A charitable remainder unitrust (CRUT) is one form of a charitable remainder trust (CRT). A CRUT is a “split-interest” trust in which a donor contributes assets to a charitable trust and receives a partial tax deduction for the contributions.
The trust agreement provides that the trustee shall manage the trust assets and make an annual payment to the noncharitable lead beneficiary either for a term of years or the life of an individual. The unitrust amount is a percentage of the net fair market value of trust assets calculated each year.
Under Section 664(d)(2)(A), the percentage cannot be less than 5 percent nor more than 50 percent of the net FMV of the trust assets, valued annually.1
The trust must make the unitrust payment at least annually, and the trust term can last for someone’s lifetime or a set term not to exceed 20 years. When the trust ends, the trustee distributes the remaining trust assets (if any) to a Section 501(c)(3) charitable organization.
The trustee must make the unitrust payment even if the trust does not have sufficient current income to cover the payment amount. In many cases, the trustee must pay the unitrust amount using a combination of income and principal if the trust does not generate a return on investment (ROI) sufficient to cover the unitrust payment.
Example of a Charitable Remainder Unitrust (CRUT)
John Doe wants to form a charitable remainder trust to provide him with a current-year charitable tax deduction and a regular income stream for a fixed number of years. John’s lawyer advises that he could set up Charitable Remainder Unitrust (CRUT) or a Charitable Remainder Annuity Trust (CRAT).
John decides to go with the CRUT. John’s lawyer creates a Charitable Remainder Unitrust, which will pay John a unitrust amount of 6% of the net FMV of trust assets valued at the start of each year. At the end of 10 years, the trust will distribute any remaining assets to a Section 501(c)(3) nonprofit organization in Orlando, Florida.
John contributed $2,000,000 in cash to the trust on January 1, 2023. John’s calculated charitable contributions deduction is $1.07 million for the 2023 tax year. John reports the charitable contributions deduction on Form 1040 Schedule A (Itemized Deductions).
The trust will pay John a unitrust amount of 6% of the net FMV of trust assets valued at the start of each year. For the first year, the unitrust payment will be $120,000 (6% times $2,000,000 of net FMV at the start of the year). The trust must file Form 5227 (Split Interest Trust) each year and provide John with a Schedule K-1.
Let’s assume that at the start of year 2 (January 1, 2024), the net FMV of trust assets was now $2,040,000. The unitrust payment for 2024 will be $122,400 (6% times $2,040,000).
Additional Fact Patterns and Video Tutorials
Please visit our channel for several video tutorials on CRUTs and CRATs and how Form 5227 is presented for each trust arrangement.
Charitable Remainder Annuity Trust vs. Charitable Remainder Unitrust
The primary difference between the CRAT and CRUT is the fluctuating payment amount. Under a CRUT arrangement, the percentage payout remains fixed, but the actual dollar amount distributed will fluctuate as the net FMV of trust assets increases and decreases.
In contrast, under a CRAT arrangement, the annuity is a fixed percentage of the initial net assets, so it does not change in future years. In the example above, under a CRAT, the annuity payment would always be $120,000 each year, regardless of the trust’s investment performance.
Additional Information
Taxpayers can find more information on charitable trust arrangements on the IRS website and the Form 5227 instructions. .