Understanding Charitable Remainder Unitrusts

Gabriel Katzner - June 21, 2024 - Estate Planning
Understanding Charitable Remainder Unitrusts

A charitable unitrust is an estate planning tool that allows the grantor to split the assets in the trust between named beneficiaries and a charitable cause while minimizing capital gains taxes.

Also called a charitable remainder unitrust (CRUT), a charitable unitrust can provide for a non-charitable beneficiary throughout their lifetime and then donate the remainder of the trust to a charity. The initial beneficiaries are typically the grantor or their family members.

This type of trust provides many benefits, but it is irrevocable. The trust documents cannot be changed once the trust is established.

How could you use a charitable unitrust?

Suppose you have $500,000 to put into a trust. You want the trust to provide income, but eventually, you want to donate some of this money to a favorite charity. You could establish a charitable unitrust for this purpose.

You would:

  • Fund the trust with your $500,000.
  • Have the trust pay you a percentage of the principal’s value each year as income.
  • When you pass away, the remainder of the principal would then be sent to your favorite charity.

What are the benefits of a charitable unitrust?

Charitable unitrusts have several benefits, including:

  • Help you plan major charitable donations.
  • Provide income for your beneficiary throughout their lifetime.
  • Allow you to defer income taxes on the sale of assets transferred into your trust.
  • May allow you to partially deduct the value of the charitable interest in the trust.

How does a charitable unitrust work?

Establishing a charitable unitrust is similar to establishing other irrevocable trusts. The steps include:

  • Fund your trust by transferring property, cash, stock, securities, real estate, or other assets into it.
  • Name at least one living beneficiary. The payments to the beneficiary will continue for a specified time of up to 20 years or the lifetime of one or more beneficiaries.
  • Name a qualified U.S. charitable organization to receive the remainder of the trust at the end of the payment term.
  • Plan that the remainder donated to charity must equal at least 10% of the initial net fair market value of all assets placed in the trust.
  • Understand that since the trust is irrevocable, all assets placed in the trust must remain there.

What are the differences between the two types of charitable remainder trusts?

The differences between the two types of charitable remainder trusts relate to how they pay beneficiaries. Both types of trusts can be established while the donor is alive (inter vivos) or upon death (testamentary).

Charitable remainder annuity trusts

A charitable remainder annuity trust pays a specific amount to the beneficiaries each year. This amount must be at least 5% of the property’s value when the trust was established, and it cannot be more than 50% of the value.

Charitable remainder unitrusts

A charitable remainder unitrust pays the beneficiaries a percentage of the trust’s value each year. This percentage must be at least 5% of the fair market value of the assets and cannot exceed 50% of their value.

Capital gains and unitrusts

A charitable remainder unitrust provides several capital gains benefits. Grantors may transfer appreciated stock or other assets into the trust to defer capital gains taxes on assets that are donated to the trust. The trust does not have to pay capital gains tax when it sells an appreciated asset.

If you place an appreciated asset, such as a stock, into your charitable remainder unitrust instead of paying a capital gains tax, the full sales proceeds remain in the trust to provide income. You could receive a 5% income stream and qualify for a tax deduction. This tax deduction is based on the present interest value that will pass to the charity in the future.

Considerations when using a charitable unitrust

The Internal Revenue Service lists several cautions and illegal uses for charitable unitrusts. You cannot:

  • Pay for personal expenses with trust funds
  • Borrow money from the trust.
  • Change the payments from the trust from ordinary income to capital gains.
  • Use loans, forward sales of an asset, or other financial schemes to hide income or capital gains in the trust.
  • Omit or fail to account for the sale of any assets in the trust.
  • Give non-charitable beneficiaries payments beyond the prescribed annual income payments.

If you want to establish a charitable unitrust to provide income throughout your lifetime, make a sizeable pre-planned gift to a favorite charity, and reap capital gains tax benefits, schedule a call with us at 855.631.3457 to learn more about how to protect those most important to you.

 

 

 

Gabriel Katzner

In 2002, Gabriel Katzner, the founding partner of Katzner Law Group received his Juris Doctorate with honors from the Fordham University School of Law. After spending the first 7 years of his legal career
practicing at Cahill Gordon & Reindel LLP, an international law firm based in New York, he went on to found his own firm.

Gabriel Katzner has a track record, along with a vast number of
outstanding public reviews across platforms, of working hard on behalf of individuals who need assistance with comprehensive
estate planning services. Finding a lawyer who is knowledgeable about revocable and irrevocable trust planning, guardianship for minor children, asset protection, trust administration and probate,
as well as Medi-Cal / Medicaid planning is extremely important.

Years of experience: More than 17 years
Location: San Diego, CA



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This page has been written, edited, and reviewed by a team of legal writers following our comprehensive editorial guidelines. Furthermore, it has received approval from attorney Gabriel Katzner, an experienced estate planning lawyer with over 17 years of legal expertise.

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