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The Benefits of Using CRUTs
These innovative trusts can let you donate money and still use the money.

It is more blessed to give than to receive, the old saying goes. This is especially true when charitable remainder unitrusts (CRUTs) are used.

If this trust is properly installed and administered, it makes both a benefactor and a beneficiary - of reduced taxes, periodic income and maybe even improved cash flow.

Under the most common unitrust scenario, a donor irrevocably transfers assets out of his estate and into a trust created by an attorney. In doing so, he stipulates that what's left in the trust at a specified time in the future becomes the property of his designated charities. Prior to that, however, the donor can arrange to have the trust make periodic payments (at least annually) to himself or to other beneficiaries.

Consider the following examples: A married couple decide to donate a growth stock they've owned for many years to the Endowment Fund, but the stock pays little in dividends. They place this stock into a unitrust ultimately earmarked for the Fund.

The trust then sells the stock and reinvests it into greater income-producing vehicles, which in turn, provide periodic payments to you. You have been designated as beneficiaries of the trust until the death of the surviving spouse.

In doing this, the couple takes advantage of the benefits of the CRUT. They can:

  • Name whomever they wish as trustee, including themselves
  • Select annual, semiannual or quarterly distribution payments from the trust subject to a minimum of 5 percent and maximum of 50 percent of the trust value
  • Add funds to the trust at any time and invest the funds however they wish
  • The income can continue for their lifetime, for a fixed term of not more than 20 years or a combination of the two.

The following are some donor benefits:

  • Immediate income tax deduction - Although your charity may not receive anything for many years, the government allows the couple to take an immediate income tax deduction for the charitable gift. The amount of the deduction, which may be taken against ordinary income up to 30 percent of their adjusted gross income (for capital gains property), depends on three factors: the size of the gift, the ages of the husband and wife and the unitrust-distribution percentage. The IRS publishes a table for calculating the present value of this future gift. The couple's tax deductions may be further enhanced if their adjusted gross income exceeds certain thresholds. They won't get a 100 percent tax deduction for the amount the charity will receive, but they will get something each time they contribute to the trust.
  • Bypass of capital gains tax - Charitable trusts are tax exempt. As a result, the trustee avoids capital gains taxes on the appreciated value of the stock when it is sold. The trust retains all proceeds of the sales, which helps generate greater distribution amounts for the designated beneficiaries, namely the couple itself.
  • Increased income - Investments held for a long time can generate large amounts of capital gains when they're sold, but they rarely spin off a lot of annual income. The capital gains tax-free reinvestment through the unitrust allows the couple to dispose of, without tax, an asset earning a relatively small yield. The trustee can reinvest the proceeds in a higher-yielding instrument, which would boost the couple's current income. Furthermore, over a period of years, the trust can reinvest this extra cash.
  • Generating increased cash flow - Selecting the right percentage of distribution can make the unitrust an excellent cash-flow generator. The trust assets are revalued each year, and the couple's income will be a percentage of that total value. For example, if they ask for 7 percent of the trust value as an annual distribution, and the trust earns 10 percent in a year, 3 percent will remain as a growth factor inside the trust. The following year's 7 percent distribution will be bigger because the amount in the trust is larger. It may be to the couple's advantage to choose a relatively low payout percentage, which in turn, will allow the unitrust's yearly payment to grow.
  • The legacy of philanthropy - The couple knows that ultimately their generosity will benefit the Endowment Fund. However, if they had been torn between leaving assets to charity or family, they may be able to solve their dilemma with life insurance. Proceeds from a second-to-die policy purchased with part of the income distribution from the trust and made payable to their heirs could make up for the value of the stock they placed in the unitrust. And if it is properly administered, the death benefit could be passed on free of federal estate taxes.

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