Cummings & Lockwood Estate Planning FAQs

The Charitable Remainder Unitrust (“CRUT”) can be an effective means for diversifying highly appreciated assets while avoiding or postponing capital gains tax, increasing cash flow during your lifetime, obtaining a current income tax deduction and providing for your favorite charities upon your death.  The concept is extremely simple:  you transfer a highly appreciated asset to a trust, retaining the right to receive payments from the trust for your life.  On your death, the charities you wish to benefit receive the assets remaining in the trust.  The trust is included in your taxable estate, but qualifies for the estate tax charitable deduction.

The tax advantages of the CRUT come primarily from its tax-exempt status, which allows the trust to sell appreciated assets without paying any capital gains tax, and from the income tax deduction generated when you fund the trust.

Your income tax deduction for funding a CRUT is limited to the present value of the charity’s right to receive the assets remaining in the trust at your death.  If you fund the CRUT with assets that, if sold by you, would generate a long-term capital gain, your income tax deduction generally will be calculated using the fair market value of the appreciated assets.  Nevertheless, you will not be required to recognize any gain when you fund the trust, either for regular income tax or for AMT purposes.  If your CRUT will benefit a private foundation, then your deduction will be calculated using your basis in the assets contributed to the CRUT unless you fund the CRUT with “qualified appreciated stock” (basically, unrestricted publicly traded securities).  There are “percentage limitation” rules that limit how much of your adjusted gross income can be sheltered from income tax in any year with a charitable deduction.  Excess deductions can be carried forward for up to five years.  It is important to work with your accountant to confirm the actual tax benefits that can be achieved by funding a CRUT with a particular asset.

The value of the charitable remainder interest in the CRUT must be at least 10% of the value of the assets contributed to the trust.  The value of the charitable interest is a function of (i) the length of time that payments will be made to you; (ii) the percentage of the trust assets that will be distributed to you each year, and the frequency with which payments will be made during the year (monthly, quarterly, semi-annually, or annually); (iii) the fair market value of the property being contributed to the trust at the time of the contribution; and (iv) the current IRS actuarial tables and interest rates used to calculate future values.

The CRUT trust document may allow for the following:

• The trust would make distributions to you for life, and upon your death, the remaining trust property would be transferred to one or more U.S. charities.
• During the term of the CRUT, you would receive a set percentage (at least 5%, but not more than 50%) of the fair market value of the trust’s assets, as redetermined each year (the “unitrust amount”).  The unitrust amount must be paid in accordance with the terms of the trust, that is, in monthly, quarterly or semi-annual installments, or annually.  The CRUT may not make any other distributions to you.
• When you receive the unitrust amount, it will be taxable to you under the Four Tier system applicable to CRUTs, which treats the unitrust amount as paid first from the trust’s ordinary taxable income (from the current year and any undistributed ordinary taxable income from prior years), next from the trust’s net capital gains (current and prior years), and then from the trust’s tax-exempt income.  If the amount distributed to you exceeds all the trust’s current and previously undistributed income and gains, the excess will be a tax-free return of principal.
• You can be the sole Trustee of your CRUT.  If your CRUT holds assets that are difficult to value (restricted stock, closely-held stock, real estate, partnership interests), you must either appoint an Independent co-Trustee to value those assets each year or obtain a qualified appraisal of the hard-to-value assets each year.

A CRUT can last for the lifetime of a beneficiary or the lifetimes of multiple beneficiaries, or for a term of years (not to exceed 20), as long as the value of the charitable remainder interest in the CRUT is at least 10% of the value of the assets transferred to the trust.

If you and/or your spouse are the beneficiaries of the CRUT, the objective is to diversify highly appreciated assets in a tax-efficient manner and to secure an income tax deduction for funding the trust.  Your retained interest in the trust is not a taxable gift.  If your spouse has an interest in the trust, then gift and estate tax deductions will be allowed for your spouse’s interest as long as your spouse, or you and your spouse, are the only non-charitable beneficiaries and your spouse is a U.S. citizen.  Gift and estate tax deductions also will be allowed for the charitable remainder interest in the trust.

If someone other than you or your spouse is the beneficiary of the CRUT, the objective will be to benefit that individual with a stream of payments over the individual’s life.  The charitable remainder interest in the trust will reduce your taxable gift to the beneficiary of the CRUT, but you will use a portion of your gift tax exemption and/or will pay gift tax on that gift.  When you use a CRUT to make a taxable gift, it is important to structure the trust in a manner that will avoid having it included in your taxable estate should you predecease the beneficiary.

Any individual can be a lifetime beneficiary of a CRUT, as long as the value of the charitable remainder interest in the CRUT is at least 10% of the value of the assets transferred to the trust.

Any individual, class of individuals (whether or not then living) or any entity (trust, corporation) can be the beneficiary of a CRUT for a term of up to 20 years.

CRUTs that are funded during the donor’s life generally benefit the donor and/or the donor’s spouse.

CRUTs that are funded upon the donor’s death often benefit the donor’s spouse or children.

If there are multiple beneficiaries, their interests in the CRUT may be successive interests or joint interests.

If a CRUT benefits both the spouse and other family members, the spouse’s interest will not qualify for the marital deduction for gift or estate tax purposes.  In such cases, it may be preferable to create a marital trust for the spouse, followed by a CRUT for the children, securing a marital deduction for funding the marital trust, and delaying and reducing the transfer tax to be paid at the spouse’s death for the children’s interest in the CRUT.