There is a tax-mitigation solution available no matter your timing. A CRUT will likely provide the most extensive returns if you have yet to sell assets and have a significant gain coming. On the other hand, if you have sold your assets or received a large amount of ordinary income, consider a CLAT. How can you choose, and what’s the difference between CRUT vs. CLAT?
In today’s post, we’ll pull the last few threads together to help you understand the differences between the main tax mitigation tools we offer and when/why you should use one over the other. For example, if you haven’t sold your assets yet and have a significant gain coming, a Charitable Remainder Unitrust (CRUT) will likely provide the most effective returns. On the other hand, if you have sold your assets or already received a large amount of ordinary income this year, consider looking more closely at a Charitable Lead Annuity Trust (CLAT).
Before we talk about the different use cases for CRUTs and CLATs, here is a quick recap of both structures:
CRUT vs. CLAT Overview
If you decide to set up a CRUT, this is how it works:
- You gift appreciated assets to the trust and typically receive a charitable deduction of ~10% of the value you granted to the trust.
- You can seed the trust with nearly any asset — public stock, private/startup equity, real estate, or crypto, for example.
- The trust is tax-exempt, so when you sell the asset, the trust does not pay taxes; this enables you to reinvest and grow the amount you would otherwise pay in taxes.
- Every year, you are entitled to a distribution of a certain percent of trust assets; you pay taxes only when you receive the distributions.
- Celebrate — You successfully deferred your taxes and were able to reinvest what you received as taxable to keep those assets compounding and working for you. You’ve also lowered your effective tax rate by smoothing out your income realization over several years instead of realizing a massive gain — and taking an enormous tax hit in one year.
Instead, if you go for a CLAT, this is how it’d work:
- You gift assets or cash to the trust and get a charitable deduction up to the entire value you donated (enabling you to write off all or nearly all of your taxes).
- You can seed the trust with nearly any asset — public equities, real estate, crypto, or even cash — and reinvest the gains in other assets throughout the term of the trust.
- Every year, the trust donates a predetermined amount to a recognized charity, such as the American Cancer Society or your Donor Advised Fund (DAF). You are liable for the taxes on the income generated inside the trust (though we do our best to minimize this tax exposure).
- At the end of the trust’s term (a predetermined number of years), the trust gives its largest donation to charity, and you or your beneficiary receive the majority of the trust assets back.
- Celebrate — You successfully deferred your taxes and were able to reinvest what you received in taxes to keep those assets compounding and working for you!
CRUT vs. CLAT: Critical Differences
1. Use Cases
- CRUT: Best suited for individuals with highly appreciated assets who aim to mitigate their tax exposure BEFORE a significant liquidity event.
- CLAT: Best suited for individuals looking to mitigate tax exposure AFTER a significant liquidity event, such as selling start-up equity or crypto portfolio, receiving a cash bonus, or just making a high salary.
2. Distribution Schedule
- CRUT: You can receive a distribution of a set percentage of trust assets every year the trust operates. At the same time, the charitable beneficiary receives whatever remains in the trust at the end of the term.
- CLAT: Distributes a set amount to a charitable beneficiary every year, and you receive whatever remains in the trust at the end of the term.
3. Charitable Deduction
- CRUT: You typically receive a charitable deduction equal to ~10% of the value you gift to the trust.
- CLAT: You can receive a charitable deduction of up to 100% of the assets you gift to the trust.
4. Tax Exempt Status
- CRUT: Gains inside the CRUT are tax-exempt (outside a few edge cases).
- CLAT: The trust is not tax-exempt, and you are taxed on gains inside the trust (though we work with you to minimize those taxes).
When should I use each type of trust?
The biggest question for most customers is when they should use whether a CRUT vs. CLAT strategy. The answer, in most cases, depends on one main factor: Is your big win still in the future, or is it in the past?
CRUTs: A good fit for highly appreciated assets you have yet to sell.
Simply put, if you have a significant unrealized capital gain and haven’t sold your assets yet, you can place those assets into a CRUT to defer and reduce your taxes. Therefore, a CRUT is a tax-exempt account, much like an IRA. It allows you to delay the taxes you owe on your capital gains — an incredible tool to turbocharge your returns. Otherwise, you’re the one receiving the gains, and you’re the one who will be taxed.
CLATs: Well suited for ordinary income and already realized gain.
Suppose it’s too late for a CRUT. For example, say you made a lot this year because you needed to learn the available strategies when you sold your crypto. Or you exercised some highly appreciated options and received RSUs. Or are you just paying a high tax rate on your regular income. Then, you can put those assets into a CLAT, potentially eliminating your tax bill by taking a significant deduction and reinvesting what you would have paid in taxes.
CRUT Use Cases
Let’s start with startup equity. If you hold company stock — whether you received common shares or already exercised your options — you can move them into a CRUT before selling them. In the case of an IPO, SPAC, or direct listing, that’s simple: You can work with us to finalize your trust beforehand (free of cost) and transfer your assets whenever you’re ready. If there’s a chance your company is going to be acquired in a private transaction, though, time is of the essence: If you sell your shares as part of that deal before moving them into a trust, it is too late to use a CRUT (but you could use a CLAT).
Instead, if you’re holding crypto that’s gone to the moon and haven’t sold yet, you can move those assets into a CRUT, make the sale, and pay no taxes today. Therefore, you have more capital to reinvest in the market and compound faster.
And finally, for public company stock or call/put options. This one’s a lot like startup equity, but you’re more in control of the timing. Get your Tesla, Amazon, or Google shares — or any other stock that has appreciated since you bought it — into a CRUT. Then you can sell, diversify your portfolio, and defer the (often massive) tax bill you would have otherwise received.
CLAT use cases
Ordinary income. Ordinary income comes in many forms. A big bonus from your employer is regular income. So is the income you receive from selling an NFT you create. Your salary, of course, qualifies too. If you received a windfall this year and didn’t want to deal with the resulting tax bill, you can put your income into a CLAT and write off as much as 100% of those taxes.
The key benefit of a CRUT is that you can defer taxes on the income you earn inside the trust. However, that move doesn’t work for ordinary income because there’s no way to realize the gain inside the trust — if you get paid for your work, that income comes to you, and a CRUT cannot reduce your taxes on this income.
Assets you’ve already sold. Another form of payment that doesn’t qualify for a CRUT is income you’ve already realized. Meaning revenue from the sale of an asset that happened in the past. Common scenarios we’ve seen are
- Equity: Your company gets a surprise deal before you have a chance to move your assets into a trust
- Crypto / NFTs: Crypto moves fast, and with a recent bull run, people have been taking gains opportunistically without much planning
Unexercised options. When you exercise appreciated options, you have to pay ordinary income tax rates on the difference between the strike price you were issued the options at and the current fair market value. Clients use CLATs to write off that ordinary income from their exercise.
Fortunately, the differences between CRUT vs. CLAT generate a solution available no matter your timing: If you still need to sell your assets and have a significant gain, a CRUT will likely provide the most extensive returns. On the other hand, if you have sold your assets or already received a large amount of ordinary income this year, consider looking more closely at a CLAT.
- CLAT: A Comprehensive Guide
- CLAT Option Exercise to Reduce Your Tax Bill
- CRUT: A Charitable Remainder Unitrusts Guide
We built a platform to give everyone access to the tax and wealth building tools of the ultra-rich like Mark Zuckerberg and Phil Knight. We make it simple and seamless for our customers to take advantage of these hard to access tax advantaged structures so you can build your wealth more efficiently at less than half the cos of competitors. From picking the best strategy to taking care of all the setup and ongoing overhead, we make it easy and have helped create more than $500m in wealth for our customers.