Combine Charity, Flexibility & Big Tax Savings with a Charitable Remainder Unitrust

Written By
Paul Tracy
Updated January 16, 2021

As we mentioned in our recent article on 3 Billionaire Habits, successful investors often have a desire -- bordering on a compulsion -- to donate their wealth to a charitable cause. 

Luckily, charitable giving bestows financial as well as emotional benefits, and you don't have to be a billionaire to get them. If you want to increase your income, lower your taxes, and create a charitable legacy, you can pull off this estate planning hat trick by setting up a Charitable Remainder Unitrust (CRUT).

By setting up a CRUT, you commit to passing assets to a charity, but give yourself the flexibility to earn income from the donated assets while you're still living.  

Most successful investors have assets that have appreciated considerably since the day they were first purchased.  But when it comes time to sell, the tax bill can make you choke.  

The key goal of the CRUT is to sell a highly appreciated asset without paying capital gains tax on the profits. But along with the tax savings on capital gains, a CRUT delivers other benefits, like boosting income and diversifying portfolios. Moreover, a charitable deduction provides immediate income tax savings. 

CRUT Basics

The owner of the appreciated asset is the "donor." The charity to which the donor wishes to gift the asset is called the "charitable beneficiary." The charitable beneficiary must always be an IRS-approved charity. 

The "trustee" of the CRUT can be the donor, a charity, an independent trust company or another person designated by the donor. Anyone who receives income from the asset under the terms of the CRUT is called an "income beneficiary." Donors can be income beneficiaries.

The trust must name the trustee, the charitable beneficiary, the percentage to be paid to income beneficiaries and the term of the trust. The trust must also specify the annual percentage to be paid out to the donor. This amount must be between 5% and 50%. The percentage calculated must also provide for a minimum charitable deduction of 10% of the amount transferred to the CRUT.

How CRUTS Work

Generally speaking, here's how a CRUT works:

Prior to any sale, the donor transfers the asset or assets into the trust. Just about any type of asset can be contributed to a CRUT: stock, bonds, real estate, collectibles, etc. Then, the trustee -- who also can be the donor -- sells the asset, reinvesting the proceeds in whatever financial instrument is appropriate. 

The trust's term can extend for the life of the donor, or for the life of the donor and another individual, typically a spouse. The term's parameters also can be set according to years, up to 20 years. 

The trust also can be structured to accumulate distributions if annual income is insufficient to cover the distribution. This is an effective retirement planning tool if your goal is to generate income in future years, because an even higher amount can be paid out at that time. This long-term strategy can also be used to provide educational funds for children or grandchildren.

The trustee continues to manage the trust throughout its term, making investment choices and distributions to the income beneficiaries. Upon the death of the income beneficiaries, or upon reaching the term's pre-set time limitation, all the funds remaining in the trust are disbursed to the charitable beneficiary.

Savings and Benefits

The tax-savings are significant, and two-fold:

1) An immediate income tax deduction for the present value of the future gift.

note that you must follow IRS guidelines for calculating this amount. The deduction varies based on the term of the trust, the monthly Applicable Federal Rate (AFR) published by the IRS, the distributions being paid out to the donor during the term, the frequency of the distributions, and the amount contributed. This deduction must equal 10% of the value contributed to the CRUT. The guidelines are complicated; you'll need to consult a tax attorney.

2) No capital gains taxes.

The CRUT is tax-exempt, which means there are no taxes due upon the sale of the asset. This allows you to reinvest 100% of the proceeds into another financial instrument. Because none of the proceeds are skimmed off by the tax man, you can generate higher income than would be available through an outright taxable sale.

To learn more about how to be smart when donating to charity, check out our popular educational article, Shrewd Philanthropy: How to Give Without Getting Taken.

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