Few vehicles for charitable giving are more effective and advantageous for donors than charitable remainder trusts. However, the fact remains that CRTs are not a one-size-fits-all solution. This is why there are several different types of charitable trusts you can establish, each with an array of benefits including CRUTs.
What is a charitable remainder unitrust and how can you let it do the heavy lifting for your future? Here is a quick breakdown of what you can expect from the structure of a CRUT.
What is a CRUT?
For anyone thinking about their financial future and legacy, a charitable remainder trust is one excellent way to make your mark. One of the benefits of CRTs is that they come in a wide variety of shapes and sizes, including charitable remainder unitrusts.
No matter what form you decide to go with, there are a few tenets that remain the same. With one of these trusts, you can contribute cash or assets like real estate that are then removed from your taxable estate. You or your beneficiaries can receive distributions for a set term or for life, or both, with the remaining funds allocated to a qualified charity or charities of your choice.
However, there are differences in how you can contribute and how distributions are taken.
The main types of CRTs are charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs).
CRATs tend to be less flexible than CRUTs, requiring donors to make their full contribution upon establishing the trust. Once the ink dries on the paperwork, you can no longer make additional contributions. The beneficiary of the trust also takes a fixed annuity amount each year which does not change.
The CRUT definition is the opposite of CRATs in many ways. You can contribute to the trust for as long as you live, allowing you to maximize the tax advantages and continue to set money aside as part of your legacy for years to come. The distributions also tend to vary based on the net value of the trust and the terms set out in the initial agreement.
Types of CRUTs
While there are differences between charitable remainder annuity trusts and unitrusts, there are also differences in CRUTs in general. There are three major types of CRUTs that you may consider in your wealth planning: standard, NIMCRUT, and flip.
Here is a quick breakdown of each so that you can start laying the groundwork for your financial future:
Standard CRUT
A standard CRUT is the most straightforward option of the three. The payouts from this type of CRUT are fixed at the outset of the trust. The percentage remains the same, even as the value of the payment varies from year to year depending on the overall contents of the trust as it depletes or grows.
NIMCRUT
The Net Income with Make-up Charitable Remainder Unitrust (NIMCRUT) functions in a very similar manner. The major difference that sets it apart is that you will receive the income from the year, up to the distribution limit. If the trust lacks the income to pay the fixed percent, then you get whatever the trust does have.
On the other hand, you might also have money in the trust that you do not receive in a particular year. Instead of withdrawing it, the money remaining will be available to you in the future. This is how the “net income” part of the NIMCRUT functions.
Flip CRUT
If you are unsure whether you would like to set up a standard or a NIMCRUT, then you may choose the flip CRUT which combines the best of both worlds. At the beginning of the trust, it functions in the same way as a NIMCRUT, paying out what it can and reserving funds for future payouts if it qualifies.
However, it will eventually “flip” to a standard CRUT when qualifying conditions are set. This could mean that the trust hits a target date or sells a particular asset contained within it. From there on out, you and your beneficiaries would get set percentages of the assets in a very straightforward standard CRUT arrangement.
When to Use a CRUT
A CRUT is a key component of estate planning for anyone who has wealth that they would like to share with their beneficiaries, but also protect from taxation. It provides a long-term income source to the allocated person (or to yourself) with an array of tax benefits. You may be able to deduct contributions on your taxes at the end of the year and skirt capital gains taxes on assets contributed to the trust.
That being said, there are greater reasons to contribute to a charitable remainder unitrust than your financial gain in the here and now. While it does provide a passive income stream for you or a loved one, it also allocates a certain percentage of the CRUT to charity at the conclusion of the trust.
This allows you to make a major impact on a charity that is meaningful to you and is doing great work in the world around you. For philanthropic purposes, a CRUT is the ideal vehicle for many who want to give generously and still take advantage of the other benefits in the present moment.
Looking at it from a holistic perspective, essentially you are shifting dollars away from taxes where they are misallocated and mismanaged and wasted, to your family and local community charities where you can see with your own eyes how the money is spent.
Establish a CRUT with Magellan
If your portfolio could benefit from a charitable remainder unitrust, the next step is to see the experienced professionals at Magellan. We provide comprehensive estate, financial, legal, and tax planning so that you can make the most of your wealth. We act as a one-stop shop, giving you all of the services that you need under one roof.
Reach out to us today to learn more about how CRUTs work and whether you could benefit from this type of trust!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.