Charitable remainder trusts (CRUTs) are a type of irrevocable trust that can provide a number of benefits for individuals who are looking to reduce their estate tax liability, support their favorite charities, and generate income for themselves and their loved ones.

Benefits of Using a CRUT

There are a number of benefits to using a CRUT, including:

• Reduce estate tax liability: When you transfer assets to a CRUT, you remove them from your estate, which can reduce your estate tax liability.
• Generate income for yourself and your loved ones: CRUTs can be structured to pay out a fixed percentage of the trust's assets to the beneficiary or beneficiaries each year. This can provide a predictable stream of income for life or for a specific term of years.
• Support your favorite charities: When the CRUT terminates, the remaining assets are distributed to the designated charities. This can be a great way to leave a lasting legacy to the causes you care about most.
• Avoid capital gains taxes: When you transfer appreciated assets to a CRUT, you can avoid paying capital gains taxes on the appreciated value. This can be a significant savings, especially if you have a large number of appreciated assets.

How CRUTs Help with Appreciated Assets

CRUTs can be a particularly good way to avoid capital gains taxes on appreciated assets. When you transfer appreciated assets to a CRUT, you can take an immediate charitable income tax deduction for the value of the charitable remainder interest. This can offset the income taxes you would have paid on the capital gains if you had sold the assets outright.

How CRUTs Help with Estate Taxes

CRUTs can also help to reduce your estate tax liability. When you transfer assets to a CRUT, you remove them from your estate. This can help to reduce the overall value of your estate and reduce the amount of estate taxes that your heirs will owe.

Comparison of Charitable Remainder Trusts

There are two main types of charitable remainder trusts: charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). CRATs pay a fixed dollar amount to the beneficiary or beneficiaries each year, while CRUTs pay a fixed percentage of the trust's assets to the beneficiary or beneficiaries each year.

Another type of charitable remainder trust is a net income with makeup charitable remainder unitrust (NIMCRUT). A NIMCRUT pays out the trust's net income to the beneficiary or beneficiaries each year, up to a certain percentage. If the trust's net income does not meet the payout percentage, the trust can make up the difference in future years.

Example of How a CRUT Can Be Used

Here is an example of how a CRUT can be used to reduce estate tax liability and support charitable giving:

• John Doe is a wealthy individual with a net worth of $10 million. He has a number of appreciated assets, including stocks and real estate. John is concerned about the estate taxes that his heirs will owe when he dies.
• John decides to set up a CRUT. He transfers $1 million worth of appreciated stocks to the CRUT. The CRUT is structured to pay out a fixed percentage of the trust's assets to John each year for his lifetime. After John's death, the remaining assets in the CRUT will be distributed to his favorite charities.
• When John transfers the stocks to the CRUT, he takes an immediate charitable income tax deduction for the value of the charitable remainder interest. This deduction offsets some of the income taxes that John would have paid on the capital gains if he had sold the stocks outright.
• The CRUT sells the stocks and reinvests the proceeds in income-producing assets. John receives a fixed percentage of the trust's assets each year, which provides him with a predictable stream of income.
• When John dies, the remaining assets in the CRUT are distributed to his favorite charities. This allows John to leave a lasting legacy to the causes he cares about most and reduce the amount of estate taxes that his heirs will owe.

Wealth Replacement Trusts

A wealth replacement trust (WRT) is a type of trust that can be used to replace the value of assets that are donated to charity. WRTs are often used in conjunction with charitable remainder trusts (CRUTs).

When you set up a CRUT, you transfer assets to the trust and then receive a fixed percentage of the trust's assets each year for your lifetime. After your death, the remaining assets in the CRUT are distributed to your designated charities.

If you have heirs, you may be concerned about the impact that your charitable donations will have on their inheritance. A WRT can help to address this concern.

A WRT works by using a portion of the income from the CRUT to purchase a life insurance policy. The life insurance policy is owned by the WRT and the beneficiary is your heirs. When you die, the life insurance death benefit is paid to the WRT and then distributed to your heirs.

This death benefit can replace the value of the assets that were donated to charity through the CRUT. This allows you to leave a legacy to your favorite charities without disinheriting your heirs.

Example

Here is an example of how a WRT can be used to recover the funds that will be donated to charity for your heirs:

• Mary Smith is a wealthy individual with a net worth of $10 million. She has two children and a number of appreciated assets, including stocks and real estate. Mary is concerned about the impact that her charitable donations will have on her children's inheritance.
• Mary decides to set up a CRUT and a WRT. She transfers $1 million worth of appreciated stocks to the CRUT. The CRUT is structured to pay out a fixed percentage of the trust's assets to Mary each year for her lifetime. After Mary's death, the remaining assets in the CRUT will be distributed to her favorite charities.
• Mary also uses a portion of the income from the CRUT to purchase a life insurance policy. The life insurance policy is owned by the WRT and the beneficiary is Mary's children. When Mary dies, the life insurance death benefit is paid to the WRT and then distributed to her children.

This death benefit replaces the value of the assets that were donated to charity through the CRUT. This allows Mary to leave a legacy to her favorite charities without disinheriting her children.

Conclusion

CRUTs and WRTs can be a powerful tool for estate planning, capital gains improvement and charitable giving. They can help to reduce estate tax liability, generate income for yourself and your loved ones, and support your favorite charities. If you are considering setting up a CRUT, it is important to work with an experienced estate planning attorney to ensure that the trust is structured in a way that meets your specific needs.