Testamentary Charitable Remainder Trust
(TCRT or TCRUT)

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When incorporated into an estate plan, the testamentary charitable remainder trust is created within the estate documents, which typically stipulate that at death, the trust be funded with tax-encumbered (IRD) assets to the extent these assets are available. The trust will pay out a prescribed percentage of the trust value annually to the heirs; this percentage and the duration of the payments are determined in the estate documents. After the set period of time, a designated charity receives the remainder of the interest in the trust. The trust assets grow tax-free, and the TCRUT gives the estate an estate tax deduction on a portion of the assets that go into the trust.

With a TCRUT, a payout percentage (5% or more) is specified within the estate documents, as is a period of time for the unitrust to make distributions to personal beneficiaries. Actual payments are determined by this payout percentage and the value of the assets in the trust. Many people choose to pay the unitrust amount to family members for a period of time that will pay out an amount equal to the initial value of the property.

For example, a trust that pays 7% for fifteen years will pay family members an income equaling approximately the initial fair market value of the property. In this way, the donor is able to double the total benefits from the property: once to the family through income payments, and once to the charities through distribution of the principal after all income payments are completed.

One advantage of the charitable remainder unitrust (CRUT) is that the amount remaining in the trust grows tax-free. For example, if a person selected a 6% payout trust and the trust investments earned 8%, there would be 2% growth tax-free each year. This tax-free growth could substantially increase the value of the trust over time, and since the selected 6% payout is based on this value, distributions to personal beneficiaries would increase proportionally.

The ability of the unitrust to increase both in principal and in income payments over a period of years is frequently referred to as an inflation hedge. However, please understand that this benefit does not come without risk. In the above example, if the growth in the trust falls short of the payout (6% in this instance), income payments to beneficiaries will actually decline with time.

In assessing the utilization of CRUTs, we generally recommend that this option only be considered if at least $100,000 is available to fund this trust; otherwise, administrative expenses will likely negate much of the benefit.

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