Key Differences among CRTs
Charitable Remainder Trusts (CRTs) are powerful tools for charitable giving, philanthropy and financial planning, offering individuals a way to secure income, avoid capital gains taxes, and make impactful charitable contributions.
Within the CRT framework, there are three primary types to consider: Standard Charitable Remainder Unitrusts (SCRUTs), Net Income with Makeup Provision Charitable Remainder Unitrusts (NIMCRUTs), and FLIP Charitable Remainder Unitrusts (FLIPCRUTs). Each has unique features that cater to specific donor needs and financial goals.
This article explores these three types in detail.
Prior to reading this article, it would be helpful to read our general article on Charitable Remainder Trusts which goes into more details on what CRTs are used for.
1. Standard Charitable Remainder Unitrust (SCRUT)
A Standard Charitable Remainder Unitrust (SCRUT) is the simplest and most common type of CRT. It provides a fixed percentage payout to the beneficiary based on the annually revalued trust assets.
Key Features:
- Annual Revaluation: The payout amount is recalculated annually as a percentage of the fair market value (FMV) of the trust’s assets, unlike the Charitable Remainder Annuity Trusts (CRATs), which are valued only at the inception.
- Flexible Contributions: Donors can make additional contributions to the trust after its creation, unlike CRATs which are fixed at inception.
- Steady Income Stream: Beneficiaries receive a consistent percentage payout, making SCRUTs ideal for individuals seeking predictable income.
- Tax Advantages: The donor receives an immediate charitable deduction based on the present value of the remainder interest and defers capital gains taxes on appreciated assets transferred to the trust.
Ideal For:
- Donors with significant appreciated assets who desire a predictable income stream.
- Individuals looking for a straightforward CRT option that balances philanthropy and financial planning.
Example:
A donor establishes a SCRUT with $1,000,000 and specifies a 5% annual payout. If the trust earns 8% in one year, the beneficiary receives $50,000 (5% of $1,000,000), and the remaining earnings are reinvested. The next year, the payout is recalculated based on the updated FMV of the trust’s assets.
2. Net Income with Makeup Provision Charitable Remainder Unitrust (NIMCRUT)
A Net Income with Makeup Provision Charitable Remainder Unitrust (NIMCRUT) is a variation of the SCRUT, designed for flexibility. For example, what if the CRT does not have enough liquid assets to make the annual payout back to the donor?
Therefore, in a NIMCRUT, the payout is limited to the lesser of the trust’s net income or the fixed percentage, with a provision to “make up” unpaid amounts in future years when the trust generates higher income. Thus, if the net income is zero in a given year, there is no annual payout back to the donor; instead, the “make up” unpaid amount is kept track of and when the CRT has enough assets, a payout can be made.
Key Features:
- Net Income Limitation: Unlike SCRUTs, payouts are capped at the trust’s net income, which can result in lower payouts in years when the trust’s income is low.
- Makeup Provision: In years when the trust’s income exceeds the percentage payout, the excess is used to “make up” unpaid amounts from previous years.
- Income Growth Potential: NIMCRUTs are ideal for trusts holding assets expected to grow in value, such as stocks or real estate.
Ideal For:
- Donors who are not immediately reliant on income from the trust and are willing to wait for higher payouts in the future.
- Trusts with assets that may take time to generate substantial income.
Example:
A donor funds a NIMCRUT with $1,000,000 and specifies a 6% payout. In the first year, the trust generates only $40,000 in income (less than the 6% target of $60,000). The beneficiary receives $40,000, and the $20,000 shortfall is added to the “makeup account.” In a subsequent year, when the trust generates $100,000, the beneficiary receives $60,000 plus a portion of the prior shortfall, depending on the available income.
3. FLIP Charitable Remainder Unitrust (FLIPCRUT)
A FLIP Charitable Remainder Unitrust (FLIPCRUT) starts as a NIMCRUT and later “flips” into a SCRUT upon the occurrence of a triggering event. This structure is particularly useful for trusts holding illiquid assets.
Key Features:
- Triggering Event: The FLIPCRUT transitions from a net income payout structure to a standard fixed-percentage payout structure when a specific event occurs, such as the sale of an illiquid asset or a predetermined date.
- Flexibility for Illiquid Assets: The initial net income structure accommodates assets like real estate or closely held stock that may not produce consistent income until sold.
- Post-Flip Stability: After the triggering event, the trust functions like a SCRUT, providing predictable payouts based on the FMV of the trust.
Ideal For:
- Donors funding the trust with illiquid or non-income-producing assets that will generate income upon liquidation.
- Individuals seeking a hybrid approach that combines the benefits of NIMCRUTs and SCRUTs.
Example:
A donor funds a FLIPCRUT with $1,000,000 in appreciated real estate and specifies a 5% payout. Initially, the trust pays only net income, which may be minimal while the property generates rental income. After the property is sold (the triggering event), the trust flips to a SCRUT and begins paying 5% of the FMV annually.
Comparison of CRT Types
| Feature | SCRUT | NIMCRUT | FLIPCRUT |
| Payout Type | Fixed percentage of FMV | Lesser of net income or % FMV | Starts as NIMCRUT, flips to SCRUT |
| Makeup Provision | No | Yes | Yes (pre-flip only) |
| Triggering Event | Not applicable | Not applicable | Yes |
| Best For | Predictable income needs | Deferred income flexibility | Illiquid assets or delayed income |
| Revaluation of Assets | Annual | Annual | Annual |
Choosing the Right CRT
Selecting the appropriate CRT depends on your financial needs, the nature of the assets you plan to contribute, and your philanthropic goals:
- Choose a SCRUT for steady income and simplicity.
- Opt for a NIMCRUT if your assets require time to generate income or you anticipate income fluctuations.
- Select a FLIPCRUT if your trust will initially hold illiquid assets, such as real estate, that will eventually be liquidated.
How Bridge Law, LLP Can Help
At Bridge Law, LLP, we specialize in designing CRTs tailored to your unique needs. Whether you want to secure income for retirement, maximize tax benefits, or create a lasting charitable legacy, our team will guide you through every step of the process.
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