Charitable Remainder Trusts (“CRTs”) are powerful estate planning tools that allow individuals to reduce tax obligations while supporting charitable causes. Among the most popular CRTs are Charitable Remainder Annuity Trusts (“CRATs”) and Charitable Remainder Unitrusts (“CRUTs”). While both offer significant tax advantages and allow for charitable giving, they differ in their structure and payout mechanisms. Here’s an overview of CRUTs, their unique features, and how they compare to CRATs.
A CRUT is a trust—an irrevocable trust—that is tax-exempt. It is designed to reduce a grantor’s tax liabilities while supporting a charitable organization (or multiple charitable organizations). A CRUT functions as a “split-interest” trust, meaning it benefits both the donor (or his/her named beneficiaries) and a charitable organization (or multiple charitable organizations). That is, a CRUT allows the donor to contribute assets to the trust and receive a partial tax deduction. The trust provides income to beneficiaries for a specified period, with the remaining assets ultimately going to a charitable cause.
Income for Beneficiaries: A CRUT provides income to a named beneficiary for either a term of up to 20 years or the lifetime of the beneficiary (if the beneficiary is living when the trust is created). The income is calculated as a fixed percentage of the trust’s assets—no less than 5% and no more than 50% of the trust’s fair market value. The assets are revalued annually, meaning payouts may fluctuate based on the trust’s performance.
Asset Contributions: CRUTs are typically funded with assets, such as: real estate, stocks, or artwork. Additional contributions can be made to the trust over time, allowing the donor to add newly acquired assets. This flexibility is one of the key advantages of CRUTs over other charitable trust options.
Remainder to Charity: Once the trust’s term ends—either after 20 years or upon the death of the beneficiary—the remaining trust assets are distributed to the designated charitable organization. Federal law requires that the charity receive at least 10% of the original asset value when the trust is established.
Tax Benefits: CRUTs have appealing federal tax treatment. As noted above, CRUTs are tax-exempt. For example, when the trust sells assets, it does not incur capital gains taxes. This makes CRUTs especially attractive for individuals looking to donate highly appreciated assets, such as stocks, cryptocurrency, or real estate. Donors may also receive a charitable income tax deduction upon funding the trust. Additionally, while the trust’s investment income is generally tax-exempt, beneficiaries are required to pay income taxes on the payouts they receive.
Growth Potential: Because the trust’s assets are revalued annually, beneficiaries may see increased payouts if the trust grows in value. This dynamic nature of CRUTs distinguishes them from CRATs, which offer fixed annual payments regardless of trust performance.
While CRUTs and CRATs share common goals of tax reduction and charitable giving, their structures differ significantly:
Payout Structure: CRUTs offer variable annual payouts based on the trust’s revaluation, while CRATs provide fixed annual payments. This means CRUT beneficiaries may benefit from potential trust growth, whereas CRAT payouts remain constant.
Additional Contributions: CRUTs allow for additional contributions to the trust over time, making them ideal for donors with fluctuating or growing assets. CRATs, on the other hand, do not permit subsequent contributions after the trust is funded.
Risk and Reward: With CRUTs, beneficiaries share in the trust’s performance. If the trust performs well, payouts increase; if not, payouts may decrease. CRATs provide stability by offering consistent payments but without the potential for growth.
A CRUT can be an effective strategy for individuals looking to minimize taxes, generate income for their families, and support a charitable cause. Its flexibility in accepting additional contributions, favorable tax treatment, and potential for growing payouts make it an appealing option for donors with appreciated assets or fluctuating financial circumstances.
If you’re considering a CRUT as part of your estate or tax planning strategy, it’s essential to consult with a qualified estate planning attorney to determine how it aligns with your specific goals and circumstances. By understanding the unique features and benefits of CRUTs, donors can make informed decisions to maximize their charitable impact while preserving wealth for current and future generations.
Contact Montgomery Legal today to discuss your federal tax situation with a dual-credentialed attorney and CPA. Schedule a Consultation, email us at info@mlegaltx.com, or call (214) 432-6100.
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