Charitable Remainder Unitrusts
Frequently Asked Questions and Answers
- What is a charitable remainder unitrust (CRUT)?
- What makes this life income program special?
- Is that the only reason the CRUT is special?
- How does it do that?
- Why is the trust called a charitable remainder unitrust?
- Does the Foundation’s staff prepare the CRUT document?
- What does the trust document do or say?
- Who can serve as trustee?
- If the Foundation serves as trustee, does it charge a fee?
- What are the benefits for the donor who establishes and funds a CRUT?
- I have heard there is more than one kind of unitrust. Is that true?
- What is the advantage of using a FLIP-CRUT with real estate?
- Is there a minimum amount I can fund the CRUT with, if the Foundation serves as trustee?
- I know I can do a CRUT during my lifetime. Can I do one through my estate plan?
- Is there a minimum age that the income beneficiary can be?
- Wherein does the security of the CRUT reside?
- Once I have executed and funded a CRUT, can I make additional gifts to the trust?
- If the Foundation is asked to serve as trustee, will there be specific language that the Foundation will require to be in the trust document?
- What reasons have previous donors given for doing a CRUT?
Q: What is a charitable remainder unitrust (CRUT)?
A: It is a special type of trust created by a donor or donors (referred to as a grantor or grantors) that annually pays a specified percentage of the trust assets to a non-charitable income beneficiary or beneficiaries for a term of years certain, not to exceed twenty years, or for the lifetime of the income beneficiary or beneficiaries. Payment is normally quarterly. At the end of trust, the trust’s residual goes to the charity.
Q: What makes this life income program special?
A: The trust is a tax-exempt entity. It has its own tax identification number. When the donor or donors fund the trust, the trust assumes the grantor’s or grantors’ cost basis and holding period. The trustee for the trust can sell the assets and no capital gain tax is paid by the trust. Any realized appreciation or income not needed by the trust to be paid out to the income beneficiary or beneficiaries can stay inside the trust tax-free. Throughout the existence of the CRUT, assuming it is operating properly, the trustee can continue to purchase and sell trust assets and the trust is not taxed. Thus, it becomes an excellent vehicle for the grantor to fund with highly appreciated assets.
Q: Is that the only reason the CRUT is special?
A: No. It is special because it provides the income beneficiary or beneficiaries with an annual payment that helps offset inflation that may occur over time.
A: The trust is revalued at the beginning of each year and then a fixed percentage (must be at least five percent) is paid out to the income beneficiary or beneficiaries in the subsequent year. With proper management over time the CRUT’s beginning year value may increase. Therefore, the trust’s payment to the income beneficiary or beneficiaries may grow over time. This increase in the annual unitrust payment may help to offset inflation.
Q: Why is the trust called a charitable remainder unitrust?
A: Because at the end of the term certain period or the lifetime of the income beneficiary or beneficiaries, the residual or remainder in the unitrust goes to the University of Florida Foundation, Inc. (Foundation) for the purpose you have designated.
Q: Does the Foundation’s staff prepare the CRUT document?
A: No. Your legal counsel prepares the document. The Foundation’s staff will be happy to review the trust document before you execute it and fund it. The staff also has Internal Revenue Service (I.R.S.) prototypes that can be provided to you or to your attorney.
Q: What does the trust document do or say?
A: It says who is establishing and funding the trust, who the trustee is, and who the income beneficiary is. The trust states what the payout percentage will be (cannot be changed after trust’s creation), what frequency (monthly, quarterly, semi-annual, or annually) the income will be paid on (cannot be changed after trust’s creation), explains what powers the trustee or grantor will or will not have, and states how the trust will operate. If the trust document is silent about certain powers or does not give the trustee or the grantor certain powers, the grantor or trustee cannot use those powers. For example, the grantor may reserve the right during his or her lifetime to terminate and appoint a different trustee, with no reason given. However, if the document is silent on this power the trustee cannot be changed.
A: Any competent adult, a bank trust department, the holding company for most major brokerage companies, or a charitable organization (like the Foundation), if it is approved to do so.
Q: If the Foundation serves as trustee, does it charge a fee?
A: Yes, it does. The trustee assumes the responsibility and liability for investing and managing the assets placed in the trust by the grantor and filing tax returns. The trustee can be sued if the trustee fails to perform. The Foundation provides a disclosure regarding the fees it charges.
Q: What are the benefits for the donor who establishes and funds a CRUT?
A: The following are just some of the benefits:
- The donor makes a gift to the Foundation and may designate how that gift will benefit the University of Florida (UF).
- The donor will receive a charitable income tax or an estate tax deduction for part of the value transferred into the CRUT.
- The donor may relieve himself or herself of management and investment responsibilities.
- The income received by the income beneficiary or beneficiaries may be tax-advantaged. The CRUT may pay out ordinary income, short-term and long-term capital gain income, qualified dividends, tax-free income or return of principal (which is tax-free also).
