All posts in Charitable Trusts

08 Apr

Can You Undo a CRT?

In Charitable Trusts by admin / April 8, 2013 / 0 Comments

Terminating a charitable remainder trust isn’t always possible

Estate Planner July-August 2006

A charitable remainder trust (CRT) allows you to support your favorite charities while providing yourself with current tax benefits and a regular income stream. (See the sidebar “ABCs of a CRT.”) But what if your circumstances change after you set up a CRT? Can you undo the trust? CRTs generally are irrevocable, but it may be possible to terminate one if applicable law permits it and all interested parties consent.

Reasons to terminate

Why would you want to terminate a CRT? Perhaps the trust’s investments have underperformed, causing its value to decline and jeopardizing the charity’s remainder interest. Perhaps you’re short on cash and would like to receive your portion of the trust’s value now rather than later. Or maybe you don’t need the income and would prefer to see the charity enjoy your donation today instead of waiting until you die or until the trust term ends.

Whatever the reason, be sure to plan carefully. Terminating a CRT isn’t always an option – it could be prohibited by state law or by the terms of your trust. And even if termination is allowed, there are specific steps you must take. Any missteps and your CRT may be disqualified retroactively and you’ll lose any previous tax benefits you claimed.

2 ways to terminate a CRT

One way to terminate a CRT is to assign your income interest in the trust to the charitable beneficiary – often referred to as an assignment termination. This may be a good option if you no longer need the trust income. Before taking action, ensure such an assignment is permitted under state law and that the trust document doesn’t expressly prohibit it.

After you assign your income interest, the charity no doubt will want immediate access to the trust principal. Depending on state law, this may happen automatically under the doctrine of merger, which provides for the termination of a trust when one party owns both the income and remainder interests. Otherwise, a court order may be required.

The second method of terminating a CRT – an actuarial split – is to divide the trust assets between yourself and the charity based on the actuarial present values of your respective interests. The IRS has issued several private letter rulings allowing actuarial splits of CRTs in cases where:

· State law permits termination of the trust,
· All of the parties consent to the termination, and
· The income beneficiaries are unaware of any medical conditions that would result in shorter life spans than those set forth in IRS life expectancy tables.

In some states, you’ll need to petition a court for an order terminating the trust. You may also need to notify the state’s attorney general or include him or her as a party to the court proceeding.

To support your actuarial present value calculations, it’s a good idea to have a physician certify that you have no known medical conditions that would result in a shorter-than-normal life expectancy.

Tax issues

The IRS considers the termination of a CRT to be a sale or exchange between the income and charitable remainder beneficiaries, generally resulting in taxable capital gains to the income beneficiaries.

Suppose, for example, that you terminate a CRT and the present values of the income and remainder interests are $50,000 each. Also suppose that the trust assets have a basis of $40,000. Basis is allocated pro rata according to the respective interests of the income and remainder beneficiaries, in this case $20,000 each. If you terminate the trust through an actuarial split, IRS regulations provide that basis is disregarded in calculating your gain, so you’ll be taxed on the entire $50,000.

If you assign your income interest to the charity, however, your gain will be reduced by your share of the basis, resulting in a $30,000 capital gain. You also can claim a $50,000 charitable deduction (subject, of course, to adjusted gross income limits).

There had been some concern that terminating a CRT might be viewed as a prohibited act of self-dealing or as the termination of a private foundation, which could result in penalty taxes or even disqualification of the trust. Fortunately, the IRS has issued several private letter rulings confirming that early termination of a CRT isn’t an act of self-dealing and isn’t subject to termination taxes (so long as the assets are divided actuarially between the beneficiaries and the termination complies with state law).

Explore all angles before taking action

Under the right circumstances, terminating a CRT can be a win-win move for everyone concerned. Be sure to consult a professional to make sure that terminating the trust is permissible and done correctly, and that the benefits of termination outweigh the costs.

Sidebar: ABCs of a CRT

You can contribute assets to a charitable remainder trust (CRT), and the trust pays you an income stream for life or for a term of years and then distributes what’s left to a qualified charity. You receive a current income tax deduction equal to the present value of the charity’s remainder interest. And you shield the contributed assets and all future earnings from estate and gift taxes.

