Frequently Asked Questions

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1. What are the two types of Charitable Remainder Trusts?
The charitable remainder trust takes two forms; (i) the charitable remainder annuity trust (CRAT) and (ii) the charitable remainder unitrust ("CRUT"). IRC 664(d)(1) and 664(d)(2) and (d)(3), respectively. The primary distinction between the CRUT and the CRAT is the manner used to determine the amount of the payment to the noncharitable beneficiary.
2. What is a Charitable Remainder Annuity Trust (CRAT)?
A charitable remainder annuity trust pays a specific amount of money to the noncharitable beneficiary every year. The annuity can be either a stated dollar amount or a fixed percentage of the fair market value of the assets on the date contributed to the trusts. The annuity may not be less than 5 percent. For transfers after June 18, 1997, the annuity may not be greater than 50 percent of the fair market value of trust assets as of the date of the transfer of assets to the trust. See IRC 664(d)(1).

The payout does not vary and it does not matter how much income is earned by the trust during the year. If assets held by the trust are producing substantial gains, the noncharitable beneficiary will not benefit. If income is insufficient to support the payout the difference is made up from the principal of the trust. Because the annuity is fixed, the noncharitable recipient receives no benefit from any appreciation in trust assets from year to year. The amount that will actually pass to the charity cannot be determined until the expiration of the noncharitable interest. However, the present value of the remainder interest is determined at the time of the contribution using actuarial tables. If the assets have been appreciating, the charity will benefit. If the corpus has been invaded to pay the annuity to the noncharitable beneficiary, there may be little left for the charity.
3. What is a Charitable Remainder Unitrust (CRUT)?
The charitable remainder unitrust pays a fixed percentage (of not less than 5 percent) of the net fair market value of its assets valued annually and for transfers after June 18, 1997, not more than 50 percent. The unitrust payout will be different each year because the payout is based on an annual valuation. IRC 664(d)(2). If the value of the unitrust assets increases, the payout to the noncharitable beneficiary will increase. The advantage of the unitrust over the annuity trust to the noncharitable beneficiary is that the unitrust serves as a hedge against inflation.

As with the annuity trust, the amount the charity will actually receive can not be determined until the noncharitable interest terminates.
4. What is a Standard Charitable Remainder Unitrust (SCRUT)?
The standard charitable remainder unitrust (SCRUT) pays to the recipients a fixed percentage of the trust assets valued annually [IRC §664(d)(2)]. It can invade corpus when the trust's income is not sufficient to make the unitrust payment. It is often referred to as a fixed percentage unitrust or a flat unitrust. Because the SCRUT is reasonably straightforward and easier to understand by the donor, it is logically preferred and represents the majority of charitable remainder trusts.
5. What are the two types of income only CRUTS (NICRUTS and NIMCRUTS)?
Two varieties of CRUTS are permitted under the Code. They can be used to avoid the invasion of corpus when the trust's income is not sufficient to make the unitrust payment. Both the NICRUT and the NIMCRUT permit the trustee to pay the lesser of the fixed percentage or the trust's actual income. NIMCRUT stands for net income with make-up charitable remainder unitrust. This type of trust pays to the noncharitable beneficiary the lesser of:

(1) The fixed percentage (not less than 5 percent nor more than 50 percent) of net fair market value of assets of the trust valued annually (the same as the CRUT) or

(2) The amount of the actual trust accounting income (not tax income) for the year. IRC 664(d)(3).

If the trust income is less than the fixed percentage amount for any given year, a shortfall is created because the beneficiary is getting less than the fixed percentage amount. The amount of shortfall may be "made up" in a later year.

Trust A has a unitrust payout of 5%. In year 1 through 4, the trust has no net income and the unitrust payout is $0.00. In year 5 the trust earns 8%. The extra 3% can be used to make-up the short fall.

