Frequently Asked Questions

1. What is a Charitable Remainder Unitrust?

2. What Formats are available for Charitable Remainder Unitrusts?

   1. Standard Payout Option

   A unitrust is required to distribute an amount, at least annually, equal to at least 5% but no more than 50%, of the annual value of trust assets. This payout is commonly referred to as a "unitrust amount" or more formally called a "guaranteed unitrust amount." In the event income and gain is not sufficient to make the required distribution, the trustee must distribute corpus. This type of format is commonly referred to as a standard unitrust or a SCRUT (Standard Charitable Remainder Unitrust.) Over half of all CRTs are SCRUTs.

   2. Net Income Option

   Notwithstanding the general rule above, the trust instrument may provide that the trust shall pay, for each year, the lesser of the full unitrust amount (payout rate times the asset value on the valuation date) or the trust income (as defined in §643(b) and the regulations thereunder). This option is commonly referred to as an income only unitrust or a NICRUT (Net Income Charitable Remainder Unitrust). Fewer than 5% of all CRTs are NICRUTs.

   IRC §643(b) provides that the term income, when not preceded by the words taxable, distributable, undistributed net or gross, means the amount of income of the estate or trust for the taxable year determined under the terms of the governing instrument and applicable local (state) law. For purposes of determining the unitrust amount (the amount to be paid out of the trust) for a net income unitrust, many states provide that expenses incurred in the administration, management or preservation of trust property, and all expenses reasonably incurred by the trustee are charges against trust income. Regular trustee's compensation is generally charged in equal portions against income and principal.

   The Revised Uniform Income and Principal Act adopted by most states defines income to include interest, most dividends, rents, royalties and the discount element of original issue discount debt instruments. Unless otherwise defined in the trust, and subject to state law, income does not generally include capital gain.

   In a NICRUT, income earned in excess of the payout rate becomes principal for future calculations. The NICRUT income beneficiary is never compensated for the difference between the calculated unitrust amount and the actual payout.

   3. Make-Up Option

   If a net income option is adopted, the trust may also be designed to pay income in excess of the full unitrust amount to the extent the aggregate of amounts paid in prior years were (by reason of the income only exception) less than the aggregate of the fixed percentage amounts for such prior years. The trust can, in other words, make-up past deficiencies from prior years by paying out excess income earned in the current year. The concept is loosely analogous to a cumulative dividend feature on preferred stock and is referred to as a NIMCRUT (Net Income with Make-up Charitable Remainder Unitrust).

   Net income and make-up provisions are available to charitable remainder unitrusts only. They are not available to charitable remainder annuity trusts.

   In a NIMCRUT, income earned in excess of the payout rate must be distributed to the extent the trust failed to earn income equal to the payout rate in prior years. Income in excess of this larger number becomes principal for future calculations. Because of the make-up provision, the NIMCRUT income beneficiary has a possibility of receiving a larger payout in future years. . .but only to the extent that the sum of the prior years distributions were less than the unitrust amounts for those prior years and also only to the extent the NIMCRUT actually earns significant income in a future year.

   4. Flip-CRUT Option

   The life cycle of a Flip-CRUT is generally characterized by two phases. In the initial phase, a Flip-CRUT acts like a NICRUT or NIMCRUT and only distributes the trust's accounting income to the income beneficiaries. In the second phase, following the occurrence of a predetermined triggering event, the trust switches, or "flips," to a SCRUT and pays out a fixed percentage of the trust's annual fair market value. The change in the payout method commences on January 1st of the year following the triggering event.

   The triggering event must be defined in the trust document and may be based on:

   • a marriage,
   • a divorce,
   • a death,
   • the birth of a child,
   • a date specified in the trust,
   • the sale of an unmarketable asset, or
   • an event not in the control of any person.

   NIMCRUTs and Flip-CRUTs comprise approximately 20% of all CRTs.

   Planning Note: NICRUTs, NIMCRUTs and Flip-CRUTs can solve the problem of funding a trust with a non-income producing asset by limiting the requirement for income distributions to times when the trustee has the capacity to make them. Further, NICRUTs, NIMCRUTs and Flip-CRUTs provide planning opportunities for those income recipients who wish to defer income distributions.
   

3. What are some possible, personal financial benefits for creating a Charitable Remainder Trust?
4. Who are the Candidates for a Charitable Remainder Trust?
5. How is the income tax charitable deduction calculated for a gift to a Charitable Remainder Trust?
6. What are the gift and estate tax consequences of retaining an income interest in a Charitable Remainder Trust?
7. What tax and information returns are required after a Charitable Remainder Trust is created?
8. What are the Annual Valuation Rules for Charitable Remainder Unitrusts? and Why are the Annual Valuation Rules Important?
9. What is a Charitable Remainder Annuity Trust?
10. What Factors Should I Consider When Choosing a Payout Format for my Charitable Remainder Trust?
11. How do I select a measuring term for my Charitable Remainder Trust?
12. What are some methods of income deferral within a Flip Charitable Remainder Unitrust (Flip-CRUT) or a Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT)?
13. What is a Flip Charitable Remainder Unitrust (Flip-CRUT)?
14. What are the Typical Responsibilities of a Trustee of a Charitable Remainder Trust?
15. What is an “Independent” Special Trustee (IST)? When is an IST used in Charitable Remainder Trust Planning?