There are two types of CRTs:

1. A charitable remainder annuity trust (CRAT) pays you an annual income of at least 5% of the initial value of the trust assets. After the trust is funded, additional contributions are prohibited. So, the payments you receive remain the same throughout the trust’s term.

2. A charitable remainder unitrust (CRUT) pays you an annual income of at least 5% of the trust assets, valued annually. Additional contributions are permitted. So, the payments you receive will vary from year to year.

Which type to choose depends on your needs and circumstances. A CRAT offers the advantage of a fixed income stream, which protects you in the event the trust’s value declines. A CRUT is riskier because income payments are tied to underlying asset values, but offers greater upside potential. All CRTs must be designed carefully to ensure they preserve a minimum level of benefits for the charitable beneficiary.

A CRT is an ideal tool for converting highly appreciated, low-yield investments into income-producing assets at a minimal tax cost. Suppose you own $200,000 worth of stock with a cost basis of $40,000. You could sell the stock and invest the proceeds in assets that pay, say, a 6% return. After paying $24,000 in capital gains taxes, you’ll have $176,000 left to invest, producing a $10,560 annual income stream.

If you contribute the stock to a CRT, however, the trust can sell the stock tax-free and reinvest the full $200,000, resulting in a $12,000 annual payment. If the CRT is designed to make a 6% annuity or unitrust payment, you’ll enjoy the income on the entire investment without having to pay capital gains taxes.

Sidebar: IRS backs off CRT ruling – for now

Last year, the IRS issued a controversial ruling threatening charitable remainder trusts (CRTs) with disqualification unless the grantor’s spouse waived his or her inheritance rights. The ruling was intended to address state laws that give your surviving spouse a right of election to receive a portion of your estate regardless of your estate plan’s terms.

The new rules – found in Revenue Procedure 2005-24 – disqualified CRTs created on or after June 28, 2005, that are subject to a surviving spouse’s right of election (regardless of whether the right is actually exercised).

After a barrage of complaints, the IRS has suspended the Revenue Procedure indefinitely. In Notice 2006-15, the IRS said that, until further guidance is issued, it will disregard a spousal right of election in evaluating a CRT. For now, a CRT will be disqualified only if a spouse actually exercises that right.


08 Apr

You Have A Charitable Remainder Trust

In Charitable Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner Jan-Feb 2006

A charitable remainder trust (CRT) allows you to support your favorite charities while
providing an income stream for yourself and generating a variety of tax benefits for you and your family. But new IRS rules may endanger those benefits unless you file additional paperwork.

The rules address laws in most noncommunity-property states that prevent you from
disinheriting your spouse. These rules give your surviving spouse a “right of election”
to receive a portion of your estate regardless of the terms of your estate plan.

The IRS was concerned that a surviving spouse could use the right of election to appropriate CRT assets that were intended for charity and were used to generate charitable deductions. To prevent this result, the new rules disqualify CRTs created on or after June 28, 2005, if they’re subject to a surviving spouse’s right of election (regardless of whether the right is actually exercised).

To preserve your CRT’s benefits, have your spouse sign an irrevocable waiver of his or her right of election against the CRT assets. Even if you live in a state where a waiver isn’t needed, it may be advantageous to get one anyway to protect your CRT in the event you relocate to a state where it is required.

08 Apr

New Rules Facilitate Funding a CRT With Unmarketable Assets

In Charitable Trusts,Funding Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 1999
A charitable remainder trust (CRT) is a popular estate planning tool for providing an income stream to you and paying the remainder to charity. In addition, a CRT provides you with an immediate charitable deduction and allows you to avoid or defer capital gains tax. CRTs may become even more widely used under final regulations issued by the Internal Revenue Service (IRS) that make it easier to fund CRTs with unmarketable assets, such as closely held stock, real estate and business interests.

