This special, irrevocable trust has two primary characteristics: (1) Once established, the CRUT distributes a fixed percentage of the value of its assets (on an annual or more frequent basis) to a non-charitable beneficiary (which may be the settlor of the trust); and (2) At the expiration of a specified time (which may be the death of the settlor), the remaining balance of the CRUT's assets is distributed to charity.
The trustee determines the fair market value of the CRUT's assets at the time of contribution and thereafter on the applicable valuation date.
The remainder (the amount expected to go to charity) must be at least 10% of the fair market value of the assets contributed to the CRUT.
Code Section 664(d)(1) sets the federal income tax requirements for a charitable remainder unitrust.
For example, assume an individual, Mr. Smith, has $1 million of publicly traded stock and would like to establish a CRUT.
For example, California requires charitable trusts to be registered by filing a form CT-1 with the state attorney general.
In the case of natural persons, payments may be made only to those who are living at the time of the creation of the trust.
Once the annuity period is over (i.e., at the death of the non-charitable beneficiary, or the expiration of the term of years), the remainder of the CRUT principal is distributed to charity.
At least 10% of the statistical fair market value[6] of each contribution of property to the trust, must be a part of the remainder interest that will pass to charity once the annuity term expires.
§1.664-3(a)(1)(i)(b)(2) allows the CRUT to pay a "makeup amount", which means if the trust income is lower than the selected fixed percentage, the trustee can distribute a "make up amount" from the trust's income in subsequent years.
A donor is entitled to a Charitable Deduction[8] based on the present value of the remainder interest in a CRUT.
The method of determining the charitable deduction is complicated, and is generally stated in Treas.
[9] Various factors are taken into consideration, including the adjusted payout rate, the value of the remainder interest, the age of the measuring life (the annuitant), the term of the CRUT, the date of trust creation, and federal interest rates.
The grantor/donor does not make a taxable gift if he or she is the recipient of the CRUT income for life or term of years.
§ 2055(a)[11] provides for a deduction from the value of the gross estate of a bequest for public, charitable, and religious purposes.
Prior to 2007, if a CRUT received UBTI it terminated its tax-exempt status and 100% of the trust income would be taxable.
In such instances, the CRUT proceeds would pay to charity before the taxpayer has received much benefit from the annuity.
In addition, at the taxpayer's death, the charity receives the assets that might have otherwise passed to children or other heirs.
Because of this, tax planners often suggest that their clients purchase life insurance, to be held separately from the CRUT.
Quarterly or annual payments to the beneficiary behave like an annuity, but they have the additional advantage of the deduction from income at the time of the creation of the CRUT.