Charitable Remainder Unitrusts
Charitable remainder unitrusts (commonly referred to as CRUTs) are separate legal entities designed to allow people to contribute assets, in a lump sum or over time, that distribute payments to beneficiaries and ultimately pass assets remaining in the trust to qualified charitable organizations. While there are many different types of CRUTs, some common traits are:
- The trust must make payments to at least one person.
- The payments may be structured as either a percentage of the value of the trust as updated annually and/or the net income earned by the trust.
- The trust will run for the life of the beneficiary(ies) or, alternatively, a term of years no greater than 20 years.
- The trust must report distributed payments and trust value to the IRS annually.
A standard CRUT distributes a fixed percentage of the value of the assets in the trust. The trust is valued once each year, typically on the first day each year, and then the annual payment is split into four equal quarterly installments. A standard CRUT must distribute at least 5 percent of the value of the trust each year. The specific payout rate is stated in the trust document and will not fluctuate. Over time, the goal is to increase the value of the trust, and as a result, the payments from the trust. CRUTs with payout rates between 5 percent and 6 percent and invested for total return tend to experience increases in beneficiary payments that keep pace with inflation over the long-term.
Net Income CRUT
When a CRUT holds an asset producing a high rate of income, a net income provision is commonly used to permit the trust to forgo the requirement of distributing a fixed percentage of the value in the trust. Instead, a net income CRUT will make payments based on the net income generated by all assets in the trust. This structure is most commonly found in CRUTs holding income producing real estate, such as rental properties and commercial buildings.
Example of Net Income CRUT
A "flip" provision with a CRUT allows the trust to convert from a net income payment to a fixed percentage payment based on a specific triggering event. A flip is often used with a CRUT to allow for a trust to hold real estate and distribute all of the net income until the property is sold and then pay a fixed percentage of the trust value following the sale. The flip provision is also a valuable tool for designing a CRUT that distributes very little income until a future date, typically timed to coincide with retirement.