What Is The Standard Charitable Remainder Unitrust And How Does It Work?

We’ll be explaining Standard Charitable Remainder Unitrusts (or Standard CRUTs) and how they are different from the other types of Charitable Remainder Unitrusts, aka CRUTs, and when they make sense.

The Standard Charitable Remainder Trust

The Standard Charitable Remainder is the most basic trust form of CRT available. Like all of the CRUTs we offer, the Standard CRT is tax exempt, which means it does not pay taxes on its gains (with a few exceptions not relevant here); it is irrevocable, so it cannot be modified after creation; it’s designed to last for a defined term or for your lifetime; and it’s a “split interest” trust, so whatever is left in the trust at the end goes to the charity of your choice.

The most important distinction between Standard Charitable Remainder Unitrusts and the other forms is that with the other versions, there is some complexity with how much you receive from the trust every year. Instead, Standard unitrusts are simpler. You receive distributions each year that are a set percentage of the trust’s assets. That percentage is determined at the start of the trust based on its expected length, and it doesn’t change during the trust’s term. So once you put your assets into the trust, you’ll receive those payouts no matter what.

How Does It Work?

• Choose an asset. You, the individual setting up the Standard CRT, choose an appreciated asset that you’d like to contribute to a trust. This could be any asset that has appreciated or is likely to appreciate significantly; the most common assets we see from our users are start-up equity, crypto, public equities, and certain alternative private assets.
• Designate a beneficiary. You designate an income beneficiary — the person who will receive payments from the trust every year. Most of our users choose to be the income beneficiary themselves and/or name a partner or child.
• Transfer assets & get a deduction. You transfer your chosen assets to the standard unitrust, and you get an immediate charitable deduction, usually equal to about 10% of the value of the asset you put in.
• Sell assets tax free. You sell your asset and, in most cases, the trust pays no taxes on that sale, allowing you to grow more money for longer.
• Take your annual withdrawal.  You receive a fixed percentage of your trust’s assets every year. Straightforward and simple
• 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. Recall that this is the reason your money gets to grow tax free in the first place: You get the tax exemption, and in exchange you promise to leave the remainder to another tax-exempt entity — a charity.

Standard Charitable Remainder Unitrust Distributions

What makes Standard Charitable Remainder Unitrust different from CRUTs is that it requires the trust to pay distributions out to you every year. How much? The calculation is actually fairly simple. Your annual payout percentage is determined by an IRS formula that takes into account:

1. How long your trust will last (your chosen term or, in the case of a lifetime trust, the IRS’s actuarial estimation of the expected length of the trust)
2. The IRS’s statutory discount rate, which is just how much the IRS expects your assets to grow in the trust.

We use that formula to calculate your payout rate, which will typically be about 11% for 20 year term trusts and between about 5% and 8% for lifetime trusts. What this means is that if you use a Standard CRT, then every year you will receive a payout from the trust equal to that fixed percentage times the value of all of the assets in the trust.

A Standard CRUT Example

Here’s a simple example: Suppose that you have $500k in start-up equity, crypto, public securities, or another asset. You’ve decided to use a 20 year term structure. What are the associated benefits?

Immediate deduction. First things first: You would receive an immediate charitable tax deduction equal to 10% of the assets’ current value. In this example, that would allow you to reduce your taxable income by $50k this year.

Payouts. Because we’re working with a 20 year term this would make your payout rate approximately 11% annually. At the end of the first year, the Standard Charitable Remainder Unitrust would owe you 11% of $500k, or $55,000. (The payout is typically calculated based on the value of the trust at the end of the year.) Now say that you have a good year, and the value of the assets doubles to $1 million. At the end of the second year, the trust would pay you 11% of $1 million, or $110,000. (If, instead, the asset had plummeted to $100k, you’d be entitled to a payout equal to 11% of $100k, or only $11,000. Every year you would receive that associated distribution.

At the end of the trust’s term, the remainder left will go to the charity you designated.

Trade-offs of Standard CRUTs

There are a ton of moving pieces here, but the are a couple of key takeaways.

Returns. The main practical insight is that, with a Standard CRUT, there’s no flexibility in when the trust pays you out. Because it pays out a steady share of the trust’s assets every year, they tend to have slightly lower returns than NIMCRUTs. This makes sense, since forcing annual payouts means your money has less time to grow and compound tax free. (It’s worth noting, though, that the returns are often still positive as compared to a taxable account.)

Consistency. At the same time, some view this additional constraint as a positive thing, because a Standard unitrust will pay out even if your assets don’t grow and increase income (whereas a NIMCRUT will not). For that reason, some use this type of trust when they want consistent distributions to pay for retirement etc.

Next Up

In short, although everyone’s preferences and circumstances are different, Standard Charitable Remainder Unitrusts can be a good fit for customers who are willing to give up some returns in exchange for relatively predictable, consistent payouts but still want to take advantage of their investment growth unlike a Charitable Remainder Annuity Trust (CRATs).

See our next article on NIMCRUTs to follow our CRUTs series. Evaluate your potential returns with our CRUT Calculator. And if you have any questions, contact us through our chat button below, or schedule a time for 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.