What Are the Types of Charitable Remainder Trusts?

Charitable Remainder Trusts are a type of charitable trust. In a Charitable Remainder Trust (CRT), a portion of the assets in the trust are distributed to an income beneficiary. The remainder of the assets in the trust are then donated to one or more charitable beneficiaries. 

There are many different types of Charitable Remainder Trusts with advantages and disadvantages to each option. In this post, we explore a few different types of Charitable Remainder Trusts and what each option could do for you. 

Charitable Remainder Annuity Trust (CRAT)

Generally, a Charitable Remainder Annuity Trust (CRAT) provides a fixed amount of income from the trust principal to the beneficiaries. The income is distributed over a term of years, not to exceed 20 years. 

The length of the term is referred to as a measuring life/lives. The grantor, the grantor’s spouse, or a lineal ancestor of either is considered a measuring life. A minimum 5% and a maximum 50% annual payment to the income beneficiary is required. 

CRATs provide the grantor with the opportunity to do multiple things. They can defer tax upon the sale of an asset, diversify a concentrated asset portfolio, and provide an immediate income tax deduction. They are often funded with a single or concentrated stock position with a low basis. 

The Advantages of a CRAT

• The grantor receives an income tax deduction upfront
• Tax-deferred growth occurs within the trust
• Deferred capital gains upon the sale of a concentrated stock position
• The trust can last for one or more lives, or a term of years – not to exceed 20 years
• The payout to an income beneficiary is protected against down performance years

The Disadvantages of a CRAT

• There is no remainder benefit to heirs
• No transferring additional assets into the CRAT after the initial setup
• The payout is fixed and will not increase, even if the portfolio does better than expected

Charitable Remainder Unitrust (CRUT)

Generally, a Charitable Remainder Unitrust (CRUT) pays an income beneficiary a percentage of the principal in the trust. The percentage is recalculated annually over the measuring life/lives or term of years, not to exceed 20 years. 

Only the grantor, the grantor’s spouse, or a lineal descendant may be considered a measuring life. 

The payout percentage is distributed based on the fair market value of the trust. It is recalculated annually, as specified in the trust document.

Charitable Remainder Unitrusts are often used to:

• Provide a grantor the ability to diversify a portfolio within a tax-exempt entity,  
• Provide an income beneficiary more income, 
• Defer taxation upon the sale of an asset, and 
• Provide an income deduction. 

They are typically funded with a single or concentrated stock position.

The Advantages of a CRUT

• The upfront income tax deduction
• Deferred tax growth within the trust
• Diversification of a single, or concentrated stock position without paying capital gains
  • This is until the trust states income is to be treated as capital gains
• The trust can last for more than one measuring life
• Additional assets may be transferred into the CRUT over time
• The payout to income beneficiaries may increase in years when the portfolio performs better

The Disadvantages of a CRUT

• There is no benefit to the heirs
• The payout to income beneficiaries may decrease during poor portfolio performance years

Net Income Charitable Remainder Trust (NICRUT)

A Net Income Charitable Remainder Trust (NICRUT) pays the net income to beneficiaries on a quarterly or annual basis. The payments are up to the percentage payout rate stated in the trust document, over the measuring life/lives of the beneficiary(ies). Only the grantor, the grantor’s spouse, or a lineal descendant may be considered a measuring life.

The payout distribution is based on the trust’s net income on the date specified in the trust document. This includes ordinary income but not capital gains (unless otherwise specified within the agreement). 

If the portfolio produces $0 net income, then $0 will be distributed to the income beneficiaries that year. All growth will be considered a capital gain, which increases the principal value of the trust. 

These are often used to:

• Allow a grantor to diversify a concentrated stock portfolio within a tax-exempt entity, and 
• To defer tax upon the sale of the asset. 
• Grantors often prefer that the trust invests in low dividend-producing assets. 

The Advantages of a NICRUT

• An upfront tax deduction
• Tax-deferred growth within the trust
• The grantor can diversify a concentrated stock position without immediately paying capital gains
• Additional assets may be added to the trust over time

The Disadvantages of a NICRUT

• The income distributed will be less than the payout percentage listed within the trust
• The difference in percentages cannot be made up in future years, even when the payout rate is higher
• Beneficiaries do not have protection against down performance years of the portfolio

Net Income with Makeup Account Charitable Remainder Trust (NIMCRUT)

A Net Income with Makeup Account Charitable Remainder Trust (NIMCRUT) pays net income to income beneficiaries up to the percentage payout rate. This payout rate is outlined in the trust document. Payments are distributed on a quarterly or annual basis over the measuring life/lives, not to exceed 20 years. 

