the trust. Trust income tax rates are generally unfavorable, reaching as high as 39.6 percent when the taxable income is $12,300 or more. Because of this, it is very important that the income earned be distributed in a timely manner, so that the income tax deduction occurs in the same tax year the income is recognized. If distributions are not timely, they will lower the amount of cash available to distribute to the cemetery/association for maintenance.
Perpetual care trusts in partnerships
Trusts that have investments in partnerships will need to make sure that the income recognized for income tax purposes and the income recognized for financial accounting purposes is not materially different. Such timing differences may lead to tax consequences if the income recognition and cash distributions are not in alignment. This unfortunate circumstance can be mitigated through comprehensive tax planning.
It’s important that the cemetery owner, trust fiduciary, and accountant work together to make sure that the trust investments generate the right mix of income and cash flow. If you have questions about your perpetual care fund’s trust taxes, contact the MKS&H perpetual care trust tax expert, Jennifer Milas.