What is a Charitable Remainder Unitrust (CRUT)?
A charitable remainder unitrust (CRUT) is an irrevocable, tax-exempt trust that generates income and provides a charitable donation to a chosen charity. It can be used to reduce taxable income, avoid capital gains taxes, and take an immediate partial income tax deduction. A CRUT is an estate-planning tool that can help fund retirement and/or provide for other family members while also contributing to a favorite charity.
- A charitable remainder unitrust can generate income for a beneficiary as well as provide a charitable donation to a chosen charity.
- A charitable remainder unitrust allows the donor to avoid paying capital gains taxes on assets donated to the trust.
- A charitable remainder unitrust is irrevocable, meaning it cannot be changed once it’s set up.
- The donor can add more assets to the charitable remainder unitrust trust after it is created.
How a Charitable Remainder Unitrust (CRUT) Works
To set up a charitable remainder unitrust, the donor transfers assets to the trust account. These assets can be cash, artwork, stock certificates, bonds, or other property. The donor sets up the terms of the trust to distribute a portion of the trust’s value to beneficiaries with the remainder of the trust going to a chosen charity.
The beneficiaries can be the donor, members of the donor’s family, or other individuals. There can be multiple beneficiaries. The amount distributed to the beneficiaries must be between 5% and 50% of the fair market value of the assets.
The assets are valued annually, so the amount distributed will change accordingly. The donor can choose the payout schedule for income distributions, which could be monthly, quarterly, semi-annually, and annually.
The donor also sets up a specified time in the future for the remainder of the trust’s value to be donated to a chosen charity. If the last beneficiary dies before that date, the trust is terminated, and its value is donated to the charity.
The donor also has the option of adding more assets to the trust over time, which would increase the income distributions and final charitable donation. In addition, the donor can make arrangements for a charitable remainder unitrust to be established upon the donor’s death.
The Secure 2.0 Act, part of the Consolidated Appropriations Act of 2023, which was signed into law by President Biden on Dec. 29, 2022, includes special provisions for making a one-time qualified charitable distribution from an IRA of no more than $50,000 to set up a charitable remainder unitrust—as well as a charitable remainder annuity trust (CRAT) or charitable gift annuity (CGA).
Types of Charitable Remainder Unitrusts (CRUTs)
There are three types of charitable remainder unitrusts. Each works a bit differently, which has tax and other implications for the donor or other beneficiaries.
This is a straightforward unitrust, wherein the income distributions are determined by a fixed percentage at the time the trust is established.
Net Income Unitrust
This unitrust can be set up with the same type of terms as the standard unitrust, or the donor can opt to receive the net income of the trust, whichever is lower. Typically, a net income unitrust is chosen by younger donors or for donors who prefer larger payouts in the future.
As the name implies, a flip unitrust initially is set up as a net income unitrust that pays based on the trust’s actual earnings. On a specified date, the trust asset(s) are sold, at which time the unitrust flips to a standard unitrust. A flip unitrust is a good tool for building retirement funds.
Pros and Cons of a Charitable Remainder Unitrust (CRUT)
A charitable remainder unitrust can be a great tool, but it’s important to know all the benefits and drawbacks before setting one up.
No capital gains taxes are paid when the trust sells an asset.
The donor can take federal, and possibly state, income tax deductions for making a charitable donation.
The donor can take an immediate income tax deduction when the trust is established, but only on a portion of the assets donated to the trust.
The trust provides an income stream until it is closed.
A portion of the trust goes to charity.
The trust is required to make payments to the beneficiary.
The donor must have high-value assets in order to generate income and provide funds for a charitable donation.
The trust is irrevocable, so it cannot be changed once it is created.
What Is the Benefit of a Charitable Remainder Unitrust?
It can generate income for several years plus provide a charitable donation to a favorite charity.
Which Assets Can I Use To Fund a Charitable Remainder Unitrust?
The following can be used to fund a CRUT: real estate, stocks, bonds, cash, publicly traded securities, and other assets.
How Much Can I Donate Through a CRUT?
The amount donated through a CRUT depends on the fixed percentage used to determine the income payouts. For instance, if the donor arranges for beneficiaries to receive 10% of the fair market value of the assets, the remaining 90% would go to the charitable organization.
The Bottom Line
Before establishing any charitable remainder unitrust, consult with a tax professional to find out if you have sufficient assets to fund a CRUT and to see if it’s the right tool for your retirement and estate planning. There are also special rules about the Secure 2.0 provisions for QCD funding of a CRUT.