Charitable Remainder Unitrusts: An Underutilized Strategy for Highly Appreciated Assets
Charitable Remainder Unitrusts, commonly known as CRUTs, have been part of the estate planning landscape for decades. Yet I believe they remain underutilized, even by estate planners who regularly advise high-net-worth families.
One reason may be the way we tend to categorize them. A CRUT is usually thought of first as a charitable giving technique. That is certainly accurate, since an irrevocable charitable remainder is fundamental to the arrangement. But viewing a CRUT only through the charitable planning lens can obscure its usefulness in addressing another common planning problem: what to do when a client owns a highly appreciated asset that he or she would like to sell.
For a client with charitable intent, a CRUT can bring together several planning objectives in a single structure. It can facilitate the sale and diversification of an appreciated asset without the immediate capital gains tax that would accompany a sale by the client, provide an ongoing income stream, generate a current charitable income tax deduction, and ultimately transfer the remaining trust assets to charity. That combination makes the CRUT worth considering more often than I believe it is.
Using a CRUT to Sell a Highly Appreciated Asset
Consider a client who owns $5 million of publicly traded stock with a tax basis of $500,000. The client wants to reduce the risk associated with holding a concentrated position but does not need the entire $5 million for current expenses. If the client sells the stock, the transaction will result in a $4.5 million capital gain. Federal capital gains tax, the 3.8% net investment income tax where applicable, and potentially state income tax will reduce the amount available for reinvestment.
A Charitable Remainder Unitrust provides a different approach. Rather than selling the stock first, the client can contribute the stock to a properly structured CRUT. The CRUT can subsequently sell the stock and diversify its investments without paying an immediate capital gains tax in the same manner that the individual client would have upon an outright sale. As a result, the gross sales proceeds can remain invested in the CRUT. The client then receives an annual unitrust payment equal to a specified percentage of the trust’s value, generally for life or for a stated term of years.
The difference between investing the gross sales proceeds and investing the amount remaining after an immediate tax payment can be significant, particularly when the asset has a very low tax basis and the trust will operate for many years.
A CRUT Defers Capital Gain Rather Than Eliminating It
It is sometimes said that a CRUT allows an appreciated asset to be sold “tax free.” While that shorthand may describe the absence of an immediate capital gains tax upon the trust’s sale, it can give clients the wrong impression about the ultimate tax consequences. A CRUT generally does not make the built-in capital gain disappear.
Distributions from a CRUT are subject to the ordering rules of Internal Revenue Code Section 664. Under those rules, the character of the trust’s income is tracked and distributions to the noncharitable beneficiary carry out income according to a statutory tier system. In simplified terms, ordinary income generally comes out first, followed by capital gain, other income, and finally a return of corpus. Accordingly, capital gain realized when the CRUT sells an appreciated asset will generally be recognized by the beneficiary over time as distributions carry that gain out of the trust.
The potential benefit is therefore better understood as tax deferral rather than tax elimination. Instead of recognizing the entire gain in the year of an outright sale, the gain may be recognized over a period of years as the client receives CRUT distributions. During that period, assets that otherwise might have been used to pay an immediate capital gains tax remain invested inside the trust. That distinction is important both technically and economically.
The Current Charitable Income Tax Deduction Matters
The charitable income tax deduction is another significant feature of a CRUT that can receive too little attention when the strategy is evaluated primarily as a means of selling appreciated property. When a client transfers property to a qualifying CRUT, the client generally receives a current charitable income tax deduction equal to the actuarial value of the charitable remainder interest. The amount of the deduction depends on the terms of the trust and applicable actuarial assumptions, including the value of the contributed property, the ages of the income beneficiaries, the unitrust payout rate, the duration of the trust, and the applicable Section 7520 rate.
The deduction is subject to the usual limitations applicable to charitable contributions, including rules that vary depending on the type of property contributed and the charitable remainder beneficiary. Any available carryforward should also be considered as part of the analysis.
For the appropriate client, the deduction can be meaningful. This is particularly true when the contribution occurs in a year in which the client has substantial taxable income and can make effective use of the charitable deduction. In other words, the charitable benefit of a CRUT is not confined to the remainder that passes to charity years later. The charitable commitment can also generate a significant current income tax benefit.