Before these regulations, using unmarketable assets to fund a CRT was difficult because of annual payout requirements. CRTs have to pay annually either a set amount to the beneficiaries (referred to as charitable remainder annuity trusts or CRATs) or an amount based on a percentage of the value of the trust’s assets that year (referred to as charitable remainder unitrusts or CRUTs). CRUTs may also use an “income exception” method of payment. Under this method, the unitrust amount is the lesser of the fixed percentage of the trust’s value or the trust’s annual income. A variation of this method allows the trust to provide that any shortfall from years in which the income of the trust was less than the fixed percentage of assets can be made up in later years in which income exceeds the fixed percentage (referred to as net income makeup charitable remainder unitrusts or NIMCRUTs).

Flip CRUTs

As noted, in the past funding CRUTs with unmarketable assets was often not practical. If the donor chose an income exception method, payments might never be made to the donor if the assets did not produce income. If the donor chose the fixed percentage of assets payment method, the trust would have difficulty making annual distributions of a portion of assets that were unmarketable, both from a valuation and mechanical perspective.

Under the final regulations, it is now easier for the donor to have the best of both worlds. The final regulations provide rules for a trust to convert from an income exception method to the fixed percentage method. These trusts are known as “Flip CRUTs” and they allow the donor to contribute unmarketable assets to the trust and, in effect, defer the annual payments until a later time at which regular payments will be made.

The conversion under a Flip CRUT may be caused by specified triggering events that must not be within the control of the trustee or others. Allowable triggering events include the sale of unmarketable assets or an event such as marriage, divorce, death or the birth of a child. Impermissible triggering events include the sale of marketable assets and a request from the recipient that the trust convert to the fixed percentage method.

Other Concerns When Using Unmarketable Assets

Although the final regulations make it easier to create a CRT with unmarketable assets, some difficulties remain. For example, the value of unmarketable assets held by a CRT must be determined either by an independent trustee or through a qualified appraisal. Also, in connection with a NIMCRUT, any makeup amount from shortfalls in prior years is forfeited at the time of the conversion.

The final regulations also clarify some other issues relating to CRTs. For example, the annuity or the unitrust amount must be paid within a reasonable time after the end of the tax year in which the payment is due. Further, for CRUTs using the income exception method, special valuation rules as to transfers of interests in trusts apply to unitrust interests that are retained by the donor (or a member of his or her family). They are given a value of zero when a noncharitable beneficiary of the trust is someone other than the donor or the U.S. citizen spouse of the donor.

Easier Estate Planning

Charitably inclined donors who hold unmarketable assets should consider creating a Flip CRUT now that the final regulations have made using this method easier. We would be pleased to discuss with you whether a Flip CRUT is right for your estate plan.

08 Apr

Charitable Remainder Trusts Can Still Be a Win-Win Strategy

In Charitable Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner Jul-Aug 1998

The new 20% capital gain tax rate may take the steam out of such planning vehicles as charitable remainder trusts (CRTs). Formerly, one of the primary benefits of a CRT was avoiding capital gains. But, with the new lower tax rate on capital gain, couldn’t you just sell the asset, reinvest the proceeds and come out the same or better? Let’s take a look.

Scenario 1: Sell and Reinvest

Assume you and your spouse are both 65 and have securities with a basis of $100,000 that are now worth $1 million. If you sell the securities, you have a gain of $900,000, a capital gains tax of $180,000 (ignoring any state tax) and $820,000 available to reinvest.
Investing at an 8% rate of return, you would receive annual pre-tax income of $65,600. If you and your spouse each live for another 21 1/2 years, you would receive a pre-tax income stream over your remaining years of about $1.4 million. Also, at the end of that time you would still have your $820,000 that can go to your children, but would be subject to estate tax.

Scenario 2: CRT

Now, suppose you instead transfer the securities to the CRT, and the trustee sells them for $1 million. Since the CRT, as an exempt entity, does not pay taxes, the trustee could invest the entire $1 million to earn an 8% return. You and your spouse could receive annual pre-tax income of $80,000 per year, about a 22% increase in your cash flow. This annuity would mean a pre-tax income stream over your life expectancy of $1.72 million. Although your annual cash flow is increased, at the end of that time your children would not have access to the funds in the CRT, and the $1 million would be earmarked for charity.