The make-up must come from extra trust accounting income, not from principal. The NICRUT is the same as the NIMCRUT except there is no make-up provision

The NIMCRUT is commonly used when the donor wants to place property that does not produce regular income and is not readily marketable into a charitable remainder unitrust. Grantors often use a NIMCRUT to hold real estate and stock or other interests in a closely held business. If the grantor were to donate only unimproved real estate to a regular unitrust, the trust would earn no income and part or all of the real estate would need to be sold in order to make the fixed payment to the noncharitable recipient. This would probably not achieve the grantor's goal, which most likely was to hold the property in trust while it appreciated. By using a NIMCRUT, the payment to the income beneficiary is $0.00, the lesser of the unitrust percentage amount or the trust accounting income. An expensive and, perhaps, fruitless effort to sell part of the trust property is avoided. In this scenario, either a NICRUT or a NIMCRUT will do.

The NIMCRUT will be used by grantors who wish to have small current income payments and larger payments in the future.

Grantor is 50 years old and is contemplating retiring in 10 years. He owns a parcel of appreciating real estate. He is in a high tax bracket and does not currently need any income. He places the property in a NIMCRUT. It makes no current payment to him, as it has no income. This continues for 10 years. In year ten he retires and the trustee sells the property. The settlement is used to invest in income producing assets. The trust now pays him the unitrust percentage, which is 7%. The trust is making 11%. The makeup provision of the NIMCRUT can now be used to pay him additional payments to make up the payments that were not received in the earlier years. He now has additional retirement income at a time when he may be in a lower tax bracket.
6. What is a FLIP Unitrust?
An other variety of unitrust is called the "flip" trust. This trust starts out as either a NICRUT or a NIMCRUT. On the occurrence of a specific event set forth in the trust document, it "flips" or converts automatically to a straight fixed percentage unitrust.

A and B, husband and wife, want to be able to help fund the college expenses of their granddaughter, C. C is 10 years old. A and B own property that is currently appreciating without producing income. They are advised to set up a flip unitrust. The unitrust amount is set at 10%. For the first 8 years the trust will be a NIMCRUT. C is the beneficiary but she receives no income during the 8 year NIMCRUT period. The triggering event to flip the trust is C's 18th birthday. The property has significantly appreciated in value. It is sold and the proceeds are invested in income producing assets. Any trust accounting income received during the year of C's 18th birthday that exceeds the 10% unitrust amount may be paid to C under the IRC 664(d)(3)(B) make-up provisions upon the flip to a standard fixed percentage unitrust, any unpaid makeup amount is forfeited. The trust assets have greatly appreciated in value so that the 10% received by C should be sufficient to fund her college expenses. Even if the trust income is not sufficient, because the trust in now a regular CRUT, corpus can be invaded to pay the unitrust amount. A and B will get a charitable deduction based on the present value of the remainder interest upon setting up the trust, but, the present value of C's unitrust interest will be subject to gift and generation skipping transfer tax. They will not have to pay capital gains on the sale of the property. Income from the trust will be taxed at C's lower tax rate. The property will be removed from A and B's estate, lowering their estate tax.

Any trust accounting income received during the year of C's 18th birthday that exceeds the 10% unitrust amount may be paid to C under the IRC 664(d)(3)(B) make-up provisions upon the flip to a standard fixed percentage unitrust, any unpaid makeup amount is forfeited. The trust assets have greatly appreciated in value so that the 10% received by C should be sufficient to fund her college expenses. Even if the trust income is not sufficient, because the trust in now a regular CRUT, corpus can be invaded to pay the unitrust amount. A and B will get a charitable deduction based on the present value of the remainder interest upon setting up the trust, but, the present value of C's unitrust interest will be subject to gift and generation skipping transfer tax. They will not have to pay capital gains on the sale of the property. Income from the trust will be taxed at C's lower tax rate. The property will be removed from A and B's estate, lowering their estate tax.
7. Funding a Charitable Remainder Trust with marketable securities.
The trustee of an intervivos CRT is able to sell low basis, highly appreciated, marketable securities without gain recognition. [IRC §664(c)] The sale proceeds can then be invested to produce payments to the recipient, usually the grantor, in the form of the annuity amount or unitrust amount. In this way, the grantor benefits from the appreciation of his/her securities via the annuity amount or unitrust amount, but has no taxable recognition of the gain from the sale of the securities while the proceeds or those in that they are invested are held by the CRT.
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