Charitable Remainder Unitrust: Types, Benefits, Legal Risks

A Charitable Remainder Unitrust (CRUT) involves investing cash or assets into a trust and receiving annual income payouts for a specific duration. The income is based on a percentage of the value of the trust, instead of being a fixed amount of money. When the trust ends, the rest of the money is donated to a charity you’ve selected.

You can have multiple beneficiaries in a CRUT. The amount of beneficiary income changes annually, depending on how well the trust is doing. When its value increases, the beneficiaries will receive larger payouts.

Read the rest of this article to learn more about CRUTs and how they work, as well as what to consider before creating one.

Why Should You Create a Charitable Remainder Unitrust?

A CRUT has various benefits. Not only does it ensure you can make large donations to charities you feel strongly about, but it can help you build your wealth by providing you with security in the form of income for life, or over a certain amount of time. You can also make use of certain tax benefits, such as income tax deductions.

What Types of CRUTS Are There?

There are various types of CRUTS. Here’s a rundown of some of them.

• Standard unitrust. The trust is valued every year, and you’ll be paid a fixed percentage of what it’s worth.
• Net income unitrust. The payments in this unitrust are restricted to what the trust is earning. If the trust earns above the payout rate, you’ll receive the payout rate.
• Net income with makeup. In this unitrust, if the trust has earned less than the payout rate, the shortfall is monitored and can be paid back if the trust earns more in the future.
• Flip unitrust. This trust is common if you’re investing assets, such as property. It will operate as a regular net income CRUT until the asset is sold, after which it will become a standard CRUT. Beneficiaries are paid according to a fixed percentage of the value of the trust.

What is the Difference Between CRUTs and CRATS (Charitable Remainder Annuity Trusts)

CRUTS are one type of charitable remainder trusts. The other type is a Charitable Remainder Annuity Trust (CRAT).

What is a CRAT?

A CRAT involves transferring assets into an irrevocable trust, so it can’t be changed and you can’t make more contributions into it. How it works is that the donor will receive a fixed payment annually, so it’s ideal for having a predictable income throughout one’s life or for a determined amount of years.

What is a CRUT?

A CRUT is similar to a CRAT, but the donor will get a variable payout that depends on the trust’s fixed percentage. Since the value of the trust gets reviewed annually, the income will fluctuate depending on how the trust performs.

How Do Charitable Remainder Unitrusts Work?

A CRUT works in the following ways:

• The donor transfers money or other assets into the trust.
• The trust pays out income to a minimum of one living beneficiary.
• For approximately 20 years or the life of one or more beneficiaries, these payouts continue.
• After the payment term is completed, the rest of the trust will be donated to one or more charitable organizations that the donor has selected.

What Assets Can Be Used to Fund a CRUT?

You can fund a CRUT with cash, real estate, and securities that are publicly traded. You can also fund it with private business interests, such as shares.

What are Potential Drawbacks of a CRUT?

There are some disadvantages to consider about CRUTs, such as that they’re:

• Irrevocable. When you create a CRUT, you can’t access the funds and it’s challenging to try to adjust the terms of the trust once it’s established. You might be able to change your chosen charity, though.
• Complicated. A CRUT can be complicated to manage, such as that it needs to be reassessed yearly. This is why it’s essential to enlist the help of a lawyer so that they can guide you on the best investment and financial options.
• Linked to asset loss. When you donate some of your estate to a charity, these assets are removed from the estate your children or family members would have been able to inherit from you.

What are the Potential Legal Risks of CRUTS?

Before establishing a CRUT, you’ll have to consider the potential legal risks. Here are common ones to bear in mind.

• IRS-compliance. You must ensure you follow all rules that the IRS has determined, which includes filing and reporting duties, or your CRUT can be disqualified, leading to severe penalties and tax consequences. These rules tend to be strict and highly technical.
• Trust document quality. Your trust documents need to be clear and specific so that you don’t cause issues or disputes between parties. A weakly-written or vague document can cause problems with your charitable deductions, while potentially causing IRS disqualification.
• Trustee liability. It’s possible for trustees to experience liability if they don’t invest prudently, miscalculate payments, or don’t follow the trust’s specific terms.

Do You Need a Lawyer when Establishing a CRUT?

You should absolutely hire a lawyer when you want to create a CRUT. This is because these trusts can be highly technical and filled with complex rules. Breaking those rules can land you in financial and legal troubles, which you want to avoid.

A lawyer can help you by:

• Reviewing and drafting all trust documents so that they’re clear, easy to understand, and legally sound.
• Considering the best type of CRUT for your specific situation and financial goals.
• Protecting you against potential problems, such as regarding trustee actions and payouts.
• Helping you remain IRS-compliant and legally sound.
• Avoiding mistakes that can cause financial losses or failure of the trust.

Do you need to find a lawyer for a CRUT?

If you’re interested in starting a CRUT, you should hire an experienced, professional lawyer from ContractsCounsel, an online legal network connecting lawyers vetted on the platform with clients. They will be able to guide you through all the steps of CRUT formation and prioritize your interests while preventing you from making mistakes that can cost you.