In addition, if your gift to the CRT would entitle you to an income tax charitable deduction of $173,000, you would save about $68,500 (assuming you are in the 39.6% tax bracket) in income taxes. If you put this tax savings into an investment fund that appreciated at 10% per year over your life, it would grow to about $530,000 that would be available to your children. If you also choose not to spend $5,000 of additional income you will receive from the CRT each year and put it annually into an investment fund growing at 10% after tax, in 21 1/2 years it would accumulate to approximately $330,000.

The Up Side of the CRT

Under the CRT arrangement:

  • The total investment fund available for your children would be about the same ($820,000 and $860,000) as without the CRT ($820,000),
  • Your annual cash flow would have increased during your lifetime, and
  • Charity would receive $1 million.

The Down Side of the CRT

Are there down sides to this CRT plan?

Naturally. First, without the CRT, you would have the after-tax sale proceeds of $820,000 available for emergencies. As noted above, the longer you and your spouse live, the more money builds up in the investment fund and the more assets are available for an emergency. But in the short term, there could be a problem and, if you do not have other financial resources available to you, the CRT may be too risky.

Second, if you and your spouse do not live as long as your life expectancy, the investment fund will not be there for your children. Also, if the investment fund grows at a rate substantially below 10%, a smaller fund would be available for your children. If this is a major concern, the easy option is to use part of the CRT plan savings to purchase wealth replacement life insurance to benefit your children. In fact, this insurance option is a major advantage of the CRT plan because the insurance can be held in trust and remain out of your estates for estate tax purposes.

Good for Many People

CRTs are complex planning vehicles and you will need the help of an experienced practitioner. It is important that projections be made, using various alternative assumptions. The reduction of the capital gains rate from 28% to 20% has tended to make the benefits of a CRT plan less dramatic, but under the right circumstances, a CRT can still be a win-win situation. Please check with us to see if this option is best for you.


Planning With and Without a CRT

CRT Sell and Reinvest
Value of Securities $1,000,000 $1,000,000
20% capital gains tax ——– (180,000)
Investable fund $1,000,000 $820,000
Cash flow at 8% $80,000 $65,600
Tax savings $68,500 ——-
Cash flow payments over lifetimes (21 1/2 years) $1,720,000 $1,410,400
Investment fund for children at life expectancy date $820,000 to $860,000 $820,000
Distribution to charity $1,000,000 ——-
08 Apr

Partial Gifts to Charity Make Giving Easy

In Charitable Gifts,Charitable Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner Jan-Feb 2001

You can gain many income, estate and gift tax advantages when you give to charity by establishing and using a split-interest trust — such as a charitable lead trust or a charitable remainder trust. But establishing these trusts can be time consuming and costly. An alternative is to give a partial property interest directly to charity.

Three simpler-to-administer ways to do this are to give remainder interests, give fractional interests or grant a conservation easement on your property.

These allow you to receive many of the same benefits as you would by establishing trusts:

  • A charitable contribution income tax deduction for the interest passing to charity, valued as of the date of the gift,
  • A charitable gift tax deduction,
  • An exclusion of the property from your estate for estate tax purposes, and
  • Additional deductions if you substantially improve the property.

Let’s examine how each method works.

1. Giving a Remainder Interest 

A gift of a remainder interest involves dividing the ownership of an asset between a current ownership interest and a later ownership interest. You keep the current ownership interest and give away the later or remainder interest.

Your personal residence, vacation home or farm are examples of good candidates for giving a remainder interest to charity. You may split the remainder interest among multiple charities or a mix of charities and individuals. By giving a remainder interest, you can choose to have your property pass directly to the charity or first to someone else and then to the charity, either at your death or at a fixed time.

You may restrict the charity’s use of the property. For example, you can require the charity to sell the property, or give the charity the right to keep it. You may require the charity to pass the title to another charity. You may provide that the charity will lose the property if it attempts to sell or place a mortgage on it, allow others to use it for reasons other than its intended use, or alter it. For example, you may use this type of restriction when your gift is a residence with historic or architectural significance.

