Legal Definitions - charitable remainder unitrust

A Charitable Remainder Unitrust (CRUT) is a specialized type of irrevocable trust designed for individuals who wish to generate income for themselves or their chosen beneficiaries for a specific period (such as a set number of years or for life), while ultimately leaving the remaining assets to a designated charity.

Here's how a CRUT typically works: You, as the donor, transfer assets—often highly appreciated assets like stocks, real estate, or business interests—into the trust. The CRUT then pays out a variable income stream each year to you or your named beneficiaries. This income is calculated as a fixed percentage of the trust's value, which is revalued annually. Because the trust's asset value can fluctuate from year to year, the income distributed to the beneficiaries will also vary.

CRUTs offer several significant tax advantages. By contributing appreciated assets to a CRUT, you can defer capital gains taxes that would otherwise be due if you sold those assets outright. You may also be eligible for an immediate income tax deduction for a portion of the gift to the charity. A key feature of a CRUT is its flexibility: unlike some other charitable trusts, you can make additional contributions to the trust even after it has been established. Federal regulations require that the annual payout rate to beneficiaries be at least 5% of the trust's value and that at least 10% of the original assets are projected to go to the charity at the end of the trust term.

Here are some examples of how a Charitable Remainder Unitrust might be used:

• Example 1: Retirement Planning with Appreciated Stock

  Sarah, a retired executive, owns a significant amount of stock in a tech company that she purchased decades ago for a very low price. The stock has appreciated substantially, and she wants to sell it to diversify her portfolio and generate retirement income, but she's concerned about the large capital gains tax she'd incur. She also wants to support her alma mater. Sarah establishes a CRUT, transferring her appreciated stock into it. The CRUT sells the stock tax-free, reinvests the proceeds, and then pays Sarah a percentage of the trust's value each year for the rest of her life. This provides her with a variable income stream, defers capital gains taxes, and ensures a future gift to her university.

  This illustrates how a CRUT allows a donor to convert a highly appreciated, illiquid asset into an income stream without immediately paying capital gains taxes, while also fulfilling a charitable intent.

• Example 2: Providing for a Loved One and a Community Cause

  Mark and Lisa want to ensure their elderly aunt, who has limited income, receives financial support for the remainder of her life. They also have a strong desire to contribute to their local animal shelter. They decide to create a CRUT, funding it with a rental property they own. The trust sells the property (avoiding immediate capital gains for Mark and Lisa) and invests the proceeds. The CRUT then pays their aunt a percentage of its value annually. After their aunt passes away, the remaining funds in the trust will be distributed to the animal shelter.

  This demonstrates how a CRUT can be used to provide income to a chosen beneficiary (not necessarily the donor) for their lifetime, while simultaneously establishing a significant future gift to a charity.

• Example 3: Business Sale and Ongoing Philanthropy

  David, a successful entrepreneur, is selling his manufacturing business, which includes a valuable piece of real estate that has significantly increased in value. He anticipates a large capital gains tax bill from the sale. David wants to reduce his tax burden and also establish an ongoing philanthropic fund for his favorite environmental conservation organization. He contributes the real estate into a CRUT before the business sale. The CRUT then sells the real estate as part of the business transaction, avoiding immediate capital gains taxes for David. The trust provides David with a variable income stream for 20 years, and he can make additional contributions to the CRUT from other assets if he chooses. After 20 years, the remaining trust assets will go to the conservation organization.

  This highlights the CRUT's utility in managing capital gains from the sale of a significant asset, providing a flexible income stream for a set period, and allowing for additional contributions to grow the charitable gift over time.