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Writer's pictureBilly Amberg

Charitable Works: Charitable Remainder Unitrust Basics


Overview

  • Irrevocable, tax-exempt trust

  • Generates income for beneficiaries

  • Provides charitable donation

  • Reduces taxable income

  • Avoids capital gains taxes

  • Immediate partial income tax deduction

  • Estate planning tool


How it Works

  • Donor transfers assets to trust (cash, artwork, stocks, bonds, etc.)

  • Income distribution to beneficiaries (5-50% of fair market value)

  • Payout schedule (monthly, quarterly, semi-annually, annually)

  • Remainder to charity at specified time

  • Can add more assets to trust

  • Secure 2.0 Act allows one-time qualified charitable distribution (QCD) from IRA to fund CRUT


Types of CRUTs

  • Standard Unitrust: Fixed percentage income distribution

  • Net Income Unitrust: Lower of fixed percentage or net income

  • Flip Unitrust: Starts as net income, converts to standard unitrust on specified date



Pros and Cons


Pros

  • No capital gains taxes on asset sales

  • Federal and state income tax deductions

  • Immediate partial income tax deduction

  • Income stream for beneficiaries

  • Charitable donation


Cons

  • Required payments to beneficiaries

  • High-value assets needed

  • Irrevocable

  • Complexities


Benefits and Considerations

  • Generates income and charitable donation

  • Assets for funding: real estate, stocks, bonds, cash, publicly traded securities

  • Donation amount depends on income payout percentage

  • Consult tax professional before establishing CRUT

  • Understand Secure 2.0 provisions for QCD funding


CRUT vs. CRAT


Charitable Remainder Unitrust (CRUT) and Charitable Remainder Annuity Trust (CRAT) are similar in that they both are irrevocable trusts that provide income to beneficiaries for a specified period and then transfer the remaining assets to charity. However, they differ in how the income is distributed:


CRUT (Charitable Remainder Unitrust)

  • Income: Pays out a fixed percentage of the trust's fair market value each year. This percentage is determined when the trust is created and remains constant.

  • Flexibility: Allows for additional contributions to the trust after it is established.

  • Income fluctuation: The annual payout can fluctuate based on the trust's asset performance.


CRAT (Charitable Remainder Annuity Trust)

  • Income: Pays out a fixed dollar amount each year. This amount is determined when the trust is created and remains constant throughout the trust's term.

  • Flexibility: Does not allow for additional contributions to the trust after it is established.

  • Income stability: The annual payout remains the same regardless of the trust's asset performance.


In summary:

  • A CRUT offers a potentially higher income stream if the trust assets appreciate, but the income is less predictable.

  • A CRAT provides a more stable income stream but does not allow for additional contributions.


The best choice between a CRUT and a CRAT depends on your specific financial goals and risk tolerance.



Disclosures



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