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Charitable Remainder Trusts Are More Flexible Than You Think

❗ Key Takeaway: In our experience, one of the main concerns our clients have with Charitable Remainder Trusts—and especially the lifetime version—is that their money could be locked up for longer than they’d like, or that they’ll be stuck with the terms of the trust for longer than makes sense. In reality, though, CRUTs are more flexible than you might think, because you can access significant liquidity–as much as 100% of the trust’s value 5 to 7 years–and you can always borrow against or sell your future trust income if you need even more.

The concern: Lifetime trusts last a long time

In our experience, one of the main concerns our clients have with Charitable Remainder Trusts—and especially the lifetime version—is that their money could be locked up for longer than they’d like, or that they’ll be stuck with the terms of . In reality, though, CRUTs are more flexible than one might think.

It’s true, of course, that some amount of money is going to go to charity at the end of the trust term. And it’s true that there are some liquidity constraints, especially early in the term. That’s the point of a CRUT—you trade liquidity now for greater (and potentially significantly greater) returns in the future, which you’re happy to do if you’re planning for the future.

But also, critically, a CRUT is not truly a lifetime commitment.

The reality: Even lifetime trusts are not a lifelong commitment

This is because, while your trust is in operation, you will have several tools at your disposal to pull money out of the trust when you need it—and even to end the trust entirely.

Withdraw money according to the rules of the trust

First, you can do what most people do with a CRUT: Withdraw money according to the terms of the trust.

  • In a NIMCRUT, this means that, in any given year, you can withdraw the lesser of (1) the trust’s annual income or (2) the assigned payout rate times total trust assets. In most lifetime NIMCRUTs, this means you will have access to around 6% of the trust’s assets in a given year; in term trusts, it’s around 11%. And, as we explain elsewhere, that amount accrues if you don’t use it. The trust will also be growing as your investments grow. This means that you can access as much as 100% of the trust’s value in the first 5-10 years.
  • In a Flip CRUT, meanwhile, you’ll get that 6 to 11% no matter whether the trust has income or not, so the payouts are steadier but you have less control.

Borrow against or sell your future trust income

In the past, one of the biggest barriers to setting up a CRUT was that CRUTs are irrevocable. This is still true. But over the past few years, a market has developed for the income streams of CRUTs. The possibility of selling or borrowing against the income stream of a CRUT means that even though the trust is irrevocable, you are not necessarily stuck with a limited income stream for the rest of your life; you may be able to turn that income back into a lump sum.

  • Borrowing. To be clear, you can’t use your trust assets as collateral for a loan; that would be self dealing, and it’s a no-go according to the IRS. But you can take out an unsecured personal loan, or borrow against your income stream from the trust, and many of our partner lenders will consider your trust assets when determining your interest rate, even if those assets won’t actually be backing the loan.
  • Cashing in. In addition to borrowing, you can also give up your future trust income stream in exchange for money today—either by selling those rights or terminating the trust and accepting the IRS’s discounted valuation of your income interest. This strategy isn’t for everyone, since you’ll likely be selling at a discount. But it is a failsafe to ensure liquidity if you need it.

Conclusion

You should always keep in mind the main benefit of Charitable Remainder Trusts: They allow your money to grow tax free for a long time. Ideally, then, you wouldn’t need to pull more out of your trust than necessary to meet your major cash needs—buying a house, building a college fund, and the like. After all, you want to take advantage of what one commentator has called “the most obvious secret in investing”: That even average returns for a very long time results in “extreme” performance.

Still, it’s always nice to know that you have liquidity options when you need them.

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