Valur Comprehensive Charitable Remainder Trusts (CRUT) Guide

‍Overview on Charitable Remainder Trusts and Valur

If you’re reading this guide, you probably understand the basics of tax mitigation, some of their use cases and how Valur helps you to take advantage of these opportunities. In this guide, we will focus on the characteristics and benefits of the Charitable Remainder Trust and in particular one variation: the Charitable Remainder Unitrust or CRUT. 

A Charitable Remainder Trust is a tax-exempt structure particularly well suited for appreciated assets you have not sold yet. In exchange for donating some of the money in the trust to a charity at the end, you are allowed to defer the associated taxes when selling the asset and you also get an immediate charitable income tax deduction from the government.

The key benefits from a Charitable Remainder Trust are:

1. Tax deferral: avoid paying taxes upfront when you sell assets so you can instead reinvest those tax dollars for your benefit. 
2. Lower effective tax rates: you can effectively smooth out your income and avoid spiking it in any individual year, which typically results in an overall effective tax rate. In exchange for donating some of the money in the trust to a charity of your choice at the end of the term, you also get an immediate charitable income tax deduction from the government.
3. Use the money in the trust to make the same investments you would make otherwise if you were investing in a taxable brokerage account.

A Charitable Remainder Trust is essentially a more flexible IRA, but the main differences are they have no contribution limit and they allow you to use your money today instead of having to wait until you are 59.5. However, you are only entitled to a certain amount of distributions from the trust per year (don´t worry, you can always borrow against or sell your future trust income if you need even more, as explained in this article).

So, now that you have a good idea of what a Charitable Remainder Trust is and their main benefits, but there is still a key decision to make:

Which type of Charitable Remainder Trust will you choose, a Charitable Remainder Unitrust (CRUT) or a Charitable Remainder Annuity Trust (CRAT)? 

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As you might guess, the truth is there is no “one size fits all” or correct answer. This is a personal decision that depends on your family circumstances, your financial goals, and what you want your life to look like for the next 20 years or more. 

Valur’s goal is to help founders, employees, and crypto investors keep more of their hard-earned gains by taking the sophisticated tax mitigation and asset protection tools of the ultra-rich and making them seamless and accessible to everyone. Below we will explain the specifics, trade offs and when each Charitable Remainder Trust structure makes sense. 

Charitable Remainder Unitrust (CRUTs) vs. Charitable Remainder Annuity Trust (CRATs)

There’s not actually all that much to differentiate between the two types Charitable Remainder Trust structures, both structures are tax-exempt so you can avoid capital gains tax, allow you to take a charitable income tax deduction and entitle you to an at least annual distribution. But there is one key difference can significantly affect your returns. This key difference comes down to how much is distributed from the trust annually, and it’s encapsulated in the trusts’ labels: A CRAT is an Annuity Trust, and a CRUT is a Unitrust. What does that mean?

Unitrust

A Unitrust, by contrast, is a trust that pays out a fixed percentage of trust assets every year, rather than a fixed amount. Since the fair-market value of the trust’s assets is measured every year, the amount that you receive from the trust will change every year. For instance, if you put the $1 million in cryptocurrency into your Unitrust and chose a 10% payout rate, you’d receive $100,000 in the first year. But if your investments do very well and the trust grows to $2 million the next year, you’d receive 10% of that new value, or $200,000. You are entitled to distributions equal to a fixed percentage of trust assets every year, though you do have some control over when you receive those distributions, we offer a variety of distribution methods to suit your needs, including Standard CRUTs, Flip CRUTs, and NIMCRUTs. Other key differences include that Charitable Remainder Unitrusts (CRUTs):

• Can be set up for longer periods such as multiple people's lifetime (or can have a higher annual payout rate than CRATs if set up for the same time period). And the longer the trust is set up for, typically the higher the expected returns are
• Have multiple distribution options that enable you to control and defer distributions if you prefer (read more here about NIMCRUTs, Flip CRUTs and Standard CRUTS here)
• Assets can be added at any time to a CRUT but cannot be added to a CRAT after it is setup

Annuity Trust

An annuity pays a fixed amount of money to a person for a specified period of time, usually in exchange for a lump-sum payment up front. Similarly, an Annuity Trust is a trust that provides a fixed income stream for the trust’s term — either a person’s lifetime or a specified period of time. That fixed income amount is based on the initial value of the assets that are placed into the trust when it is set up. So, for example, if you put $1 million in into your Annuity Trust and chose a 10% payout rate, you’d receive $100,000 per year, no matter how the trust performs — whether the equity grows 100x or not at all, you will receive $100,000 per year. This can bring welcome certainty, but the returns are likely to be lower than with a CRUT assuming normal market returns, since your assets are likely to grow over time and much of those gains will be stuck in the trust and will revert to the charitable beneficiary at the end of the term instead of you.

Why are CRUTs “particularly suited for appreciated property”?

Broadly Charitable Remainder Trusts are great tax planning structures for appreciated assets because it is tax exempt, meaning you can avoid paying capital gains taxes on the sale and reinvest all of the sales proceeds instead of just the after tax proceeds and you receive an income tax deduction from using both structures. But the big question for most people is how much money you will they receive from the Charitable Remainder Trust. That depends primarily on whether you choose to use a Charitable Remainder Unitrust (CRUT) or Charitable Remainder Annuity Trust (CRAT).

So, now that you have a good idea of what CRUTs are and their main benefits and why most people choose them, lets dive into two key decisions you will have to make: 

1. Should you use a “lifetime” or “term” trust? 
2. What are your preferred withdrawals from the trust? 

Lifetime vs term trusts

Specifics and trade offs 

The length of CRUTs ultimately determine how they will make distributions to the beneficiaries. They can be either for life (the remainder of your lifetime) or a specified period of years (Between 1 and 20 years). 

