8089 / What is a charitable remainder unitrust?

A charitable remainder unitrust provides to a noncharitable beneficiary a variable payment stream based on an annual valuation of the trust assets, with an irrevocable remainder interest to be paid to or held for the benefit of a charity. The payout must be a fixed percentage of not less than 5 percent nor more than 50 percent of the net fair market value of the trust assets, and is paid at least annually to the noncharitable beneficiary or beneficiaries.¹ Since the trust is valued annually, the donor may make additional contributions to the trust. To qualify as a charitable remainder trust, a trust must meet the definition of, and function exclusively as, a charitable remainder trust from the time the trust is created.² Thus, if a trust does not qualify as a charitable remainder unitrust at its inception, it never will.³

The IRS denied both trust and CRUT status to an entity that was proposed to be established by an S corporation essentially to receive its profits and make distributions to its owners. The Service ruled that the proposed entity would not qualify as a trust under Treasury Regulation Sections 1.301.7701-4(a), 1.301-7701-4(c), or as a valid CRUT.⁴

10 percent Remainder Interest Requirement

The value of the remainder interest (i.e., the charitable deduction) must equal at least 10 percent of the net fair market value of the property as of the date it is contributed to the trust.⁵ The value of a remainder interest for this purpose is calculated using the IRC Section 7520 interest rate, which is published every month by the IRS. The calculation of the deduction can be made using the current rate or either of the previous two months’ rates. See Q 8099 for an explanation of the calculation of the deduction.

If a transfer to an existing charitable remainder unitrust does not meet the 10 percent remainder interest value requirement, the contribution will be treated as if it were made to a separate trust; thus, the existing CRUT will not become disqualified by a contribution that does not meet this requirement.⁶ It appears that the separate trust will be taxed as a complex trust, since it will not meet the requirements for a CRT.

The Service privately ruled that reducing the unitrust payment percentage for additional contributions to ensure that the value of the charity’s interest would be no less than 10 percent of the fair market value of the additional property would not cause the CRUT to be disqualified if the total annual unitrust payment percentage for the additional contribution did not fall below 5 percent annually.