- If you fund your CRUT with appreciated assets, rather than selling those assets outside of the trust, you put all of the value (not less capital gains) to work inside the trust to earn income for your income beneficiary or beneficiaries.
Q: I have heard there is more than one kind of unitrust. Is that true?
A: Yes. There is a standard unitrust that pays out the specified, fixed percentage of payout. There is a net income unitrust that pays out the lesser of net income earned or the fixed percentage specified in the trust. The net income type trust may be written so that shortfalls in payments are not made up in future years (if income exceeds the specified percent of payout). Or, the net income CRUT can have a make-up provision so that in future years if excess income is earned it may be paid out to make up prior shortages in income paid out. Finally, there is what is known as a FLIP-CRUT. The FLIP-CRUT is often used with a trust funded with real estate or closely held stock. This type of trust starts out with a net income type payment, but has a triggering event that changes the trust from a net income unitrust to a standard unitrust in the year following the year in which the triggering event occurs. The triggering event cannot be something that can be controlled by the trustee. It can, however, be a specific date in the future, a birth of a child, the death of a person, or the sale of the property held in the trust (in the case of real estate or closely held stock).
Q: What is the advantage of using a FLIP-CRUT with real estate?
A: Suppose you funded a 5% standard CRUT with real estate and that I was trustee. At the end of the year (assuming annual payments are to be paid), if the land has not sold, I, as trustee, would have to deed you back that portion of the land which would equal 5% of the trust’s value. And, since you received value in that year, you would have to declare that dollar amount representing 5% of the trust’s value as income and pay income tax on the value. Unfortunately, Uncle Sam does not accept land in payment of income tax. Thus, you end up with what is called “phantom income.” If, on the other hand, you had a FLIP-CRUT and no trigger event had occurred and the trust earned no income, you would receive no payment. But, you would also have no income to declare on your return and upon which to be taxed.
Q: Is there a minimum amount I can fund the CRUT with, if the Foundation serves as trustee?
A: Yes, Fifty Thousand Dollars ($50,000.00) or more.
Q: I know I can do a CRUT during my lifetime. Can I do one through my estate plan?
A: Yes. You may request sample wording from the Planned Giving Office at the Foundation.
Q: Is there a minimum age that the income beneficiary can be?
A: Only to the extent that the trust you create must pass certain Federal laws. For example, the calculated charitable deduction for your trust when it is created must be at least 10% of the value of the trust at the time of creation. If you wanted to create a trust for your twenty-five year old child and have it pay a 5% unitrust rate quarterly to the child for his or her lifetime, the trust currently would not pass the 10% test. You could, however, if you wish, establish a trust to make a 5% quarterly payment to that child for a term of twenty years. It would pass the test. The penalty for not passing the 10% charitable deduction test (as with the sample of the lifetime trust payment) is that the trust is not considered to be “qualified.” This would mean you would get no charitable deduction for setting up the trust and the trust would not be a tax-exempt entity.
Q: Wherein does the security of the CRUT reside?
A: It resides in the document written and the trustee selected. If for some reason, the assets of the CRUT were dissipated, the payments to the beneficiary or beneficiaries would stop. As previously mentioned, the income beneficiary might be able to sue the trustee.
Q: Once I have executed and funded a CRUT, can I make additional gifts to the trust?
A: If the document specifically states additional gifts can be made to the trust, you could. If the document is silent, you could not.
Q: If the Foundation is asked to serve as trustee, will there be specific language that the Foundation will require to be in the trust document?
A: Yes. We have information sheets available for you or your legal counsel.
Q: What reasons have previous donors given for doing a CRUT?
A: Here are a few of the reasons that have been given:
Seeing a need in society that was being addressed by research at UF made me want to support that research. When I discovered that I could provide future support for this research by doing a CRUT that provided me with many current tax advantages sealed the gift.
- I was looking for a way to assist my daughter and her spouse in their retirement years. The CRUT allowed me to get a highly appreciating piece of property out of my estate, support my family, and provide future student support.
- My wife and I had two estate-planning goals. We wanted to provide more current financial support for our children now and, at the same time, provide current support to UF. We found that with special construction of a CRUT we could accomplish both goals plus provide future support for UF.
- As a holder of highly appreciated real estate, the deferment of capital-gain tax, the charitable income-tax deduction, and the lifetime income for my family made the CRUT a very attractive gift to make.
- A CRUT was an effective way to achieve many of our philanthropic and financial goals. It was truly a win-win situation. My success started at UF and maybe my example will inspire others to consider similar gifts to UF.
- We were looking for a way to honor our daughters who graduated from UF. Providing that part of the residual of our CRUT to endow a student scholarship seemed like a wonderful way to honor them.
- We spent our lives in our chosen field. We strongly believe there was an existing need for research in a specific area that was unlikely to be addressed. By utilizing more than one CRUT, we felt we could support our family and the needed research.
- I like the idea that I can build as much retirement as I want. How much I put into the CRUT is my decision. The amount is not regulated like contributions to an Individual Retirement Account.
