Cummings & Lockwood Estate Planning FAQs

Depending on who serves as trustee and handles the investment of the trust’s assets, the CRUT may have to pay trustee fees and/or investment management fees.  The trustee must file an information return for the trust each year, and must prepare a Schedule K-1 informing the beneficiary how to report the unitrust payments for income tax purposes.  Usually there is no court supervision or associated costs  involved during the beneficiary’s life.  Some states (for example, New York) require a court accounting to be filed after the interests of the non-charitable beneficiaries expire.  There also are costs involved in establishing the trust, such as fees to prepare the trust agreement and gift tax return.

Generally, funding a CRUT during life with low basis assets that if sold would produce a long-term capital gain will produce the greatest benefit for the donor.  If the CRUT will benefit a private foundation, it is generally preferable to fund the CRUT with qualified appreciated stock (unrestricted publicly traded securities that if sold would produce a long-term capital gain).

When funding a CRUT at death, it may be advantageous to use assets that are subject to income tax, such as a retirement account.

You should avoid funding a CRUT with mortgaged property, property in which you will continue to own an interest (property that you would own with the CRUT as tenants in common), interests in partnerships that hold debt-financed property or that operate an active trade or business, S corporation stock, assets that are subject to a binding sales contract or any agreement or understanding under which the trustees of the CRUT would be obligated to sell the property to a third party, and during your life, retirement accounts and other assets that would cause you to recognize ordinary income if you transferred them to the trust.  Illiquid assets, life insurance policies, options, and tangible personal property also may present issues.

It is advisable to work with your attorney and your accountant to confirm that your plans for funding a CRUT will produce the desired results both with respect to the income tax consequences of your gift and with respect to the administration of and tax consequences to the CRUT.

Administration of a Charitable Remainder Unitrust (the “CRUT” or “trust”) involves investing the trust’s assets, revaluing them annually, making timely unitrust payments to the beneficiaries, preparing and filing returns in a timely manner, providing the beneficiaries with tax information regarding their unitrust payments, and accounting for the trust’s administration.

Funding a CRUT with appreciated property generally produces the greatest income tax benefit for the donor.  A donor does not recognize capital gain, for regular income tax, AMT or net investment income tax purposes, when he or she funds a CRUT with long-term capital gain property (appreciated property that, if sold by the donor, would have produced a long-term capital gain).  Since the CRUT is a tax-exempt trust, the trustee can sell the appreciated property without incurring any tax liability and re-invest the entire proceeds.  The beneficiary of the CRUT will be taxed on the capital gain from the trust’s sale only when and to the extent that such gain is received by the beneficiary as part of a unitrust payment.  This deferral, and possibly avoidance, of tax on the capital gain makes it advantageous for income tax purposes to fund a CRUT with highly appreciated long-term capital gain property during life.