2. Giving a Fractional Interest

A gift of a fractional interest involves dividing the ownership of an asset into fractions. For example, you keep 2/3 of an asset and give the other 1/3 to charity. A vacation home or items on tangible personal property that have a significant value are assets to consider for a fractional interest gift. (See “Donate Artwork Using Fractional Interests.”) If you and the charity later sell or replace the property with another type of property, the charity will be entitled to share in the proceeds of the new property.

Your gift must be a portion of your entire ownership in the property. For example, if you have a right to use a vacation residence during your lifetime, you could donate one-third of your interest in the use of the property for your life to charity. If you owned the property outright, you would not be able to donate just the use of the property to charity for your lifetime.

3. Granting a Conservation Easement 

A conservation easement is a permanent restriction on the use of your property that furthers the objectives of a tax-exempt organization whose goals generally relate to the environment or the presentation of history.

For example, you could place a restriction on the development of vacant land. You must grant the easement to a qualified organization that would be able to enforce it, such as a charity or government organization. The value of the easement for determining your charitable deduction is the difference between the value of the property before and after you grant it.

Which Method Is Best for You?

If you wish to benefit from the income, estate and gift tax advantages of making a gift to charity using a split interest but want to avoid the expense and complications of a charitable lead trust or a charitable remainder trust, consider making a partial gift. If you would like assistance in determining whether one of these charitable gifting methods is best for you, please give us a call.

Donate Artwork Using Fractional Interests

If you wish to give a work of art you own to a museum, you may use fractional interests. Suppose you give a one-third interest in a painting to charity. The charity will then have the unrestricted right to use the painting for four months of the year. The charity is not required to take possession of the painting; it simply must have the right to do so. The right of the charity to possess the painting must take place within one year of the date of the gift.

08 Apr

The Gift That Gives Back – Charitable Lead Trusts Can Help You Shelter Assets

In Charitable Gifts,Charitable Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner Jan-Feb 1999
In the right situation, a charitable lead trust enables you to transfer significant wealth to later generations at reduced transfer tax costs, while helping you meet your charitable objectives.

The charitable lead trust (CLT) is the reverse of a charitable remainder trust. The CLT is an irrevocable trust established during life or at death that gives one or more charities the “annuity” or “lead” interest. The remainder interest passes to children or other noncharitable remainder beneficiaries, either outright or in trust. The remainder interest could also revert to the donor.

Generally, a CLT is appropriate if you are interested in supporting a charity and transferring assets to the next generation at substantially reduced transfer tax costs. The CLT is also suitable if you make substantial charitable contributions each year or your charitable gifts exceed the percentage of gross income ceiling on income tax deductibility.

How To Create a CLT

You establish a CLT by placing assets into a trust in which one or more charitable organizations receive an annuity interest for a period of time. (CLTs are not subject to the 20-year term limit that applies to charitable remainder trusts.) You can either stipulate the charities to receive the annual distributions in the trust agreement or leave the choice to the discretion of the trustee or a distribution committee. You should not serve as trustee.

To increase flexibility, you can designate a philanthropic or donor-directed fund or a private foundation as the charitable recipient. But take care that this increased flexibility and control do not cause the trust to be included in your estate for estate tax purposes if you die during the trust’s term. All assets remaining in the CLT at the end of the term (the remainder interest) are distributed to your children or to other designated beneficiaries.

Gift Tax Considerations

When you establish a CLT during your lifetime, the present value of the remainder interest is a current taxable gift. To calculate this value, you first determine the present value of the lead or annuity interest to the charity by using the applicable federal interest rate prescribed by U.S. Treasury regulations.

You then subtract this value from the total value of the assets placed into the CLT. The lower the applicable federal interest rate, the lower the taxable gift and the greater the potential benefit to the remainder beneficiaries if the trust can grow in value at a rate greater than the required payout.

For example, let’s say you transfer $3 million of appreciated securities to a CLT that distributes an 8% annuity each year for 20 years to your favorite charity. Table 1, below, shows how the results change depending on the applicable federal rate.
Increasing the term of the trust or the amount of the annual distribution may reduce or possibly eliminate the amount of the taxable gift.

Since the remainder interest in a CLT is a future interest, the taxable gift portion does not qualify for the gift tax annual exclusion. If the remainder interest passes to your spouse who is a US citizen, it should qualify for the gift tax marital deduction.

Estate Tax Considerations

You may establish a CLT at death through a will or revocable trust. Your estate is entitled to an estate tax charitable deduction for the present value of the charitable interest. This value is calculated in the same way as the charitable gift tax deduction.

If you transfer highly appreciated assets to a CLT, a testamentary lead trust may be preferable to a trust established during your lifetime. This is because assets transferred to a CLT created at the time of your death receive a step-up in basis. This will reduce the capital gains tax owed by the trust or by the remainder beneficiaries when the assets are sold. Unlike a charitable remainder trust, a CLT is a fully taxable trust. Income will be taxed either to the grantor or the trust (and the trust will be entitled to receive an offsetting charitable income tax deduction).

A CLT must be either an annuity trust or a unitrust. In the case of an annuity trust, the annuity is expressed as a percentage of the initial fair market value of the assets contributed to the trust. With a unitrust the annual distribution is redetermined each year based on the current value of the trust’s corpus. If the remainder interest in the CLT passes to your grandchildren or other “skip persons,” the generation-skipping transfer (GST) tax rules will apply differently depending on whether the trust is an annuity trust or a unitrust. How you can allocate your GST tax exemption depends on the type of trust established.

You may use a CLT to shelter future growth in the value of assets transferred to or acquired by the trust or as part of a business succession plan. You may be able to fund a CLT with discounted interests, such as in a family limited partnership, thus increasing the potential benefit to the remaindermen. A CLT may produce better results than a direct gift to grandchildren, depending on your assumptions of growth. Just be sure to run the numbers using different examples.

Timing Is Everything

Estate planning is often a matter of timing. The current low applicable federal discount rates provide a significant opportunity to use a CLT to leverage the transfer of wealth to the next generation. If you think a CLT may help you achieve your objectives, please call us. We would be glad to answer questions you may have about CLTs and show you how to use them to your best advantage.

Table 1: Calculation of Current Taxable Gift

Value of transferred securities $3,000,000 $3,000,000
Annual distribution to charity (8%) $240,000 $240,000
Applicable federal rate (120%) 5.4% 7%
Present value of charitable gift $2,892,000 $2,543,000
Taxable gift $108,000 $457,000 
08 Apr


In Charitable Gifts,Charitable Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner Mar-Apr 1998

Choose the Charitable Remainder Unitrust Option To Meet Your Needs

Charitable remainder unitrusts (CRUTs) can provide an income stream to an individual, a contribution to a charity and an income tax deduction for the donor. Certain limitations, however, make traditional CRUTs less attractive in some situations. Two other types of CRUTs — the net income with make-up CRUT (NIMCRUT) and the Flip CRUT — can be useful alternatives. The type of assets you are contributing and your charitable goals will help you determine which type of CRUT is right for you.

How CRUTs Work

You (the donor) contribute assets to a trust and take a current income tax deduction equal to the present value of the gift that will eventually be distributed to charity. The CRUT pays the noncharity beneficiary (the annuitant, who can be you or someone else) a percentage of the trust assets, valued each year either for the annuitant’s life or for a term of years (not more than 20). At the end of the trust term, the remaining assets go to the charity (or charities) you have named as the beneficiary.

For example, Beth creates a CRUT and funds it with $1 million. The CRUT terms require the trust to pay Beth 7% of the value of the trust assets each year for 20 years. Beth will receive a distribution of $70,000 in the first year. If the trust assets grow to $1.1 million in the second year, Beth will receive $77,000. At the end of the trust term, Beth’s favorite charity will receive the balance of the trust assets.

Use a CRUT To Defer Taxes on Appreciated Assets

CRUTs can be ideal vehicles to defer tax liabilities on appreciated assets. Why? Because the trustee of a CRUT can sell the appreciated assets transferred to the trust without incurring capital gains tax, though the annuitant is responsible for income tax on the payment he or she receives each year.

