The purpose of estate tax planning is to maximize the assets you pass on to future generations by minimizing gift and estate taxes. Estate-tax strategies revolve around the use of irrevocable trusts. This article discusses the most common types of irrevocable trusts that are used to minimize gift and estate […]
There is a tax-mitigation solution available no matter your timing. A Charitable Remainder Unitrust (CRUT) will likely provide the most extensive returns if you have yet to sell assets and have a significant gain coming. On the other hand, if you have sold your assets or received a large amount of ordinary income, consider a Charitable Lead Annuity Trust (CLAT).
How can you choose, and what’s the difference between CRUTs and CLATs? Before we talk about the different use cases for CRUTs and CLATs, here is a quick recap of both structures:
If you decide to set up a CRUT, this is how it will work:
If you instead go for a CLAT, this is how it’d work:
The biggest question for most customers is when they should use whether a CRUT or a CLAT. The answer, in most cases, depends on one main factor: Is your big win still in the future, or is it in the past?
CRUTs: A good fit for highly appreciated assets you have yet to sell.
Simply put, if you have a significant unrealized capital gain and haven’t sold your assets yet, you can place those assets into a CRUT to defer and reduce your taxes. Therefore, a CRUT is a tax-exempt account, much like an IRA. It allows you to delay the taxes you owe on your capital gains — an incredible tool to turbocharge your returns. Otherwise, you’re the one receiving the gains, and you’re the one who will be taxed.
CLATs: Well suited for ordinary income and already realized gain.
Suppose it’s too late for a CRUT. For example, say you made a lot this year when you sold some crypto. Or you exercised some highly appreciated options and received RSUs. Or you are just paying a high tax rate on your labor income. Then, you can fund a CLAT, potentially eliminating a large chunk of your tax bill by taking a significant charitable deduction.
Let’s start with startup equity. If you hold company stock — whether you received common shares or already exercised your options — you can move them into a CRUT before selling them. In the case of an IPO, SPAC, or direct listing, that’s simple: You can work with us to finalize your trust beforehand (free of cost) and transfer your assets whenever you’re ready. If there’s a chance your company is going to be acquired in a private transaction, though, time is of the essence: If you sell your shares as part of that deal before moving them into a trust, it is too late to use a CRUT (but you could use a CLAT).
Instead, if you’re holding crypto that’s gone to the moon and haven’t sold yet, you can move those assets into a CRUT, make the sale, and pay no upfront taxes. That will leave you with more capital to reinvest in the market.
And finally, for public company stock or call/put options. This one is a lot like startup equity, but you’re more in control of the timing. Get your Tesla, Amazon, or Google shares — or any other stock that has appreciated since you bought it — into a CRUT. Then you can sell, diversify your portfolio, and defer the (often massive) tax bill you would have otherwise received.
Ordinary income. Ordinary income comes in many forms. A big bonus from your employer is ordinary income. So is the income you receive from selling an NFT you create. Your salary, of course, qualifies too. If you received a windfall this year and didn’t want to deal with the resulting tax bill, you can put your income into a CLAT and write off as much as 100% of those taxes.
The key benefit of a CRUT is that you can defer taxes on the income you earn inside the trust. However, that move doesn’t work for ordinary income because there’s no way to realize the gain inside the trust — if you get paid for your work, that income comes to you, and a CRUT cannot reduce your taxes on that income.
Assets you’ve already sold. Another form of income that doesn’t qualify for a CRUT is income you’ve already realized. Meaning revenue from the sale of an asset that happened in the past. Common scenarios we’ve seen are
Unexercised options. When you exercise appreciated options, you have to pay ordinary income tax rates on the difference between the strike price you were issued the options at and the current fair market value. Clients use CLATs to write off that ordinary income from their exercise.
We built a platform to give everyone access to the tax and wealth building tools of the ultra-rich like Mark Zuckerberg and Phil Knight. We make it simple and seamless for our customers to take advantage of these hard to access tax advantaged structures so you can build your wealth more efficiently at less than half the cos of competitors. From picking the best strategy to taking care of all the setup and ongoing overhead, we make it easy and have helped create more than $500m in wealth for our customers.
