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CRUT: What Is A Charitable Remainder Unitrust?

A CRUT, or Charitable Remainder Unitrust, is a type of Charitable Remainder Trust that typically offers greater returns and distributions than its cousin, the Charitable Remainder Annuity Trust. In this guide, we’ll explain the basics of Charitable Remainder Unitrusts, describe the various types of CRUTs, and explore an example.

What is a CRUT (Charitable Remainder Unitrust)?

A CRUT is defined as a tax-exempt structure with many tax benefits and according to Charles Schwab, is well suited for appreciated assets you have not sold yet. In exchange for donating some of the money in the trust to a charity at the end of the trust’s term, you are allowed to defer the taxes you would otherwise pay when selling an asset and grow your asset tax free inside the trust. Plus, CRUTs carry an immediate charitable income tax deduction.

So, what does a CRUT mean? A form of tax-deferred account, similar to an IRA, that is designed to incentivize charitable giving in exchange for significant tax benefits: tax deferral and the ability to lower your tax rate via income smoothing and an upfront charitable deduction.

How Does A CRUT Work?

Like all Charitable Remainder Trusts, setting up and reaping the benefits from a Charitable Remainder Unitrust is easy.

  • Asset Choice. You, the individual setting up the trust, choose an appreciated asset that you’d like to contribute to a trust.
  • Designate who benefits. You choose the person(s) who will receive payments from the trust every year, also known as an income beneficiary
  • Asset transfer & charitable deduction. After you transfer your chosen assets to the trust, and you get an immediate charitable deduction, equal to ~10% of the value of the asset you put in.
How Does The CRUT Operate:
  • Tax free sales. You sell your asset and the trust pays no taxes on that sale, allowing you to avoid taxes
  • Reinvest the savings. You’ve just saved as much as 50% on your taxes and you get to reinvest those savings and diversify your portfolio at the same time.
  • Take your annual withdrawal. You are entitled to an at least annual distribution, the amount and control you have on the distribution size depends on the type and length of Charitable Remainder Unitrust you choose.
  • Leave the remainder to charity. The remainder —whatever is left in the trust at the end of the trust’s term — is donated to a charitable organization.
  • Profit. Charitable Remainder Trusts typically result in 50% to 100% greater returns or more when used with appreciated assets, even after you make your charitable donation.

What Are The Benefits Of A Charitable Remainder Unitrust?

A Charitable Remainder Unitrust carries three significant tax benefits.

First, the sale of appreciated assets in a CRUT trust is tax deferred; you pay no taxes when you sell, and the money you save can be reinvested and continue to grow on a tax free basis inside the trust. That additional reinvestment could more than double your returns.

Second, selling assets via a Charitable Remainder Unitrust will allow you to achieve “tax smoothing” by spreading your income out over time to lower your annual income and, therefore, the effective tax rate you pay on your big gain.

Third, when you place assets into a unitrust, you will receive an up-front tax deduction worth about 10% of the assets’ value. That’s yours to use in the year you fund your trust, no matter when you sell the assets for, or for how much.

What Are The Tradeoffs of Charitable Remainder Unitrusts?

There are a few tradeoffs associated with the CRUT strategy. First there is a liquidity tradeoff: CRUT trusts allow you to withdraw a certain percent of trust assets each year, so in the early years of the trust you are giving up liquidity for the potential of greater future wealth.

Most importantly, a CRUT is an irrevocable trust, so you can’t reverse the strategy after you’ve funded your trust — though there is some flexibility to make changes, or even back out, before you’ve placed your assets in the trust.

What is a Unitrust?

A Charitable Remainder Unitrust (or CRUT) is a type of Charitable Remainder Trust. While on the other hand, you could go for an Annuity Trust, that its easier to understand. But over time, Unitrust started to bring better results for people. So, what is a Unitrust and why it’s effective?

unitrust is a trust that pays out a fixed percentage of trust assets every year, rather than a fixed amount. According to Charitable Remainder Unitrust rules, the annual distribution is measured as a share of the fair-market value of the CRUT assets every year, the amount that you receive from the trust will change every year — and, in most cases, it will go up as the trust’s assets grow over time.

For instance, if you put $1 million into your Unitrust and chose a 10% payout rate, you’d receive $100,000 in the first year. But if your investments do very well and the trust grows to $2 million the next year, you’d receive 10% of that new value, or $200,000. As a result, a CRUT trust can allow you to withdraw more money from your trust for your own use. Plus, three more highlights:

  • Per IRS rules, a unitrust can last much longer than an annuity trust, or it can take a larger annual distribution percentage if set up for the same time period. A longer trust term means more tax-free growth and more distributions for you and your family.
  • You can add assets to a Charitable Remainder Unitrust over time. Not so with a CRAT.
  • CRUTs come in multiple shapes to to suit your needs.
CRUT
How assets move between you, your Charitable Remainder Unitrust, and the charitable beneficiary

Comparing Different CRUTs

Let’s assume that you’ve decided on a Charitable Remainder Unitrust for its larger annual payouts and greater overall returns. There are still two key decisions to make:

  1. Which type of CRUT is right for you — standard, NIMCRUT, or flip CRUT?
  2. How long will your trust last — for a fixed term, your lifetime, or even longer?

