A Charitable Remainder Unitrust (CRUT) is an irrevocable trust that allows donors to contribute assets, receive income for life (or for a specified term), and donate the remaining assets to a charity at the end of the trust term. CRUTs offer tax benefits, including income tax deductions, deferral of capital gains tax, and possible reductions in estate taxes.

How a CRUT Works

1. Funding the CRUT: A donor contributes assets (cash, stocks, real estate, or other property) to the CRUT.

2. Income Payments: The CRUT pays a fixed percentage (at least 5%) of its value, revalued annually, to the donor or beneficiaries.

3. Charity as the Remainder Beneficiary: After the term ends (either upon the donor’s death or after a set number of years, up to 20), the remaining assets go to the designated charity.

4. Tax Benefits:

• Immediate charitable income tax deduction based on the present value of the remainder interest.
• No capital gains tax on appreciated assets sold within the trust.
• Possible estate tax benefits.

 

Example of a CRUT in Action

Scenario:
John, 65, donated $1 million in highly appreciated stock to a CRUT. The trust will pay him 6% of its annually revalued assets for life. Upon his death, the remaining assets will go to his favorite charity.

Year 1

• Trust assets: $1,000,000
• John receives $60,000 (6% of $1M)
• No immediate capital gains tax on the sale of stock.
• John claims an income tax deduction based on the remainder value going to charity (calculated using IRS formulas).

 

Year 2 (Assume a 5% market growth)

• Trust assets: $1,050,000
• John receives $63,000 (6% of $1.05M)

This continues until John’s passing. At that point, the remaining assets (say $1.5 million) are distributed to the designated charity.

 

Key Benefits

• Tax efficiency: It avoids capital gains tax and provides income tax deductions.
• Flexible income: The unitrust payout percentage ensures that payments adjust with the trust value.
• Charitable impact: A meaningful donation to charity after the donor’s passing.