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What is a Charitable Remainder Unitrust (CRUT)?

A Charitable Remainder Unitrust (CRUT) is an effective estate-planning tool that allows individuals to generate income for themselves or their beneficiaries while also making a charitable contribution to a favored organization. This irrevocable trust offers numerous benefits, including the reduction of taxable income, avoidance of capital gains taxes, and the ability to claim an immediate partial income tax deduction. In this article, we will delve into the key aspects of a CRUT, its workings, and the various types available.

What is a Charitable Remainder Unitrust (CRUT)?

A Charitable Remainder Unitrust (CRUT) is an irrevocable trust that serves two primary purposes: generating income for the trust's beneficiaries and providing a charitable donation to a chosen charity. It enables individuals to support charitable causes while retaining control over their assets during their lifetime. By establishing a CRUT, donors can achieve tax advantages and secure income for themselves, their families, or other designated beneficiaries.

How Does a Charitable Remainder Unitrust (CRUT) Work?

To set up a CRUT, the donor transfers assets into the trust, which can include cash, real estate, stocks, bonds, or other valuable property. The donor defines the terms of the trust, specifying the portion of the trust's value to be distributed to the beneficiaries, with the remaining amount going to the chosen charity.

The beneficiaries can be the donor, family members, or other individuals, and multiple beneficiaries can be designated. The income distributed to the beneficiaries must be between 5% and 50% of the fair market value of the assets. The income distributions can be scheduled on a monthly, quarterly, semi-annual, or annual basis, according to the donor's preference.

The donor can specify a future date for the final charitable donation if the last beneficiary passes away before that date, terminating the trust and transferring its value to the designated charity. Additionally, the donor has the flexibility to add more assets to the trust over time, thereby increasing both the income distributions and the final charitable donation.

Types of Charitable Remainder Unitrusts (CRUTs):

There are three primary types of CRUTs, each offering distinct features and implications for donors and beneficiaries:

  1. Standard Unitrust: This type of CRUT operates with a fixed percentage determined at the establishment of the trust. Income distributions to the beneficiaries are based on this predetermined percentage.

  2. Net Income Unitrust: In a net income unitrust, income distributions are based on either a fixed percentage or the net income generated by the trust, whichever is lower. This option is often preferred by younger donors or those seeking larger payouts in the future.

  3. Flip Unitrust: A flip unitrust begins as a net income unitrust, distributing income based on the trust's actual earnings. At a specified date, the trust asset(s) are sold, and the unitrust converts to a standard unitrust. This type of CRUT is commonly used for building retirement funds.

Benefits and Considerations of a Charitable Remainder Unitrust (CRUT):

Establishing a CRUT can yield several advantages for donors, including:

  1. Tax Advantages: Contributions made to a CRUT often qualify for income tax deductions, providing immediate tax benefits. Additionally, the trust's income and appreciation are tax-exempt, allowing for tax-efficient growth of assets.

  2. Income Generation: CRUTs enable donors to receive regular income payments during their lifetime or the lifetimes of designated beneficiaries. This can be particularly beneficial for retirement planning or providing for family members.

  3. Charitable Legacy: CRUTs offer individuals the opportunity to support causes they are passionate about by ensuring a significant charitable donation at the termination of the trust. It allows donors to leave a lasting impact while still benefiting from their assets during their lifetime.

A Charitable Remainder Unitrust (CRUT) is a powerful tool that combines philanthropy with financial planning. By establishing a CRUT, individuals can generate income for themselves or their beneficiaries while supporting charitable organizations close to their hearts. The tax advantages, flexibility in asset management, and ability to create a charitable legacy make CRUTs an attractive option for individuals seeking to optimize their financial and philanthropic goals. Before implementing a CRUT or any estate planning strategy, it is advisable to consult with a qualified financial advisor or attorney to ensure alignment with personal objectives and legal requirements.

Summary

A Charitable Remainder Unitrust (CRUT) is an irrevocable trust created for the purpose of donating a fixed percentage of a trust to a charitable organization each year.

The fixed percentage must be at least 5% per year but no more than 50%, under current law. At a specified time (usually at the death of the person that established the trust), the remaining assets are distributed to charity. A Charitable Remainder Unitrust is a mechanism that allows you to create tax-advantaged income in your lifetime with the ultimate end of donating a large portion of the principle to charity.

By naming yourself as the Trustee of a CRUT, you can have control of the investments and management of the Trust. You may also name a beneficiary to continue receiving income after your death (usually the spouse is chosen).

The money earned from investments within your CRUT is not subject to the Capital Gains Tax, and transfers to the CRUT will in most cases result in some sort of tax-deduction. Very often, people contribute a significant amount of shares of a company into a CRUT.

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Disclaimers and Limitations

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