This is an archived article that was published on sltrib.com in 2013, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.
Last column, I talked about how an investor can use a charitable remainder unitrust (CRUT) for preserving a large gain on a single stock while diversifying, creating income and leaving an inheritance to a favorite charity.
CRUTs can be especially beneficial in today's new, higher-tax environment, said Vic Xistris, a senior vice president and market trust director for U.S. Trust in Fairfield County, Conn.
In my example from last week, Elaine, age 74, has a $2 million gain on a stock worth $2.5 million. Instead of selling the stock herself and suffering a huge tax hit, the CRUT sells it without triggering taxes CRUTs pay no taxes.
Elaine's lawyer customizes her CRUT to make lifetime payments in an amount that is suitable for her, after considering Internal Revenue Service guidelines on payouts and weighing the charitable deduction that would benefit her at tax time.
IRS guidelines require a CRUT to pay a fixed percentage of its net fair market value at least yearly to one or more beneficiaries, at least one of which is NOT a charity, according to attorney L. Randolph Harris of LeClairRyan in San Francisco.
The higher the payout, the lower the charitable deduction, according to attorney David Lehn of Withers Bergman in Greenwich, Conn. The deduction is based on the present value of the remainder interest ultimately passing to charity, which is a function of the annual payout and Elaine's age, according to Harris.
If the CRUT is designed for the lowest payout and the highest tax deduction in Elaine's case (age 74), her first-year payout would be $125,000 (5 percent of $2.5 million), and her tax deduction would be about $1,460,000. If the CRUT is designed for the highest payout of 32 percent ($800,000 in her first year), she will qualify for a tax deduction of about $250,000.
While the annual payout rate is stable (5 percent, for example), the amount paid to Elaine fluctuates year to year as the fair market value of the trust's assets rise and fall.
Assuming Elaine's CRUT is crafted to provide a 5 percent payout, she would receive $125,000 for the year at a $2.5 million valuation. If the CRUT rose in value to $3 million on the second valuation, she would receive $150,000 for the year. If the CRUT fell to $1.5 million on the third valuation date, the payout would be $75,000 that year. The valuation date is set by the CRUT document.
How much Elaine will actually deduct from her taxes will depend on her income. The maximum deduction she can take for a charitable contribution is limited to 50 percent of her adjusted gross income, according to Lehn. Any amount in excess of this 50 percent limit may be "carried forward" for the next five years.
Even with all of the benefits I've discussed, CRUTS are not for everyone. As attorney Mark Doyle of Tredway Lumsdaine and Doyle in Orange County, Calif., pointed out, assets transferred to a CRUT are irrevocably out of the reach of the donor and the donor's family.
Should financial emergencies arise, the donor will not be able to access the CRUT's assets beyond the agreed-upon payouts, said attorney Daniel McCarthy of Wick Phillips in Fort Worth, Texas. Children may be disappointed that trust assets pass to charity and not to them upon the death of their parents, said Certified Public Accountant John Nuckolls of BDO USA.
Not to be forgotten is the extra administrative cost, including annual income-tax filings with the IRS and possible state tax filings, added Nuckolls. The CRUT must avoid investments that generate trade or business income, since that will generate "unrelated business taxable income," causing an excise tax of 100 percent of such income, said Nuckolls.
If a CRUT fits your needs notwithstanding these drawbacks, you'll need to visit with your trusts-and-estates lawyer to custom design the CRUT for you.
The IRS form for CRUTs, Form 5227, is available for public inspection. To get a copy, complete IRS Form 4506-A, Request for Public Inspection or Copy of Exempt or Political Organization IRS Form.
Julie Jason, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments at email@example.com.