In the case of a charitable remainder unitrust (CRUT) for the life of one beneficiary, a transfer is made of cash and/or property to a trust. The donor reserves (either for himself or for some other non-charitable beneficiary) an interest in the property for life. The trust must provide that the remainder interest in the property will pass at the death of the specified life to a qualified charity.
The major distinction between a charitable remainder unitrust and a charitable remainder annuity trust is that the donor reserves a varying annuity in the case of a unitrust. In other words, the income received by the non-charitable beneficiary of a unitrust can and typically will vary from year to year. As is the case for a gift to an annuity trust, a gift to a unitrust will result in income and gift tax charitable deductions, or an estate tax charitable deduction. Gifts to a unitrust must meet highly complex and stringently enforced rules. The unitrust pays a variable amount to the income beneficiary based on annual fluctuations in the value of trust assets. This unitrust for life will qualify as such only if it meets the following requirements:
- A fixed percentage (not less than 5%) of the net fair market value of the assets must be paid for the life of an individual living at the time the unitrust is created.
- The fixed percentage amount must be paid at least annually (which means the unitrust assets must be revalued each year).
- The payment must last for the life of the individual.
- No amount can be paid to anyone other than a qualified charity at the termination of the retained interest.
- At termination, whatever assets are in the trust must be transferred to (or for the use of) the qualified charity or retained by the unitrust for the charity’s use.
In the case of a charitable remainder unitrust gift, an immediate income tax deduction for the value of the remainder interest is allowed. When the donor has retained a varying annuity, there is a deduction for the present value of the remainder interest that ultimately will pass to the charity.
The present value of the remained interest is based on tables in the income tax regulations specifically designed to value a remainder interest in a charitable remainder unitrust. The donor receives an immediate income tax deduction but can continue to enjoy income from the property transferred to the trust.
A Charitable Remainder Unitrust (CRUT) is used to provide an income to a non-charitable beneficiary while at the same time transferring the remainder interest to a qualified charity.
The donor would irrevocably transfer securities or property to a trustee. In return, the trustee would pay the donor (or other income beneficiary) income from the property for life. The donor could also provide that if he or she predeceased a spouse, the spouse in turn would receive income from the donated property for life. The donor would receive payments based on a fixed percentage of the fair market value of the assets placed in trust. The assets would be revalued each year.
Unlike the Charitable Remainder Annuity Trust (CRAT), however, the CRUT may continue to receive assets in later years. The Charitable Remainder Unitrust (CRUT) also differs from a CRAT since the stream paid out by the CRUT trust must be at least 5% of the annual reappraised value of the corpus.
Thus, while the CRAT pays a fixed sum of income that never varies in amount, the Charitable Remainder Unitrust (CRUT) may distribute greater or lesser amounts of income, depending on the reappraised value of the corpus and accumulated income.
If the value of the corpus and income continues to appreciate, the amount of the payment to the non-charitable beneficiary may increase with each succeeding year. This makes the CRUT an effective means of fighting inflation. If, however, the value of the assets continues to depreciate over a period of years, the CRUT may actually pay less income to the non-charitable beneficiary than was originally intended.
If a grantor wishes to ensure an annual increase in the value of the income payment to the non-charitable beneficiary, the grantor should fund the corpus of such a trust with assets that pay a guaranteed rate of return, such as U.S. Treasury notes that pay interest tied to a specific rate of return.