Charitable Remainder Trusts (CRUT): The “Give It Away to Keep It” Liquidity Strategy
Charitable Remainder Trusts (CRUT): The “Give It Away to Keep It” Liquidity Strategy
๐ WHO THIS IS FOR (Prerequisites)
- Required Profile: Founders or Investors facing a massive liquidity event (IPO, M&A) with a low cost basis and no QSBS eligibility.
- Primary Objective: Deferral & Income (Avoiding the immediate 23.8% – 37% tax hit upon sale and converting the gross proceeds into a lifetime income stream).
- Disqualifying Factor: Need for immediate lump-sum cash access or zero philanthropic intent (at least 10% must eventually go to charity).
โ ๏ธ STRATEGY ELIGIBILITY CHECK
A CRUT is a “Split-Interest” vehicle. You keep the “Income Interest” (the fruit), and the charity gets the “Remainder Interest” (the tree) after you die or the term ends.
- โ๏ธ Timing: Must be set up BEFORE a binding agreement to sell the asset exists. (Assignment of Income Doctrine trap).
- โ๏ธ Payout Rate: You must take an annuity of at least 5% but no more than 50% of the trust assets annually.
- โ๏ธ The 10% Rule: The actuarial value of the remainder interest going to charity must be at least 10% of the initial contribution.
- โ๏ธ Asset Type: Public/Private Stock, Real Estate, Crypto, Art. (Mortgaged Real Estate creates “UBTI” issuesโavoid).
EXECUTIVE SUMMARY
- The Premise: You own $10M of Apple stock bought for $100k. Selling it triggers ~$2.4M in federal tax immediately. You only have $7.6M to reinvest.
- The Edge: You transfer the $10M stock to a CRUT. The Trust sells the stock tax-free (Charities pay no capital gains). The Trust now has the full $10M to reinvest.
- The Result: You receive an income stream (e.g., 5% or $500k) from the full $10M principal for life. You pay tax only on the income you receive (deferral).
- Wealth Replacement: You use a portion of the increased income to buy Life Insurance (ILIT), replacing the asset for your heirs tax-free.
In the UHNW ecosystem, the CRUT is the ultimate “Have your cake and eat it too” tool. You get the tax deduction, the gross compounding, and the income, while society gets the remainder later. Source: Cornell Law / Bernstein Private Wealth
- Scenario: Sale of $10M zero-basis asset.
- Comparison: Direct Sale (Taxable) vs. Contribution to CRUT (Tax-Exempt Sale).
- Tax Rate: 23.8% Capital Gains Tax (Federal).
- Reinvestment: 7% Annual Return.
- Payout: 5% Unitrust Payout (Standard).
Performance Simulation (Income Power)
| Metric | Direct Sale (Sell & Pay) | CRUT Strategy (Defer) | Delta (Alpha) |
|---|---|---|---|
| Sales Proceeds | $10,000,000 | $10,000,000 | – |
| Immediate Tax Bill | ($2,380,000) | $0 (Exempt) | +$2.38M Working Capital |
| Investable Principal | $7,620,000 | $10,000,000 | +31% More Capital |
| Annual Income (Year 1 @ 5%) | $381,000 | $500,000 | +$119,000/Year |
| 20-Year Total Income | $10,147,000 | $13,590,000 | +$3.4M Income |
*Chart Note: The CRUT generates 31% more annual income for life because the tax drag didn’t erode the principal. The income tax is paid slowly over time as distributions are received.
Advanced Mechanics: The “Spigot” Trust (NIMCRUT)
*Controlling when you pay tax.
| Structure | Mechanism | Ideal Use Case |
|---|---|---|
| Standard CRUT | Fixed % payout every year regardless of income. | Retirees needing steady cash flow immediately. |
| NIMCRUT | Pays lesser of fixed % or “Net Income.” Defers payouts if income is low. | Young founders who don’t need cash now. Allows tax-free compounding inside trust until “Make-Up” provision is triggered later. |
| Flip-CRUT | Starts as NIMCRUT (for illiquid assets), flips to Standard upon sale. | Holding Real Estate or Pre-IPO stock that generates no cash flow initially. |
Solving the “Disinheritance” Problem:
- The Fear: “If I give the $10M to the CRUT, the charity gets it when I die. My kids get nothing.”
- The Fix: Use the extra income ($119k/year delta in the chart above) to fund a Life Insurance policy inside an Irrevocable Life Insurance Trust (ILIT).
- The Result: Upon death, Charity gets the Trust Remainder. Kids get the $10M Tax-Free Death Benefit. Zero net cost to heirs, massive tax savings for you.
โ BOUNDARY CLAUSE: Structural Limitations
- Irrevocability: Once the asset is moved to the CRUT, you cannot take it back. You only own the income stream, not the principal.
- Tiered Taxation (WIFO): CRUT distributions are taxed “Worst-In, First-Out.” Ordinary income comes out first, then Capital Gains, then Tax-Free Corpus. You cannot cherry-pick the tax character of your distribution.
๐ค DECISION BRANCH (Logic Tree)
IF Asset = QSBS Eligible:
โข Input: Founder shares, <$50M assets.
โข Output: Prioritize QSBS (#553). 100% Tax Exclusion (Keeping the principal) is better than Deferral (CRUT).
IF Asset = Non-QSBS (Crypto/Public Stock):
โข Input: Low basis, High tax bill.
โข Output: Execute CRUT. Capture the 30% arbitrage on principal. Use NIMCRUT if you are under 50; Standard CRUT if over 60.
Philanthropy isn’t just about charity; in the CRUT structure, it’s a strategic financial partner. The government pays you to be generous.