The crux of CRUTs: charitable remainder unitrusts provide donors giving opportunity, income.

• Author: Malekhedayat, Julie
• Position: Estateplanning

Estate planners have several tools and techniques to help clients meet their tax and non-tax planning needs, including the charitable remainder unitrust, or CRUT.

This tool combines a client's charitable intentions with the opportunity to spread the receipt and taxation of income over several years. The CRUT is often a good choice for those who desire to maintain a stream of income during their lifetimes, but also would like to leave a part of their estate to charity.

Split-Interest Trust

The IRS classifies CRUTs as "split-interest" trusts, meaning that one interest in the trust is designated for a non-charitable beneficiary while a separate interest in the trust is given to a qualified charity.

The operation of a split-interest trust typically involves one beneficiary-type (either charitable or non-charitable) receiving payments over a period of time, and then the other beneficiary-type receiving the remaining trust assets.

Several variations of split-interest trusts are available. While charitable lead trusts (CLTs) first make a stream of payments to one or more charitable beneficiaries, then leave remaining trust assets to non-charitable beneficiaries, charitable remainder trusts (CRTs) do the opposite. CRTs make payments first to the non-charitable beneficiaries, and then the remaining assets are transferred to the charitable beneficiaries.

While a CRUT is a special type of CRT, a net income make-up CRUT, or NIMCRUT, is further specialized to allow for maximum income deferral opportunities.

For this reason the NIMCRUT is perhaps the most popular type of charitable remainder trust, since it allows for the deferral of income to later years, much like a deferred-income retirement plan, and still allows the trustee to maximize the payout amount.

Tax-Exempt Entity

All CRTs are tax-exempt for income tax purposes. Thus, income earned by the trust, including gain on the sale of appreciated assets, is nontaxable to the trust. But just how do the original assets get into the trust, and what are the income, gift and estate tax consequences of putting the assets in the trust? This is where the magic of the CRT comes into play.

Because a CRT is structured as a separate entity for all tax purposes, any transfer of assets to the trust is considered to have at least one gift component.

First, the present value of the stream of payments made over the term of the trust will be a gift subject to normal gift tax rules if the beneficiary is other than the donor or the donor's spouse.

Second, the value of the remaining assets, which are transferred to one or more qualifying charities at the end of the...