Charitable Remainder Unitrust:

Questions Donors Ask

Who can serve as trustee of my unitrust?

Donors should consult with their professional advisors, as several choices are available regarding selecting the best trustee for their situation.

How would the assets in my unitrust be invested?

If the assets in the trust are liquid, such as cash or securities, typically a unitrust is invested in a balanced portfolio that is designed to produce both income and growth over the term of the trust. If the trust assets are primarily non-liquid assets, such as real estate or personal property, the trust may be held for growth in capital appreciation rather than current income. At some later date, the non-liquid assets could be sold (avoiding capital gains taxes) to be re-invested to produce income for the income beneficiaries.

Is it better to give cash or appreciated securities?

Gifts of cash or appreciated property yield the same result for tax-deduction purposes. However, gifts of appreciated property have the added value of avoiding capital gains taxes.

How will income from my unitrust be taxed?

The donors’ income will be taxed according to the type of investments and payout rate of the trust. They will usually pay tax at the ordinary income level on any ordinary income that is distributed, up to the full payment. The rest of the donors’ income will be taxed at the next lowest rate, usually as capital gains, then as tax-free return of principal.

Can I give real estate or other property to a unitrust?

In most cases, yes. The value of the trust principal will be determined by a qualified appraisal of the property; however, real estate or other property may not be producing income, and thus the income beneficiaries may receive very little or no pay-out until these assets are sold and re-invested.

Can I include my children as income beneficiaries?

It depends on the age(s) of any children named as income beneficiaries. Your organization’s interest in the trust must be at least 10% of the value of the assets donated to the trust. This interest is calculated using the life expectancies of the income beneficiaries. Thus, the younger the donor’s children, the longer their life expectancy, and the smaller will be the charitable remainder value. Even younger adult children may disqualify the trust.

What are the tax deduction implications of my CRUT?

The taxation of CRUTs is prescribed by the Internal Revenue Code and accompanying U.S. Treasury regulations. The trust itself is a tax-exempt entity, but the trust distributions to an income beneficiary will be taxable to that beneficiary according to a four-tiered system. That system requires that the payments carry out ordinary income first, then capital gains, then tax-free income, and finally return of principal. The amount of the payment in each category depends on the trust’s overall investment performance, the nature of the assets donors contribute to the trust, and any carryover of income from one year to the next.

Can I delay the start date of my unitrust payments?

Yes. Donors can create a Flip-CRUT that will begin making unitrust payments on a future date they select. (See next chapter.) The donors will be able to claim a tax deduction in the year they create their trust.

Can I name children or others as income beneficiaries?

Yes, if the trust continues to meet the 10% remainder and minimum 5% unitrust payment requirements. Here the number of named beneficiaries is not limited as it is, for example, in a charitable gift annuity. Note that naming income beneficiaries other than a spouse will trigger gift-tax issues.

Is there a minimum contribution to establish a CRUT?

No. Federal tax law does not set a specific minimum contribution required to establish a CRUT.