A charitable remainder unitrust (known as a "CRUT") is an irrevocable trust created under the authority of Internal Revenue Code § 664[1] ("Code"). This special, irrevocable trust has two primary characteristics: Once established, the CRUT distributes a fixed percentage of the value of its assets (on an annual or more frequent basis) to a non-charitable beneficiary (which is considered the settlor of the trust); and At the expiration of a specified time (usually the death of the settlor), the remaining balance of the CRUTs assets are distributed to charity. The trustee determines the fair market value of the CRUT's assets at the time of contribution, and thereafter on the applicable valuation date. The fixed annuity percentage must be at least 5% and no more than 50% of the fair market value of the assets in the corpus. The remainder (the amount expected to go to charity) must be at least 10% of the fair market value of the assets contributed to the CRUT. Code Section 664(d)(1) sets the federal income tax requirements for a charitable remainder unitrust.
Assume an individual, Mr. Smith, has $1 million of publicly traded stock and would like to establish a CRUT. Assume the CRUT is set up to pay the annuity to Mr. Smith over his lifetime. Mr. Smith selects a 10% CRUT. The CRUT will pay Mr. Smith 10% of its assets (initially $100,000) per year until Mr. Smith dies. At that time, any balance remaining in the CRUT will be distributed to charity. The term "unitrust" means the annuity percentage is fixed; the CRUT will distribute 10% of the value of the CRUT's assets each year, the CRUT's value may increase or decrease over time.
Code § 664[1] (authorizing CRUTs) was added to the Code in 1969, as part of the Tax Reform Act of 1969 (Pub. L. No. 91-172).
Requirements
A charitable remainder unitrust is a trust that meets both: The applicable rules under state law for a valid Charitable Trust; and the requirements set forth in Code Section 664(d)(2)
State Law Requirements
First, a CRUT is formed like any other kind of trust, and must be valid under state law. Most states require CRUTs to be registered with the state. For example, California requires charitable trusts to be registered by filing a form CT-1 with the state attorney general. This is because the state attorney general represents the charitable interests involved with CRUT. However, California Govt. Code Section 12585(a) provides that "A trustee is not required to register as long as the charitable interest in a trust is a future interest, but shall do so within 30 days after any charitable interest in a trust becomes a present interest."
Income Tax Requirements
Code Section 664 imposes the following requirements on CRUTs:
Fixed percentage payment
The CRUT must distribute a fixed percentage annuity to the non-charitable beneficiary. This percentage may not be less than 5 percent nor more than 50 percent of the net fair market value of the CRUT's assets. The CRUT's assets are valued annually, and the annuity amount is determined at that time As may be seen, the amount of the annuity might vary from year to year, but the percentage always stays the same. For example, assume a 10% CRUT is established, and assume the value of its portfolio holdings in year 1 is $1 million. The annuity that year is $100,000. Assume the portfolio drops in value, and in year 2 is worth $900,000. The annuity in year 2 will be reduced to $90,000 (10% of the value of the CRUT's assets).
The annuity must be distributed not less often than annually to one or more persons. The "person" may be an organization, however, it may not be a charity described in {{USCSubs|26|170|c}}. The CRUT is usually set up so that annuity is paid to the settlor of the trust. In the case of natural persons, payments may be made only to those who are living at the time of the creation of the trust. The annuity is paid to that non-charitable beneficiary for his or her lifetime, or for a fixed term of years (not to exceed 20 years).
No other payments
The CRUT may not distribute any of its assets to anyone other than the annuity recipient or the qualified charity beneficiary. The CRUT may not let any of its assets be used for the benefit of anyone other than the annuity recipient, the qualified charitable beneficiary, or a charitable organization as described in section 170(c). Code Section 664(d)(2)(B).
Transfer remainder interest when termination of payments
Once the annuity period is over (i.e., at the death of the non-charitable beneficiary, or at the expiration of the term of years), the remainder of the CRUT principal is distributed to charity. The charity must be an organization described in 170(c).
Portion of remainder interest in contributions to trusts
At least 10% of the statistical fair market value of each contribution of property to the trust, must be a part of the remainder interest that will pass to charity once the annuity term expires.
Treasury Regulations have imposed several other conditions relating to CRUTs:
This information is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
