What's a CRUT? Your guide to charitable remainder unitrusts

When you consider supporting an organization you love—whether your alma mater, your church or a beloved charity—you can use a charitable trust to donate an asset without sacrificing your family's income needs. One trust option that can enable your generosity while generating income and tax benefits is a charitable remainder unitrust, or CRUT.

A charitable remainder unitrust, like other charitable trusts, is an estate management tool that allows you to transfer assets to a charitable organization with some tax efficiency. The distinguishing characteristic of a CRUT is that it makes payments to a named beneficiary for a period of time before the assets eventually pass to the charity. 

Charitable lead trusts, on the other hand, make recurring payments to the charitable beneficiary and then return the assets to you or a non-charitable beneficiary, whom you designate when the trust terminates.

You can establish a CRUT by working with appropriate professionals to file the required paperwork and funding the trust with cash, securities or other valuable property. In addition to the initial gift, further contributions also are permitted during the life of the trust.

In general, payouts must be at least 5% of the trust's value each year and cannot exceed 50%. There are also a few other ways to modify this standard payout method. For instance, net income unitrusts (NI-CRUTs) make payments only from actual income earned by the trust. If the trust does not earn income in a given year, then no payment is made. When the trust income exceeds the predetermined percentage established according to the standard payout method, the trustee can pay the lesser amount, and additional income goes to the trust's assets. This feature means the trust may grow over time, and the payments may increase.

It is also possible to add a makeup provision that would allow the trustee to make missed payments in future years when there is sufficient income. Through a flip unitrust, payments start under a net income method but then "flip" to the straight percentage established under the standard payout method when a triggering event or date is reached.

The method for calculating payouts is what distinguishes a CRUT from the closely related charitable remainder annuity trust (CRAT):

• A CRAT makes payments in a fixed dollar amount that is established when the trust is formed. No further contributions are allowed after formation.
• A CRUT makes payments that vary. Payments are recalculated each year as a fixed percentage of the current value of the trust assets.

The named beneficiary of a CRUT receives payments while the trust is in force. This is often you or a family member. The trust term can be a defined period of up to 20 years or the donor's life. When the trust term expires, either by reaching the end of the defined period or via the donor's death, any assets that remain in the trust pass to the charitable beneficiary. For example, if you own a highly appreciated stock in a taxable account, you can use the dividend income to help fund your retirement or support a loved one. Once you pass or the trust expires, the remaining amount in the CRUT passes to your designated charity or organization.

You can benefit your preferred charity by creating a charitable remainder unitrust with one of several types of assets:

• Cash and publicly traded securities. The deduction is determined by their actual market value since a price is readily available.
• Real estate. You will need an appraisal to determine the deduction amount.
• Closely held or private stock. This does not include S-corp stock.
• Collectibles. This might be assets such as artwork.

One family's story highlights how a CRUT might work: A couple in their mid-50s owned a sand and gravel business, but they wished to retire and become missionaries. To fund that plan, they needed to sell their business and its assets. The equipment was fully depreciated, and selling would have created a significant tax burden. Instead, they established a CRUT and funded it with a donation of equipment. The trust sold the assets and invested the proceeds. Income from the investments will support the couple in retirement, and when they pass the remaining value will transfer to their chosen charity.

By placing assets in a CRUT, donors can support a charity or organization while also receiving financial benefits themselves.

As the donor, you are able to deduct your gift in the year you make it, even though it won't transfer to the charitable beneficiary until the trust term ends. This deductible amount is equal to the present value of the expected amount that will eventually pass to charity. The deduction is limited by the type of asset you donate: Cash contributions are deductible up to 60% of your adjusted gross income, while long-term appreciated assets such as stocks and real estate are deductible up to 30% of your adjusted gross income. If your donation exceeds the allowable deductible limit, the excess carries over for up to five additional years. A lifetime limit of $50,000 applies.

CRUTs allow you to donate an asset, receive a deduction and remove the asset from your estate while still retaining the benefit of the income it provides. This is often the most significant reason to choose a charitable remainder unitrust over other types of trusts.

If you sell appreciated assets and donate the proceeds to charity, you'll have to pay taxes on the gain you realize from the sale. Placing them in a charitable remainder unitrust allows you to avoid realizing the capital gain, potentially lowering your tax bill and increasing the amount of your gift. The trust will not be subject to capital gains tax when the asset is sold.

A CRUT is a great tool for the right application, but there are some potential downsides that you need to be aware of.

Donations are irrevocable and generally cannot be undone. Once you place the assets in the trust you no longer own them, and your control over them is lost. This applies to provisions of the trust as well. Once they are set, they are very rarely amended.

Payouts to the lead beneficiary reduce the potential value of the remainder that is left to the charitable beneficiary and may be taxable to the beneficiary. While this arrangement may be the best way to balance your goals, it does present a tradeoff that you should carefully consider.

Trusts can be quite complex. Establishing and administering the trust may be difficult and accompanied by costs that you wouldn't otherwise have. Working with an organization like Thrivent Charitable can make the account easier to establish and administer.

As you plan for ways to secure your family's financial future, you also can make space to support the causes that mean the most to you. In that regard, CRUTs are one of many tools for effective charitable giving. Connect with a local financial advisor to explore the different ways to make a charitable impact with your savings and the methods for doing so.