When setting up a Charitable Remainder Trust a key decision you have to make is how long to set the trust up for. First starting with the basics, a Charitable Remainder Unitrust can last for a specific number of years up to 20 years, or the lifetime of one or more people. In most cases, people will try to set up the CRUT for as long as possible to grow their assets faster by taking advantage of deferring taxes for a longer period. However; each of these structures has benefits and costs, and we've worked with our legal partners to design our trusts in a way that enhances the value while minimizing the drawbacks.
In this post, we'll talk briefly about the trade-offs of each strategy, outline our default structures, and walk through how we've chosen those defaults to create more value for you.
The Trade-OffsLet's start with the trade-offs between a lifetime and term Charitable Remainder Trust. We'll presume that you have at least a basic understanding of how these things work — the differences between Standard CRUTs and NIMCRUTs, for example, and the trade-offs between Lifetime and Term structures.
Term TrustsTerm structures usually have a lower ROI than lifetime structures, for the simple reason that they don't last as long — a term CRUT can last for as long as 20 years, and your assets grow on a pre-tax basis for less time. (You can see the potential ROI differences by using our Charitable Remainder trust returns calculator.) The advantage, however, is that term trusts offer more up-front distributions/liquidity in the trust's early years because term trusts usually have a higher annual payout rate than lifetime trusts.
Lifetime TrustsLifetime structures, by contrast, typically have higher ROI than term structures, again for a simple reason: They tend to last longer, allowing you to defer your taxes for many years and reap the benefits of tax free compound growth in the meantime. The risk associated with this type of trust is that you have less up-front liquidity and, critically, lifetime trusts are tied to the life of the beneficiaries, so when the beneficiaries pass away the trust simply ends, and the remaining money goes to charity.
As a result, a lifetime CRUT can end up having negative ROI if you pass away early, before the trust has had enough time to pay out. In addition, if you choose a NIMCRUT and pass away suddenly, you may miss the chance to cash out the amounts in your make-up account (however our trust length timelines are designed to reduce this risk which we dive into below).
How Valur Structures are Designed to Reduce Risk and Increase ReturnsWe've put in significant work to mitigate these risks.
Term TrustsIf you choose a term trust (or if that is your only option, which will be true if you fall below the IRS's lifetime trust threshold, which is currently 27.5 years of age), our default beneficiary setting is that your trust will continue for 20 years no matter what, even if something happens to you. We do this by including a provision stating that you may appoint a successor beneficiary — someone who will receive your distributions if you're not around anymore — through your will. This ensures that you can take care of your family and others while preserving the option to change the beneficiary.
Lifetime TrustsWe have chosen beneficial defaults to hedge most of the risks associated with lifetime CRUTs — namely that, if you pass away early or suddenly, your money gets stuck in your trust and ends up going to charity instead of your beneficiaries. The default settings change depending on which structure you choose, and we'll outline each.
Lifetime NIMCRUTsWe address these dual risks — 1) that you pass away early, before the trust has paid out at least your principal, and 2) that you pass away suddenly, with a significant amount of money built up in your NIMCRUT makeup provision — in different ways, depending on your circumstances.
No named beneficiaries. First, if you choose not to name a back-up beneficiary (and if you're old enough), your trust will run for the longer of your life or 20 years. This structure helps hedge against risks to your health. If this were a simple lifetime trust and something happened to you unexpectedly, all of the money left in your trust would go straight to charity; by doing it as the "longer of your life or 20 years", if something did happen to you during the first 20 years, your distributions would go to whoever you name in your will or living trust, maximizing the returns for you and your family. If you don't have a will or living trust yet, that's not a problem -- we can connect you with an estate lawyer if you'd like, and, in the meantime, the default is that your money will pass to your heirs according to the default rules of inheritance.
One or more named beneficiaries. If you do choose to name a back-up beneficiary (and, again, if you're old enough), we've focused on the second risk — that you pass away suddenly, leaving a lot of money in your makeup provision. To mitigate that risk we have designed our NIMCRUTs to not end when you pass away. In these circumstances, your trust will run for your lifetime plus one year, so long as your named beneficiary outlives you. This structure also helps hedge against risks to your health, but in a different way. By setting up your trust for your lifetime plus one year, if something did happen to you, your secondary beneficiary would have a year to pull the accumulated distributions out of the trust (via the NIMCRUT "makeup" account), maximizing the returns for you and your family. (Note that this would still leave the risk that you pass away very early in your trust's term and that your money would not have years to grow. To protect against that risk, you can purchase term life insurance to against some or all of the value in the Charitable Remainder Trust if something happens to them. For instance, someone who puts $2 million into a CRUT might buy a $1 million, 20-year term life insurance policy. That way, even if they pass away early, their loved ones will be able to collect at least some of the value that was put into the trust, thus hedging out at least some of the risk. For more on this approach, you can check out our article on how it works here.)
We know that's a lot to digest, so here's a quick example. Ben is 34 and his wife, Jen, is 33. With a standard Lifetime NIMCRUT, if Ben passes away unexpectedly in 40 years, all of the assets in the trust, including the makeup amount he has accrued by deferring his distributions, would typically pass on to his chosen charity instead of his wife. With our optimized default structure, however, the Lifetime NIMCRUT will actually last for Ben's life plus one year (assuming Jen is still around when Ben passes away). In this case, when Ben passes away, the trust does not end immediately. Instead, it will run for another year, which gives us, as the trust administrator, the time to pay Jen as much as we can according to the NIMCRUT rules. This reduces the second key risk of a Lifetime NIMCRUT and can increase returns by double digits.
Two-life trusts. If you are married or have another adult secondary beneficiary in mind, you may be eligible for additional options. (As a rule of thumb, the combined ages of the two beneficiaries has to be around 79 or higher, according to the IRS's formulas.) If you are eligible, you can set up a trust for the length of multiple people’s lives. This version is actually pretty simple: You and your other beneficiary will each receive distributions jointly while you are both alive, and then the survivor will continue to receive distributions for the rest of his or her life. The key benefit of this structure is that you will both receive distributions for your whole lives, so the trust will last longer that a single-life trust. The main drawback is that the payout rate is slightly lower since the trust is expected to last longer. So while you are entitled to a smaller distribution every year, your family or other chosen beneficiaries would potentially be able to continue drawing money from the trust for much longer and be able to take advantage of your assets growing tax free for a longer period of time.
Lifetime Standard CRUTsThe longer a trust lasts, the lower a Standard CRUT's ROI tends to be relative to a NIMCRUT's, because — as you'll know if you've dug into the differences — NIMCRUTs can defer distributions to enable you to take advantage of additional tax-free compounding for a longer time. Standard CRUTs, however, are more consistent and less volatile, since they pay a fixed percentage of trust assets every year no matter the trust's returns.
Since lifetime Standard CRUTs do not have a make-up provision, they have one key risk: That the primary beneficiary passes away early. We address that risk the same we we do if you don't name a beneficiary: If you are old enough, we set up the lifetime Standard CRUT for the longer of your life or 20 years. As we explained earlier, this ensures that even if you pass away early in the trust's term, it will run for the full 20 years for the benefit of whoever you name in your will. As a result, that person will receive annual payouts for the remainder of the 20 years no matter what, mitigating the risk of the trust ending early.
ConclusionWe know there's a lot here, but these small details are critical, and we have found these timeline defaults to be a huge improvement for our customers (and, unfortunately, they're not something that most lawyers are aware of, let alone focused on). We hope this information is helpful as you decide on your tax planning strategy.