Charitable Unitrust Remainder Trust & Tax Incentives
A Charitable Unitrust Remainder Trust (“CRUT” or “Trust”) is an irrevocable agreement that will provide an income stream to the donor or a named beneficiary for life or a term of years. At the end of this period, the trust will pay the remainder to a designated charity, donor-advised fund, or private foundation. Charitable minded donors may utilize the CRUT to structure a lifetime benefit with an ultimate gift to a charitable cause. See IRC § 170(c)
The Trust pays a fixed percentage of at least 5% of the trust’s net asset value to the income beneficiary. The net asset value is recalculated annually to adjust for fluctuation in value of the trust asset and provide a stable and sustainable benefit. The CRUT assets can be funded by a variety of investment classes including cash, stock, securities, real estate. One wrinkle to CRUTs is for investors looking to contribute business interests as the tax incentive status of those contributions may be at risk. CRUT are not precluded from accept additional contributions after the initial funding of the trust.
From a taxation perspective, the CRUT is an excellent vehicle for gifts of appreciated stock or property because the trust is tax-exempt and does not pay capital gains tax on the sale of assets. The full sales proceeds remain in the trust to provide a payout to the income beneficiaries, which is generally taxable to them. See IRC § 664
One benefit of a CRUT is that the donor will receive an income tax deduction in the year the trust is funded. This deduction is based on the present value of the interest that will pass to the charity in the future. If the CRUT is funded with cash, the donor can claim a charitable deduction of up to 100% of Adjusted Gross Income (AGI) in 2021, with the extension of the charitable contribution provisions of the CARES Act (typically the limit is 60%) Furthermore, if the donor cannot use the whole deduction in the year the trust is funded, the deduction may be carried forward for five years.
A CRUT can be designed for the particular asset being gifted to the trust. There are two variations to a standard CRUT:
- A Net Income Unitrust CRUT (NIMCRUT): This is ideal for assets that have variable levels of income each year because the trust is designed to pay out the lesser of a stated percentage or the actual income earned by the trust.
- “Flip” CRUT: This allows the donor to contribute an asset earning little or no current income to the trust, secure an immediate charitable deduction, and structure the payout later when the original assets are sold and reinvested.
For counsel on Charitable Unitrust Remainder Trusts, estate planning, or tax planning, please contact our specialized attorneys.