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 […]
We’ll be explaining Standard Charitable Remainder Unitrusts (or Standard CRUTs) and how they are different from the other types of Charitable Remainder Unitrusts, aka CRUTs, and when they make sense.
The Standard Charitable Remainder is the most basic trust form of CRT available. Like all of the CRUTs we offer, the Standard CRT is tax exempt, which means it does not pay taxes on its gains (with a few exceptions not relevant here); it is irrevocable, so it cannot be modified after creation; it’s designed to last for a defined term or for your lifetime; and it’s a “split interest” trust, so whatever is left in the trust at the end goes to the charity of your choice.
The most important distinction between Standard Charitable Remainder Unitrusts and the other forms is that with the other versions, there is some complexity with how much you receive from the trust every year. Instead, Standard unitrusts are simpler. You receive distributions each year that are a set percentage of the trust’s assets. That percentage is determined at the start of the trust based on its expected length, and it doesn’t change during the trust’s term. So once you put your assets into the trust, you’ll receive those payouts no matter what.
What makes Standard Charitable Remainder Unitrust different from CRUTs is that it requires the trust to pay distributions out to you every year. How much? The calculation is actually fairly simple. Your annual payout percentage is determined by an IRS formula that takes into account:
We use that formula to calculate your payout rate, which will typically be about 11% for 20 year term trusts and between about 5% and 8% for lifetime trusts. What this means is that if you use a Standard CRT, then every year you will receive a payout from the trust equal to that fixed percentage times the value of all of the assets in the trust.
Here’s a simple example: Suppose that you have $500k in start-up equity, crypto, public securities, or another asset. You’ve decided to use a 20 year term structure. What are the associated benefits?
Immediate deduction. First things first: You would receive an immediate charitable tax deduction equal to 10% of the assets’ current value. In this example, that would allow you to reduce your taxable income by $50k this year.
Payouts. Because we’re working with a 20 year term this would make your payout rate approximately 11% annually. At the end of the first year, the Standard Charitable Remainder Unitrust would owe you 11% of $500k, or $55,000. (The payout is typically calculated based on the value of the trust at the end of the year.) Now say that you have a good year, and the value of the assets doubles to $1 million. At the end of the second year, the trust would pay you 11% of $1 million, or $110,000. (If, instead, the asset had plummeted to $100k, you’d be entitled to a payout equal to 11% of $100k, or only $11,000. Every year you would receive that associated distribution.
At the end of the trust’s term, the remainder left will go to the charity you designated.
There are a ton of moving pieces here, but the are a couple of key takeaways.
Returns. The main practical insight is that, with a Standard CRUT, there’s no flexibility in when the trust pays you out. Because it pays out a steady share of the trust’s assets every year, they tend to have slightly lower returns than NIMCRUTs. This makes sense, since forcing annual payouts means your money has less time to grow and compound tax free. (It’s worth noting, though, that the returns are often still positive as compared to a taxable account.)
Consistency. At the same time, some view this additional constraint as a positive thing, because a Standard unitrust will pay out even if your assets don’t grow and increase income (whereas a NIMCRUT will not). For that reason, some use this type of trust when they want consistent distributions to pay for retirement etc.
In short, although everyone’s preferences and circumstances are different, Standard Charitable Remainder Unitrusts can be a good fit for customers who are willing to give up some returns in exchange for relatively predictable, consistent payouts but still want to take advantage of their investment growth unlike a Charitable Remainder Annuity Trust (CRATs).
See our next article on NIMCRUTs to follow our CRUTs series. Evaluate your potential returns with our CRUT Calculator. And if you have any questions, contact us through our chat button below, or schedule a time for a meeting with us.
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