CRUTs Also Belong in the Estate Planning Discussion
A CRUT is not merely an income tax strategy. It also has an estate planning component. In the common arrangement in which a donor establishes a CRUT, retains a unitrust interest for life, and designates one or more charities to receive the remainder, the charitable remainder ultimately passes to charity without adding to the donor’s taxable estate.
That should not be confused with a unique estate tax advantage available only through CRUTs. Property passing directly to charity at death can also qualify for the estate tax charitable deduction. The more important point is that the CRUT allows a client to integrate lifetime income, charitable giving, income tax planning, investment diversification, and estate planning within the same structure. For some clients, that integration is precisely what makes the strategy attractive.
It may also explain why CRUTs are sometimes overlooked. They do not fit neatly into a single professional category. The estate planning attorney must understand the income tax consequences. The accountant must understand the Section 664 distribution rules and trust reporting. The investment advisor must manage a portfolio that supports the required unitrust payments as well as the charitable remainder. The client’s charitable objectives must also be incorporated into the design.
A CRUT works best when those disciplines are considered together.
The Charitable Commitment Cannot Be an Afterthought 
The tax benefits of a CRUT should not obscure its most important requirement. This is a charitable planning technique, and the charitable commitment is real.
Once assets are transferred to the CRUT, the charitable remainder interest is irrevocably committed to charity. The donor cannot later decide to reclaim the trust principal. The donor’s retained economic interest is generally limited to the unitrust payments specified in the trust.
For that reason, a CRUT is not appropriate merely because a client owns a low-basis asset and would prefer not to pay capital gains tax today. There must be genuine charitable intent, and the client must be comfortable permanently devoting a portion of the transferred wealth to charity.
Similarly, a CRUT may not be the best choice when the client’s primary objective is to maximize the amount ultimately passing to children or other descendants. Other estate planning strategies may better accomplish that goal. In appropriate circumstances, a CRUT can also be coordinated with separate wealth replacement planning, but that requires its own analysis.
The decision should begin with the client’s objectives, not with the tax technique.
When Should a CRUT be Considered?
I believe this is where CRUTs are most often overlooked. Estate planners routinely consider GRATs, SLATs, sales to intentionally defective grantor trusts, ILITs, family entities, and other sophisticated strategies when advising wealthy families. A CRUT, by contrast, may not enter the discussion unless the client specifically raises charitable planning. That may be too narrow an approach.
When a client has charitable intent and is contemplating the sale of a substantially appreciated asset, a CRUT should be among the alternatives considered before the sale occurs. The potential application is not limited to publicly traded securities. Depending on the facts, CRUT planning may also be considered for appreciated real estate, closely held business interests, and other appreciated investments.
The timing of that discussion is critical. A client generally cannot complete a sale and then transfer the proceeds to a CRUT with the expectation of obtaining the same capital gains tax treatment. Transactions involving assets already subject to a pending sale require particular care because assignment-of-income principles can cause the gain to be taxed to the donor despite the contribution to the trust. The CRUT should therefore be considered early in the planning process, before the contemplated transaction has progressed too far.
Putting the CRUT Back in the Estate Planner’s Tool Chest 
For the right client, a Charitable Remainder Unitrust can accomplish several objectives at once. It can permit diversification of a highly appreciated asset without an immediate capital gains tax upon the trust’s sale, keep the gross sales proceeds invested, provide an ongoing unitrust payment, generate a current charitable income tax deduction, defer recognition of capital gain as distributions are made, and ultimately provide a substantial benefit to charity.
There are tradeoffs. The client gives up access to the contributed principal beyond the prescribed unitrust payments. The charitable remainder is irrevocable. The trust requires proper administration and tax reporting. Investment performance, payout rates, life expectancy, tax rates, and the client’s other resources can materially affect the result. Those considerations are reasons to analyze a CRUT carefully, not reasons to leave it out of the discussion.
A CRUT will not be the right answer for every client with appreciated assets. But when a high-net-worth client has charitable intent and is considering the sale of a substantially appreciated asset, I believe the Charitable Remainder Unitrust deserves a place alongside the other strategies that estate planners routinely evaluate.
It may be a charitable trust, but its planning applications extend well beyond charitable giving.