In lifetime trusts, you have your whole life to withdraw the trust’s assets. This type of trust brings two key advantages:

• Larger return on investment: the tax-exempt nature of Charitable Remainder Trusts allows you to defer your taxes longer and earn greater returns from your deferred taxes. Simply put, the longer your money grows tax free, the bigger your gains.
• Flexibility in investments: you have the possibility to invest in illiquid assets with long time horizons -say angel or other venture investments that could be illiquid for a decade. 

Planning Note: Losing out because something happens to you suddenly shouldn't be much of a concern. Valur offers a common tool—the Wealth Replacement Trust—that can ensure that assets are available to your family if the worst happens. Learn more ➔

One important trade off is they have a limitation if you would like to leave your money to another beneficiary in case something happens to you. However, it is also good to know there are strategies that can help you work around to make sure you don’t lose the value of your trust. The most common strategy is life insurance that is paid for by the trust.

In a term trust, instead, withdrawals from the trust’s assets are for a pre established number of years (usually 20), and there are two main reasons why you might decide to use this approach:

• Predictability: for some people, it's better to commit to a 20-year financial plan than to one that lasts a lifetime.
• It is easier to leave your money to another beneficiary if something happens to you

Planning Note If you’re interested in exploring more on the trade offs of Lifetime vs Term Trusts, please visit our blog post on this topic here.

The main trade off is that less time means less compound growth of your assets, so term trusts typically deliver a lower return on investment than the lifetime option.

Distribution strategies

Specifics and trade offs

You should always keep in mind the main benefit of CRUTs: they allow your money to grow tax free. Ideally, you wouldn't need to pull more out of your trust than what’s necessary to meet your immediate cash needs ie: down payment on a home, paying for college, etc.. Still, it's always nice to know that you have liquidity options in case you need them.

Withdrawals work differently depending on whether you choose a Standard CRUT, a NIMCRUT or a Flip CRUT, but the bottom line is that you'll have access to some of your money immediately, and the amount available to you will grow every year as long as your investments keep growing.

Main features of each of the Charitable Remainder Trusts:

• Standard CRUTs: you receive payouts each year that are a set percentage of the trust's assets. That percentage is determined at the start of the trust and it doesn't change during the trust's term.  You’ll receive this percentage of assets each year, no matter what, and regardless of how the investments perform inside of the trust. Please visit our article to better understand how they work and an example. 

• NIMCRUTs: you have the option, but not the obligation, to pull a percentage out of the trust every year. Because this trust only distributes income, you have some additional control over your withdrawal amount. By choosing not to take a large payout every year, you can achieve significantly greater long term gains. More on NIMCRUTs and another example here.

• Flip CRUTs: Flip CRUTs 'flip' from a NIMCRUT structure to a Standard CRUT structure after a predetermined event, such as the sale of a non-marketable asset. Think of having the best of both worlds! Read more on Flip CRUTs in this article.

When they make sense

Standard CRUTs can be a good fit for customers who are willing to give up some returns in exchange for relatively predictable, consistent payouts.

NIMCRUTs, instead, typically are focused on maximizing total returns for people setting Charitable Remainder Trusts up for a long period of time (30+ years).

Flip CRUTs generally work best for people with illiquid assets that won't be easily distributed for a while or who don't want distributions for a period of time and then want consistent predictable distributions i.e. post retirement income.

If you’re interested in learning more about all 3 structures and how they compare to each other, please visit our post that include easy-to-understand examples.

Customer Case Study

Charitable Remainder Trusts are useful structures for people who haven’t sold their assets yet. Typical customer profiles include business owners, startup founders/employees, or investors of all kinds (crypto, equity, institutional). Here is a specific example for startup employees:

Annie (30) is an employee who joined a successful Bay Area startup at a relatively early stage and the company recently completed it’s IPO. 

Suppose that her shares - all exercised for a total cost of around $50k and she’ll likely be able to sell her shares at a significant markup: $5M.

Let's say she has enough other savings and ongoing income to cover her expenses, and she decides to put all of her shares into a trust. 

Annie works with Valur to place those assets in a NIMCRUT today. By doing so, she’ll:

1. Receive a charitable income tax deduction of approximately 10% of current value of her shares: in this case, that's a $250k deduction and since she lives in a high-tax state, that deduction translates into cash savings of about $90k on taxes. (The savings is dependent on the individuals tax rate.) 
2. Sell the shares when she is ready and instead of sending $1.6 million to California and the federal government for taxes, she'll keep that money, reinvest it and let it grow.
3. Have the option (but not the obligation) to pull a percentage out of the trust every year: after she sells her shares, she'll be able to cash out a set percentage of the trust's current value every year (for a term trust, it'll be a minimum of 11%; for a lifetime trust, it depends on her age, but it'll be right around 6%). One technical note here: because Annie chooses a NIMCRUT, the annual withdrawal allowances are cumulative, so if she decides not to withdraw a percentage of her money in a particular year, she'll have the ability to take larger distributions in the future. 

Bottom Line

What would all of these tax savings, investment gains, and withdrawals mean for Annie's bottom line?  If Annie has her money in a Lifetime Charitable Remainder Trust, she'll end up with about $19.6M in total payouts.

If, instead, Annie had kept her money in a regular, taxable investment account, she would have instead ended up with about $8.7M In other words, even after making what can only be described as a very generous donation to charity, Annie still pockets an extra $10.9M. Not a bad outcome for what amounts to a simple tax planning exercise!

About Valur:

We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerburg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy. Schedule a time to chat with our team and learn more about how we can help you!

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