Donors often have personal financial objectives with charitable giving — minimizing taxes, planning inheritances for heirs, or increasing current income — in addition to being driven to support and invest in the organizations that align with their personal goals and values or serve their community. A charitable remainder unitrust (CRUT) can serve both purposes.
A CRUT is a type of irrevocable trust that allows nonprofits to receive a portion of the donor’s assets tax-free, while the donor and beneficiaries can receive estate tax benefits and an income stream from the assets. In addition, the donor sets the timing of the CRUT distribution to their chosen charity, which will occur after their passing.
Existing or potential donors: Do you want your money to go to heirs, charities, or the Internal Revenue Service? Presumably, leaving a legacy to both heirs and charitable organizations (and not to the IRS) will be the answer. A planned giving strategy, which might include a CRUT, can help donors achieve their philanthropic and financial objectives. Read more about planned giving.
For endowments and foundations, the benefits from donors’ CRUTs can influence future budget planning and provide immediate advantages, such as regular donations from the donor during their lifetime.
How does a CRUT work?
The following scenarios demonstrate the different outcomes for a donor without a CRUT and with a CRUT, highlighting the benefits of the trust for both donors and charities. In both examples, the hypothetical donor is 70 years old with a life expectancy of 91 years.1
Example 1:
The donor owns an asset purchased for $50,000 that has appreciated to a current value of $250,000, resulting in an untaxed gain of $200,000. Upon deciding to sell the asset, the donor invests the proceeds into a balanced portfolio, planning to withdraw 5% of the balance annually. After selling the asset for $250,000 and accounting for a 20% capital gains tax ($40,000), the net amount available for investment is $210,000.2 Assuming an annual investment return and the specified withdrawal rate, the portfolio’s remaining balance at the end of the donor’s life is projected to be $317,000, which can be designated to heirs or a charity. The total pre-tax withdrawal amount received by the donor during their lifetime is estimated to be $279,412.
Example 2:
Instead of selling the $250,000 asset, the donor transfers the appreciated asset to a CRUT, converting it into a balanced portfolio with a 5% annual payout.3 Because the trust assets are destined for charity, the donor receives an immediate charitable deduction for the present value of the assets earmarked for future distribution to the charity. Assuming the CRUT’s investment return and payout rate, the charity will receive $374,322 after the donor’s passing, while the donor will receive a cumulative income of $332,634, including an estimated tax savings of $33,688, totaling $366,322 in lifetime income.3
Ultimately, the charity gains an additional $57,322, and the donor receives an extra $86,910 in income — approximately 20% more for the charity and 27% more for the donor. Moreover, the donor’s annual income increases, enhancing the potential for further charitable contributions due to excess cash flows.
For donors concerned about leaving assets to heirs, additional strategies can be combined with the CRUT such as: 1) using the income tax savings from the donation (as illustrated in Example 2) to offset taxes on converting pretax retirement savings to a Roth IRA, or 2) using the extra annual income to purchase a life insurance policy with heirs as beneficiaries. These approaches can structure charitable giving to slightly reduce the inheritance amount while significantly increasing the donation to the nonprofit.
Philanthropic guidance
We recognize that the operating budgets of foundations and endowments have been feeling the impact of the pandemic and inflation. In 2023, total giving rose 1.9% but, after adjusting for inflation, it actually decreased by 2.1%.4 However, the total charitable giving amount of $557.16 billion in 2023 was still higher than pre-pandemic levels, even after adjusting for inflation. This is an encouraging trend and presents an opportunity for nonprofits to offer philanthropic guidance to donors.
Fortunately, nonprofits don’t need to master the complexities of donor options for planned giving to reap the benefits. Wealth advisors, tax attorneys, and other financial experts are equipped to help potential donors create personalized giving plans that align with their goals. These plans are crucial for future planned giving and can also help maximize current contributions to their favorite charities. For some donors, a CRUT might be the ideal solution, but other strategies, such as bequests, beneficiary designations, donor-advised funds, and charitable lead trusts, can also be effective. Since there is no one-size-fits-all solution for donors, financial professionals can assist in navigating the complexity and suitability of each strategy. Learn more about philanthropic guidance.
If you’re ready to connect with us and learn more about how we can partner with your organization on philanthropic guidance, as well as fundraising strategies, Board of Director education, and fiduciary support, let’s talk.
1. This is a hypothetical example provided for illustrative purposes only.
2. Assuming the portfolio has a 7% annualized return. Investing involves risk, future investment risk cannot be guaranteed.
3. Assuming a 30% tax rate.
4. “Giving USA 2024: The Annual Report on Philanthropy,” Giving USA.
Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. Hypothetical examples are for illustrative purposes only. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.
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