CRUT: Unlock Income & Support Charity

Short answer: A charitable remainder unitrust (CRUT) is an irrevocable trust that pays you a fixed percentage of its value, recalculated every year, for life or up to 20 years, and then gives what’s left to charity (26 U.S.C. §664(d)(2)). The trust itself pays no federal income tax (26 U.S.C. §664(c)(1)), so it can sell an appreciated asset and reinvest the whole price. You pay tax on the payments as you receive them, and you give up the asset for good.

A CRUT fits a narrow set of people: someone holding stock, real estate or a business interest with a large built-in gain, who wants income more than a lump sum, and who has a charity they want to benefit. For them, it can turn a taxable sale into a lifetime income stream plus a charitable gift.

Law verified against 26 U.S.C. §§170, 664, 2055, 4947 and 6034, Prob. Code §15400, and Rev. & Tax. Code §17755, 2026. This is general information, not legal advice for your situation.

What is a charitable remainder unitrust?

A CRUT must pay a fixed percentage, between 5% and 50%, of the net fair market value of its assets, valued annually, at least once a year (26 U.S.C. §664(d)(2)(A)). The payments go to one or more people who are alive when the trust is created, for their lives or for a term of no more than 20 years (26 U.S.C. §664(d)(2)(A)). When the payments end, the remainder goes to a charitable organization (26 U.S.C. §664(d)(2)(C)). The projected value of that remainder has to be at least 10% of the value of each contribution when it goes in (26 U.S.C. §664(d)(2)(D)).

That 10% test limits how high the payout can be and how young the income beneficiaries can be. A high percentage paid to a young couple for two lives can fail it. The math has to be run before the trust is signed.

Why does it have to be irrevocable?

The charitable deduction depends on the charity’s remainder being locked in. Federal law denies an income tax deduction for a remainder interest given in trust unless the trust is a charitable remainder annuity trust, a unitrust or a pooled income fund (26 U.S.C. §170(f)(2)(A)). The estate tax deduction follows the same rule (26 U.S.C. §2055(e)(2)(A)).

In California, a trust is revocable unless the instrument expressly makes it irrevocable (Prob. Code §15400). A CRUT document has to say so plainly. Once you sign and transfer the asset, you can’t take it back.

How does a CRUT defer the capital gains tax?

If you sell an appreciated asset yourself, you pay capital gains tax and reinvest what’s left. If you transfer it to a CRUT first and the trustee sells, the trust owes no federal income tax on the sale (26 U.S.C. §664(c)(1)). The full proceeds stay invested and generate the payments.

The gain doesn’t disappear. Each payment you receive is taxed under a four-tier ordering rule: first as ordinary income, then as capital gain, then as other income, and last as a tax-free return of principal, to the extent the trust has each type of income for the current year and prior years (26 U.S.C. §664(b)). The deferred gain comes out to you over time in the capital gain tier.

If the trust earns unrelated business taxable income, federal law imposes an excise tax equal to 100% of that income (26 U.S.C. §664(c)(2)(A)). California doesn’t use that excise tax. It taxes a CRUT’s unrelated business taxable income under its regular trust income tax instead (Rev. & Tax. Code §17755). Real estate and operating business interests need close review before they go into a CRUT.

What income do you receive?

You receive the stated percentage of the trust’s value as revalued each year (26 U.S.C. §664(d)(2)(A)). If the portfolio grows, your payment grows. If it falls, your payment falls.

A variation lets the trust pay the lesser of the stated percentage or the trust’s actual income, with a make-up for shortfalls in later years when income exceeds the percentage (26 U.S.C. §664(d)(3)). That version is used for assets that produce little income until sold, such as raw land.

Who ends up with the assets?

The charity you named gets the remainder, and none of it comes back to your family. A CRUT isn’t a way to pass wealth to your children. If replacing that inheritance matters, a separate plan is needed, often life insurance held in an irrevocable trust so the proceeds stay outside your taxable estate. I cover that in irrevocable life insurance trusts.

How does a CRUT compare to other charitable trusts?

• Charitable remainder annuity trust (CRAT). It pays a fixed dollar amount set when the trust is funded, between 5% and 50% of the initial value (26 U.S.C. §664(d)(1)(A)). The payment never changes.
• Charitable lead trust. It reverses the order. The charity receives payments first and your family takes what’s left. For the charity’s interest to qualify for the estate tax deduction, it has to be a guaranteed annuity or a fixed percentage of value distributed yearly (26 U.S.C. §2055(e)(2)(B)).

A CRUT suits people who want payments that can grow with the portfolio. A CRAT suits people who want a fixed check regardless of markets. A lead trust suits people whose goal is moving wealth to the next generation. For a broader look, see charitable giving in estate plans.

What are the tradeoffs?

• It’s permanent. The asset belongs to the trust once you fund it.
• Payments float. A unitrust payment rises and falls with the trust’s value.
• The charity gets the remainder. Your heirs don’t, unless you plan separately.
• It has ongoing filings. A charitable remainder trust is a split-interest trust (26 U.S.C. §4947(a)(2)) and must file an annual information return (26 U.S.C. §6034(a)).

When does a CRUT make sense?

It makes sense when you already hold an appreciated asset you plan to sell, want income instead of a lump sum, and have a charity you want to support. It doesn’t make sense when the goal is leaving the most to your children, or when a properly funded living trust and good beneficiary designations already do what you need.

A CRUT sits alongside the rest of your estate plan, not in place of it. More on how I set these up is on my charitable remainder trust attorney page, and the definition is in the glossary entry for the charitable remainder trust.