Tax Efficient Gifting with Charitable Remainder Unitrust
Gifting assets is a great way to fulfill your charitable inclinations and reduce your tax bill.
You can gift cash, but many times donating appreciated securities can allow for the avoidance of capital gains on the appreciation of the asset with the same dollar amount gifted.
What you gift matters.
You can gift all your assets in one year, but provided you’re capped on 30 - 60% of your adjusted gross income depending on the type of gift, you may find that donating over multiple years can maximize how much of the deduction you’re able to use (note: there is a carryforward of unused charitable contributions that exceed current year AGI for 5 years).
When you gift & how much you gift matters.
You can gift to a charity directly, or you can contribute to a donor advised fund & gift later.
If you’re gift total is nearing upwards of one-million or more, you could consider starting your own private foundation to support non-public charitable interests or receive an income stream from the use of a current year gift & avoid future estate taxes (provided you’re someone with a 2024 gross estate over $13.61M) with charitable remainder trusts (which will be the topic of discussion today).
To what vehicle you gift to, matters.
All this to say:
Gifting is a beautiful thing to support those causes you care about but being thoughtful about what you gift, when you gift, how much you gift, & to which vehicles you gift to all factor into how much of your tax bill you’re able to reduce.
When it comes to reducing your tax bill through charitable giving, one popular strategy for those individuals who may be subject to a future 40% estate tax rate is the use of Charitable Remainder Unitrust (CRUT).
The timeline of a CRUT looks something like this:
CRUT receives assets → CRUT makes ongoing distributions → CRUT terminates → remaining CRUT assets go to charity.
The amount of time the CRUT makes ongoing distributions of the assets is set by the trust document.
CRUTs are tax-deferred vehicles so interest, dividends, and capital gains inside the trust are deferred.
A CRUT can last:
For the life of a single beneficiary
For the lives of multiple beneficiaries (lives of your children)
For a term of certain period of no more than 20 years
Some combination of the above
Payout options of the CRUT:
Must make distributions at least annually from the CRUT
5% minimum
50% maximum
The longer the money sits in the trust, the longer there is tax deferral. Income is forced out via distributions. You can use an excel spreadsheet to back into the most optimal distribution annually. Income forced to the beneficiary.
The taxation of CRUT distributions:
Worst in, first out
Ordering rules
Ordinary income
ST CG
LT CG
Tax-free income
Return on principal
When to comes to the remainder interest that must go to charity, that’s broken down as follows:
Actuarial equivalent of 10% of present value must be left to charity
Impacted by age of beneficiary
Impact be code section 7520 rates.
Equal to 120% of the applicable federal midterm rate (this is also used for 72T distributions)
Can use applicable rate from the current month, previous month, or 2 months prior.
You can use this to figure out the 10% present value needed to get the higher distribution amount.
But if you’re looking to use a CRUT as a wealth transfer tool - things can get tricky.
Some individuals are too young to be beneficiaries
Actuarially it’s impossible to satisfy 5% minimum annual distributions and 10% remainder requirements
Youngest possible beneficiary age is usually somewhere in mid-20 where age is based on life expectancy tables.
If you have a younger individual who you want to make the beneficiary you can do two things:
Make distributions up to 12 months after the valuation date
Use the 5-year rule to delay distributions to the CRUT.
The reverse is also true if you have a beneficiary who is too old. A CRUT wouldn’t make sense as the primary benefit of the CRUT is tax-deferral.
When to comes to whether a CRUT makes sense, the true trade off is;
The break even between tax deferral vs 10% of assets required to be donated to charity at the end of the trust term.
Can you make up the 10% given to charity for the benefit of a longer tax-deferral period with annual distributions?
The breakeven point can further be broken down into a couple different buckets:
The CRUT beneficiaries ordinary income rates & capital gains rates (& percentage of growth subject to either tax rate)
The CRUT investment turnover
CRUT payout percentage
The risk of using the CRUT is premature death. You’re not living long enough for tax deferral to work versus paying the charity 10%.
Generally, it takes decades (typically 2 or 3) to break-even here.
One last consideration is that the beneficiary of your trust could be a donor advised fund or a private foundation.
A CRUT doesn’t work for everyone but it can be a great tool to satisfy charitable inclinations and receive tax benefits.