A Charitable Remainder Unitrust (CRUT) is an estate planning tool that allows individuals to make charitable contributions, while still receiving income from their assets during their lifetime. It offers flexibility, potential tax benefits, and the opportunity to leave a charitable legacy. This type of trust is a popular choice for individuals looking to balance their financial needs with philanthropic goals.

What is a CRUT?

A Charitable Remainder Unitrust (CRUT) is an irrevocable trust in which a donor transfers assets to the trust, receiving a percentage-based income, and the remainder of the assets eventually goes to a designated charity. Unlike a Charitable Remainder Annuity Trust (CRAT), where the income is fixed, a CRUT provides variable income that fluctuates depending on the trust’s value each year.

How Does a CRUT Work?

1. Transfer of Assets: The donor transfers assets such as stocks, real estate, or cash into the CRUT. These assets are removed from the donor’s estate, which helps reduce estate taxes.

2. Income Payments: Each year, the CRUT pays the donor (or designated beneficiaries) a percentage of the fair market value of the trust’s assets, which are revalued annually. This percentage must be at least 5% of the trust’s value, and the payments continue for a set period, which could be the lifetime of the beneficiaries or a specific number of years (up to 20).

3. Remainder to Charity: After the income period ends, the remaining assets in the trust are transferred to the designated charitable organization(s). The charity or charities can be named when the trust is created, allowing donors to support causes that are meaningful to them. A Donor-Advised fund can be a named beneficiary of a CRUT.

Benefits of a CRUT

1. Variable Income with Growth Potential: A key advantage of a CRUT is that the income payout is tied to the trust’s performance. If the assets appreciate, the donor's income increases, which provides a hedge against inflation. This feature makes CRUTs appealing to individuals who want the potential for growth in their income over time.

2. Tax Advantages:

• Charitable Deduction: The donor receives an immediate charitable income tax deduction based on the projected value of the assets that will eventually go to charity. The deduction is calculated based on the value of the remainder that the charity will receive after the income payments end.

• Capital Gains Tax Deferral: If highly appreciated assets are transferred into the CRUT, the trust can sell these assets without paying capital gains tax immediately. This allows for the full value of the assets to be reinvested within the trust, potentially increasing future income.

• Estate Tax Reduction: Since the assets are removed from the donor’s estate, they are not subject to estate taxes, helping to reduce the overall taxable estate.

3. Flexibility: One of the major advantages of a CRUT is its flexibility. Donors can make additional contributions to the trust over time, which is not allowed with a Charitable Remainder Annuity Trust (CRAT). This allows the donor to continue growing the trust and potentially increase the income payouts.

4. Philanthropy: A CRUT enables individuals to leave a lasting charitable legacy. By naming one or more charities as the remainder beneficiaries, donors can support causes that align with their values and interests.

CRUT vs. Other Charitable Trusts

Compared to a Charitable Remainder Annuity Trust (CRAT), where the income is fixed, a CRUT offers the potential for increasing income based on the trust’s annual valuation. This makes it ideal for individuals who are comfortable with income variability and want to benefit from potential asset appreciation. Additionally, CRUTs allow for future contributions, whereas CRATs do not.

However, with this flexibility comes risk. If the assets in the CRUT decline in value, the income payments will decrease as well. For individuals seeking predictability, a CRAT may be a better option, while those looking for growth potential and flexibility might prefer a CRUT.

Key Considerations in Estate Planning

When considering a CRUT as part of an estate plan, individuals should evaluate the following factors:

1. Income Variability: While a CRUT offers the potential for higher income if the trust assets appreciate, it also carries the risk of lower income if the assets lose value. Donors should be prepared for fluctuations in income.

2. Irrevocable Nature: Like other charitable remainder trusts, a CRUT is irrevocable. Once assets are transferred into the trust, the donor cannot reclaim them, and the terms of the trust cannot be altered.

3. Suitability: CRUTs are especially useful for individuals with highly appreciated assets, such as stocks or real estate, who want to avoid immediate capital gains taxes and receive an income stream. They are also appealing to those who have a philanthropic desire to leave a charitable legacy.

4. Payout Flexibility: Donors can design the trust to benefit multiple generations, with payouts lasting for their lifetime and the lifetime of a spouse or children. This makes the CRUT a versatile tool for both income planning and multigenerational wealth transfer.

Conclusion

A Charitable Remainder Unitrust (CRUT) is an estate planning vehicle that provides financial benefits to donors while supporting charitable causes. With the ability to receive variable income, avoid capital gains taxes, and reduce estate taxes, a CRUT aligns personal financial goals with philanthropy. It is especially well-suited for individuals looking to benefit from the growth of their assets over time and leave a lasting legacy to charity. By including a CRUT in an estate plan, donors can ensure that their wealth supports both their own financial security and their chosen charitable organizations.