By Robert Standish J.D. CFP®, Vice President/Financial Planner,
BPU Investment Management, Inc
Whether you are living alone, still with your original spouse or in a “blended family,” everyone with an estate wants to establish a legacy. One way to do so is with a Charitable Remainder Trust (CRT).
A CRT is a tax savings strategy for people who wish to make a substantial gift to a charitable organization. It can create substantial benefit for donors who have closely held business interests or stock and real estate that have appreciated.
Giving assets to a CRT presents you with the opportunity to create a current income tax deduction for the present value of the projected gift to a charity. The transfer to the CRT could also enable a donor to reduce capital gain tax liability and provide a stream of income. Upon the donor’s death, the charity would receive the remaining principal in the trust.
One of the most popular forms of a CRT is a Charitable Remainder Uni-Trust (CRUT), which is a trust that receives cash or property from a donor, makes payments to a non-charitable beneficiary for a life, lifetimes or term of years, and then distributes what is left to charity. The donor can get a tax deduction in the year of the gift for the entire value that passes eventually to the charity. Stock sold in a properly crafted CRUT is not subject to capital gains tax at the trust level, and the beneficiary is only subject to capital gains tax in proportion to the payment received from the trust relative to the value ultimately passing to the charity.
The way you receive the annual payout amount is one of the most critical decisions to make in establishing a CRUT. There are four ways a CRUT can make the annual payout:
1. A standard CRUT pays its beneficiary(s) a percentage of the value of the trust, usually determined at the beginning of each year. This percentage must be paid regardless of the assets in the CRUT and whether or not the trust actually generates any income. If there is not enough income, distributions are made from principal.
2. A net income CRUT pays the lesser of a percentage of the value of the trust or net income. If the CRUT does not earn any income, no payment is made. Payments from principal are not permissible.
3. A net income CRUT (NIMCRUT) pays the lesser of a percentage of the value of the trust or the CRUT’s net income, but in any year in which the trust does not earn enough income to pay the full percentage, the difference between net income and the percentage goes into a “deficit” account and under the right circumstances will be “made whole” in future years.
4. A FLIP CRUT begins as a NIMCRUT. On the first day of the year following a specific objective event or date beyond the donor’s control, such as the date an illiquid asset is sold, the trust transforms to a standard CRUT.
The FLIP CRUT is particularly useful if you have contributed unmarketable assets like real property or closely-held stock to a CRUT. Although many donors like standard CRUTs because they are guaranteed to receive regular distributions, a standard CRUT offers no flexibility to a trust that holds only unmarketable assets and therefore has no cash with which to make distributions.
By contrast, a NIMCRUT offers flexibility to a trust that holds unmarketable assets because no distributions need to be made unless the trust earns income. Once the unmarketable assets are sold, the donor can now depend upon trust income for distributions. The FLIP CRUT gives the donor the best of both worlds: flexibility before an asset is sold and regular distributions thereafter.
If you have appreciated and/or unmarketable assets and a desire to make a substantial charitable contribution while retaining a right to an income stream from those transferred assets, you may consider a CRUT. If a current stream of income is not important, but you would like to defer that stream of income until the assets are more liquid in the future, a FLIP CRUT strategy might be appropriate.
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