Types of Charitable Remainder Unitrust

Withdrawals work differently depending on whether you choose a Standard CRUT, a NIMCRUT, or a Flip CRUT. The bottom line is that you’ll have access to some of your money immediately, and the amount available to you will grow as your investments keep growing, but details matter. Here are the key differences?

1. Standard CRUT

With a Standard CRUT, you’ll receive a set percentage of the trust’s assets each year. Because this is a unitrust, that percentage is determined at the start of the trust, but the total amount will depend on how much your trust is holding each year.

Standard CRUTs can be a good fit for customers who are willing to give up some returns in exchange for relatively predictable, consistent payouts.

2. NIMCRUT

With a NIMCRUT, you are owed the same set percentage of trust assets every year as you would be from a Standard CRUT. The key distinction, though, is that you can defer those distributions to future years. Because this trust only distributes actual realized income and unpaid distributions roll over to future years, you have some additional control over your annual distributions. And if you choose not to take a large payout every year, you can achieve significantly greater long term gains.

Although NIMCRUTs carry the greatest expected returns, they can only distribute capital gains, so down markets can be a problem. For that reason, a NIMCRUT is a good fit for those who are set on maximizing total returns and who are planning for a long trust term and can weather down years.

3. Flip CRUTs

Flip CRUTs ‘flip’ from a NIMCRUT structure to a Standard CRUT structure after a predetermined event, such as the sale of a non-marketable asset or a certain number of years.

Flip CRUTs are generally the best fit if you have illiquid assets that won’t be easy to distribute for a while; with a Standard CRUT or NIMCRUT, you could be on the hook for distributions you can’t pay out. Flip CRUTs also tend to work for those who want to defer distributions for a period of time and then switch to the consistent, predictable distributions of a Standard Charitable Remainder Unistrust — for example, if you are planning for a period of growth and then will need retirement income.

Different Length Choices Of A CRUT

A Charitable Remainder Unrust can last for a fixed period (between 1 and 20 years), for one life, or for even longer – say, your lifetime and your partner’s, or your lifetime plus an additional period after that for your family to draw additional distributions.

However, term trusts allow you to change your tax-planning strategy after a set period. For some people, it’s easier to commit to a 20-year financial plan than to one that lasts a lifetime. While lifetime trusts, and trusts that last even longer than that, but have several advantages:

  • Higher return on investment. CRUTs allow you to defer your taxes and earn returns on the savings. Lifetime and longer trusts can last for 40 or 50 years, or even more. And the longer you defer your taxes – and let your money grow tax free – the bigger your gains.
  • Flexibility in investments: With a term trust, your investment horizon is necessarily limited: Whatever you invest in has to pay off within the term of the trust. With a lifetime trust (or longer), you can invest with an eye toward a more distant future, opening up the possibility of investing in illiquid assets with long time horizons – say, alternative asset classes that could be illiquid for a decade or more.
  • Lifetime trusts do have one additional constraint, related to where the money goes if something happens to you suddenly.
CRUT
Choosing which of the three Charitable Remainder Trusts makes sense for you depends on your goals, risk appetite, and timeline.

A Charitable Remainder Unitrust Example

CRUTs are useful structures for people who haven’t sold their assets yet. Take Annie, age 30, who joined a successful Bay Area startup at a relatively early stage. The company recently completed its IPO. Annie exercised her shares for a total cost of around $50,000, and she’ll be able to sell at a significant markup: $5 million. By setting up a CRUT trust, Annie will receive a charitable income tax deduction of approximately 10% of current value of her shares, or $500,000; save about $1.6 million in taxes when she sells her shares, which she can reinvest; and withdraw as much as 11% of her assets from the trust every year, depending on whether she chooses a term trust or one that lasts for her lifetime or longer.

What would all of this mean for Annie’s bottom line?  If she has her money in a Lifetime Charitable Remainder Trust, she’ll end up with about $19.6 million in total payouts. With a regular taxable account, it would have been about $8.7 million. That’s an extra $10.9 million via a trust, even after making a large donation to charity. Not a bad outcome for what amounts to a simple tax planning exercise!

Next Steps

You’ve read up on the basics of a CRUT, and now you know more about the Charitable Remainder Unitrust rules in particular. If you’re interested in going deeper still, you can visit our post on one type of CRUT, standard CRUTs. Access our calculator to evaluate the potential return on investment given your situation, or schedule a meeting with us.

About Valur

We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy.