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Is a CRUT for You?
Give later, reap tax benefit now
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Business New Haven
12/29/1997
By: Kirah Ramage
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Glenn H. Hascher is director of personal financial counseling at Ernst & Young LLP in Stamford. BNH asked Hascher to explain charitable remainder unitrust as a planning tool.
What exactly is a Charitable Remainder Unitrust (CRUT)?
It is a vehicle by which you can give assets to charity in the future and get tax benefits right now.
What are some of those benefits?
Income tax and charitable contribution income tax benefits. With a Charitable Remainder Unitrust, after a period of years and/or life expectancy, the remainder goes to a charity, but [in the meantime] you have the ability to utilize the income benefits from the assets during that term of years, meaning
you can draw income from it.
Do you pay income tax on that income?
Yes. But you get a tax deduction today for the value of the remainder interest that's going to charity [when the unitrust expires]. Remainder interest is what is left for charity after the term of the unitrust ends. The charity has no right to anything from the unitrust until it expires.
What is another benefit?
Typically, people set up a CRUT and put in property that has large capital gains built into it - such as a property worth $1 million dollars and has capital gains of $1 million - so that they can sell the property within the trust, not pay capital-gains tax, and [instead] gain income for life, or the term of years [of the CRUT] that may be greater than the current income.
How does a CRUT relate to real estate holdings?
For example: You have a property worth $1 million that has huge capital gains built into it, and it generates little or no income [such as vacant land in a desirable development area]. You would typically have to sell it, pay capital gains and end up with about $750,000 to invest. Or you could contribute that property to a CRUT, sell it but not pay capital gains tax on the sale, and reinvest those proceeds on something that can give a seven- or eight-percent rate of return. So, you can take a non-income performing asset and turn it into an income-performing asset.
Who would benefit most?
A person between the ages of 50 and 60 who has property
with large capital gains built into it but very little income being generated, and [who is] in good health and/or has charitable intent. Because once the CRUT is created, you lose the asset.
It is not reversible. If you have a family, you have to think long and hard about doing a CRUT. If you set up a CRUT and then die two years later, you will not have been able to take out enough income to make up for having lost the asset.
How does a CRUT benefit heirs?
It doesn't. At death, there's no benefit to the heirs because the trust terminates and gets passed on to the charity.
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