The Charitable Remainder Unitrust, commonly known as a "CRUT," can benefit charity, and the grantor, at the expense of Uncle Sam.

A CRUT provides the grantor with an income tax deduction equal to the present value of the remainder interest in the CRUT that passes to charity (such remainder interest must be at least 10% of the value of the assets transferred.)

The grantor and/or other non-charitable beneficiaries (the beneficiaries are often the grantor and his or her spouse) receive periodic payments for a term of years (not to exceed 20 years), or for the lifetimes of the non-charitable beneficiaries. The periodic payments must be paid at least annually.

Assume Husband ("H") is age 65 and Wife ("W") is age 64. H & W have a business in which they invested $100,000, that is now worth $5,000,000.

If they sell the business for cash and pay income tax at a 30% rate on the gain of $4,900,000, H & W would have net sale proceeds after tax of $3,530,000 to invest to produce future income [$5,000,000 - (30% of $4,900,000, or $1,470,000)].

Alternatively, before consummating a sale H & W could create a CRUT and gift the business to it. Because a CRUT is exempt from income tax, if the CRUT sells the business, no taxable income will result from the sale.

If H & W retained the right to receive a payment of $5% of the value of the CRUT, payable quarterly, payments for the first year would total $250,000 (5% x $5,000,000).

Additionally, H & W would receive a charitable deduction of 33.166% of the $5 million transferred to the CRUT or $1,658,300. Any unused charitable deduction can be carried forward for 5 years.

The fixed percentage payment cannot be less than 5% or more than 50% of the value of the CRUT to qualify.

In the example above, the payment to the grantors can be up to about 11%, in order to have the charity’s actuarial remainder interest be valued at 10% , which is the minimum requirement for qualification as a CRUT.

The payout percentage is the same each year, but the payment will vary as a result of any increase or decrease in the value of the CRUT.

The non-charitable beneficiaries are taxed on the CRUT payments received. Since the CRUT payouts are a fixed percentage that cannot be changed, a grantor of a CRUT is advised to keep sufficient liquid assets on hand to meet his or her obligations.

There are alternatives to the traditional CRUT such as a Net Income with Makeup Charitable Remainder Unitrust ("NIMCRUT"), which pays either a fixed percentage of the value of the NIMCRUT, or the net income actually received by the trust, whichever is less.

If the net income is less than the fixed percentage, the deficiency can be made up in future years when the trust has net income exceeding the fixed percentage. The NIMCRUT is often used when the timing of the sale of the appreciated asset is uncertain.

CRUTs are not for everyone, but they are worth considering before selling a highly appreciated asset.

By Philip S. Magaram