For example, if Beth sells $1 million of stock, for which she had paid $100,000, she will pay $180,000 in tax, leaving her $820,000. To receive the $70,000 annual income stream she needs, she will have to earn a 9% return. If instead she funds a CRUT with the stock, and the CRUT sells it, the full $1 million will be available to invest because the CRUT will pay no immediate capital gains tax.

CRUTs don’ t work as well when funded with assets that produce no income, such as real estate. If the assets held by a CRUT do not produce enough income to meet the annual payment obligation, the trustee will be forced to use the trust corpus to transfer a portion of the assets back to the annuitant as a part of the payment. This will reduce the trust’s ability to produce income in the future and leave less for the charity at the end of the trust term.

Use a NIMCRUT To Hold Currently Unproductive Assets

If you are interested in funding a CRUT with assets that are currently unproductive but are likely to be productive at some point over the trust term, consider using a NIMCRUT instead. Under the NIMCRUT, the annuitant receives the lesser of either the net income earned by the trust during the year or a fixed-percentage amount. A make-up account is established for years when the trust pays less than the percentage amount, and any shortfall is made up in years the trust earns more income than the percentage amount.

Using our previous example, if the NIMCRUT earns $60,000 in the first year, Beth will receive a payment in that year of $60,000, because this is less than the 7% required amount. If the trust earns $90,000 in the following year, and assuming the value of the trust is still $1 million, Beth will receive a payment of $80,000 — the $70,000 percentage amount, plus an additional $10,000 to make up for the prior year’s $10,000 shortfall.

By using a NIMCRUT, the trustee avoids having to distribute a portion of the trust corpus to an annuitant as part of the annual payment in years in which the trust does not produce enough income. Thus, a NIMCRUT preserves trust corpus while still, over time, paying the annuitant the percentage he or she is entitled to under the trust.

But the trustee may face another dilemma if the unproductive asset is sold. Generally, the terms of a NIMCRUT agreement forbid the trustee to pay the fixed-percentage amount from capital gains or trust principal. Therefore, the trustee may feel pressured to invest for current yield, and produce additional income to make up prior shortfalls to the annuitant, rather than to invest for total return, which may better serve the long-term interest of the charitable beneficiary.

Use a Flip CRUT To Benefit Annuity and Charity More Equally

If you want to benefit the annuitant and the charitable beneficiary more equally, consider a Flip CRUT, a technique approved in last year’s tax legislation. The Flip CRUT begins as a NIMCRUT and can be funded with an unproductive asset. This allows the trustee to make smaller or no payments to the annuitant in years the trust is earning little or no income.

Once the asset is sold, the trust flips to a traditional CRUT, which then pays the annuitant the fixed-percentage amount, allowing the trustee to invest for total return.
For instance, using our prior example, if Beth funds a Flip CRUT with an unproductive asset valued at $1 million, the trust will earn no income and Beth will receive no annual payments. When the trust assets are sold and invested in income-producing assets, Beth will begin to receive fixed percentage payments of 7% of the trust assets as valued each year but will receive no make-up for payments not received in prior years.

To qualify as a Flip CRUT, though, at least 90% of the fair market value of the trust assets must be unmarketable at the time of trust funding, and the trust’ s governing instrument must provide that it will be a NIMCRUT until the unmarketable assets are sold. At that point, it will flip to a standard CRUT and the annuitant will forfeit any make-up payments.

Which Vehicle Is Right for You?

CRUTs, NIMCRUTs and Flip CRUTs can all be effective estate planning techniques if you want to make a charitable donation while retaining an income stream that can continue for the benefit of your spouse or children. If you have questions about these trust options, please contact us. We would like to help you determine which is appropriate for your situation.


Flip CRUT as a Retirement Planning Tool

If you have no current need for income, you can fund a Flip CRUT with an unproductive asset, retaining an income interest and receiving a current income tax deduction. You can time the sale of the asset to coincide with your retirement, when you will need additional income. The trust will flip on the sale of the assets and begin paying you income during your retirement years.