Charitable Remainer Unitrust (CRUT)

[Kathleen Reynolds]

#3922

A CRUT is an irrevocable trust to which the grantor gifts assets and retains a payout each year for a specified term of years or until the death of the grantor. The annual payout is equal to a stated percentage (minimum 5% and maximum 50%) of the net fair market value of trust assets determined annually. A designated charity receives the remaining trust principal at the end of the specified term or at the death of the grantor. Should the grantor die during the trust term, the trust principal is not included in the grantor’s estate (no retained interest). An income tax deduction is given for the present value of the remainder interest (must be at least 10%) which passes to the charity.

This calculation determines the donor’s deduction for a contribution to a charitable remainder unitrust. Specify whether the trust lasts for a term of years, a single life expectancy, or a joint life expectancy (up to five ages). It also calculates the deduction as a percentage of the amount transferred.

When a charitable remainder unitrust is established, a donor transfers cash and/or property to an irrevocable trust but retains (either for himself or for one or more non-charitable beneficiaries) a variable annuity (payments that can vary in amount but are a fixed percentage) from that trust. At the end of a specified term, or upon the death of the beneficiary (or beneficiaries, and the donor and the donor’s spouse can be the beneficiaries), the remainder interest in the property passes to the charity the donor has specified.

For calculations involving a term, the length of the economic schedule is limited to that term. Otherwise, the economic schedule illustrates the trust for life expectancy. If the number of lives is greater than one, then the length of the economic schedule will be determined by the joint life expectancy of the first two ages provided by the user. Single life cases will use the single life expectancy. The economic schedule will end if the trust is depleted of funds prior to the end of the schedule.

The principal difference between a charitable remainder unitrust and a charitable remainder annuity trust is that a unitrust pays a varying annuity. In other words, the amount paid is likely to change each year. The payable amount is based on annual fluctuations in the value of the trust’s property. As it goes up, so does the annuity paid each year. If it drops in value, so will the annuity.

A gift to a charitable remainder unitrust will qualify for income and gift tax charitable deductions (or an estate tax charitable deduction) only if the following conditions are met:

• A fixed percentage (not less than 5% nor more than 50%) of the net fair market value of the assets is paid to one or more non-charitable beneficiaries who are living when the unitrust is established. The charity’s actuarial interest must be at least 10% of any assets transferred to the trust.
• The unitrust assets must be revalued each year, and the fixed percentage amount must be paid at least once a year for the term of the trust, which must be a fixed period of 20 years or less or must be until the death of the noncharitable beneficiaries, all of whom must be living at the beginning of the trust.
• No sum can be paid except the fixed percentage during the term of the trust and at the end of the term of the trust, the entire balance of the trust’s assets must be paid to one or more qualified charities.

The donor receives an immediate income tax deduction for the present value of the remainder interest that will pass to the charity at the end of the term.

Because a charitable remainder unitrust is exempt from federal income tax (the income and gains of the trust are only taxed when they are distributed to the noncharitable beneficiaries as part of the fixed percentage of trust assets distributed each year), they are frequently used to defer income tax on gains about to be realized. For example, if a donor has an appreciated asset that is about to be sold, the donor can give the asset to a charitable remainder unitrust, reserving the right to received a fixed percentage of the value of the trust for life, and for the life of the donor’s spouse as well, and the asset can then be sold by the trust and the proceeds of sale reinvested without payment of any federal income tax on capital gains. The capital gains will be taxable to the donor (or the donor’s spouse) only as they are distributed to the donor as part of the annual distributions from the trust.

A variation of the CRUT (which pays a fixed percentage of the value of the trust assets, regardless of income) is the net-income-with-makeup CRUT, or “NIMCRUT,” which pays either the fixed percentage or the income actually received by the trust, whichever is less. However, if the income is less than the fixed percentage, the deficiency can be paid in a future year, as soon as the trust has income, which exceeds the fixed percentage. An additional variation is a “flip” unitrust, which is a trust that changes from a NIMCRUT to a regular CRUT upon the occurrence of a specific event, such as the sale of a specific asset that was contributed to the trust and was not expected to produce much income. However, both NIMCRUTs and “flip” CRUTs are valued in the same way as a regular CRUT for the purpose of determining the income, estate, and gift tax charitable deduction.

Click the Edit button to set the specifications of the CRUT:

• The name of the CRUT
• The type of calculation: Select a type of trust (Term, Life, Joint Life, Shorter, Testamentary) If you select Life, the Economic Schedule runs from year one until the Life Expectancy or until the remainder is zero (whichever happens first). If you select Term or Shorter, the Economic Schedule runs from year one until the end of the Term or until the remainder is zero (whichever happens first).
• The year in which the transfer takes place
• The §7520 rate
• To select the asset to use to fund this technique, click the ‘+’ button.
• Verify the amount listed as FMV.
• Percentage Payout Enter the payout rate of the annuity.  The annuity must be at least 5% and less than 50%.
• Cost Basis Enter the cost basis.
• Enter the years of the term of the trust: If you chose a term or shorter trust, enter the number of years that the trust will last.
• Select the payment period: Select the number of payments that will be made during a normal full year to the beneficiary (Annual, Semiannual, Quarterly, Monthly, and Weekly).
• Verify the client’s age.
• Months Valuation Precedes Payout: Enter the number of full months by which the valuation date (for the assets of the unitrust) precedes the first payout in the first full taxable year of the trust (not the short first year). The program will only allow valid input values according to which Payment Period was selected in the previous entry field. Growth is applied on the payment schedule before payments are calculated unless Months Valuation Precedes Payout is zero. This does not pertain to the planning period before the trust goes into effect.
  
• Enter the percentage of the annuity to be taxed.

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