The payout is distributed based on the net income produced within the trust, specified in the document annually. Income includes ordinary income, but not capital gains income (unless otherwise specified within the trust document.) 

If the trust produces $0 in income, then $0 in distributions will be made to the income beneficiary. All the growth will be considered a capital gain, which will increase the principal value of the trust. 

The amount paid to an income beneficiary from a NIMCRUT is limited to the percentage of the trust assets, plus any prior year’s deficiency not paid. NIMCRUTs are used to provide the grantor the ability to diversify within a tax-exempt entity. They provide more income while deferring tax upon the sale of assets and an income tax deduction. 

A younger grantor may choose not to have the portfolio produce income in the trust. They may prefer to invest in highly appreciating assets with low dividends without worrying about the minimum 5% payout. 

The Advantages of a NIMCRUT

• An upfront income tax deduction
• Tax-deferred growth
• Diversification of concentrated portfolio position
• Variable annuities may be used as an investment within the trust portfolio
• Income distributed may be less than the payout percentage listed within the document
• Net income may be paid out in future years to make up the difference from prior years
• Additional assets may be added to the trust

The Disadvantages of a NICRUT

• The income distributed will likely be less than the payout percentage listed in the trust
• The payout to the income beneficiary is not protected against down performance years of the portfolio

Flip Charitable Remainder Trust

A Flip Charitable Remainder Trust (Flip CRT) is a trust that pays net income to the income beneficiaries. The income is distributed up to the percentage that is outlined in the trust document. Income is distributed on a quarterly or annual basis over the measuring life/lives, not to exceed 20 years. 

The payout is distributed based on the net income within the trust, on the date specified, until a triggering event occurs. Upon such triggering event, the trust changes from a net income charitable remainder unitrust NICRUT to a standard CRUT. The income includes ordinary income but not capital gains (unless otherwise specified in the document).

If before the flip – or triggering event – the NICRUT produces $0 income, then $0 in distributions will be made to the income beneficiaries. All the growth will be considered capital gains, thus increasing the principal value of the trust. 

The Flip Unitrust is often used to: 

• Provide a grantor with the ability to diversify a concentrated position within a tax-exempt entity, 
• Provide more income to the beneficiary, defer tax upon the sale of the assets, and 
• Provide an income tax deduction. 

A younger grantor who may not initially be seeking income will likely invest in highly appreciating, low dividend-producing assets. They will not need to worry about the minimum 5% payout until it is needed. Upon such a triggering event, the NICRUT may be changed to a standard CRUT. 

The Advantages of a Flip CRT

• An upfront income deduction
• Tax-deferred growth
• Diversification of a concentrated portfolio without immediately paying capital gains
• When the trust flips from a Net Income Charitable Remainder Unitrust to a Standard Charitable Remainder Unitrust, the income beneficiary receives a percentage of the net fair market value of the trust, not just the net income 
• Additional added assets may be added to the flip unitrust over time 

The Disadvantages of a Flip CRT

• The income distributed will be less than the payout percentage listed in the trust
• The makeup of the difference may not occur in future years. This occurs even if the net income is higher than the payout rate
• Payout to income beneficiaries is not protected against the down performance of the portfolio

Planned Philanthropy for Future Generations

Charitable planning within an estate plan is not just about transferring assets. It is about transferring a philosophy of giving and caring across multiple generations. It aligns your generous nature with the principle and values you may seek to pass on to your children. 

Being a steward of wealth comes with responsibility.  The best way to cultivate the next generation in your philosophy is by showing what an opportunity giving can do for others in need. 

Studies have shown that charitable giving produces positive feelings in the giver, not to mention those on the receiving end. While there is a tax benefit, giving to others provides great personal satisfaction. By creating a planned giving strategy in your estate plan with your family, you can accomplish multiple goals with one act. 

These goals include getting a tax benefit, giving to others, and teaching the next generation to be generous.

Alliance Trust Company of Nevada manages many different types of Charitable Remainder Trusts. Based in Reno, Nevada, Alliance can take advantage of the most favorable trust laws in the United States. 

Nevada leads the nation in asset protection and wealth management. Contact one of the experts at Alliance today to discuss the Charitable Remainder Trusts available to you and what is best.

This article is informational only and should not be taken as legal or tax advice. Each individual’s legal and tax situation is unique and should be reviewed by licensed professionals. Laws and regulations are subject to change, and Alliance cannot be held responsible for reliance on the information contained herein.