Valur Charitable Remainder Trust Guide


Overview on Charitable Remainder Unitrusts and Valur

If you’re reading this guide, you probably understand the basics of tax mitigation, some of their use cases and how Valur helps you to take advantage of these opportunities. In this guide, we will focus on the characteristics and benefits of one particular structure: the Charitable Remainder Unitrust or CRUT. 

CRUTs are tax-exempt accounts for appreciated assets you have not sold yet. In exchange for donating some of the money in the trust to a charity at the end, you are allowed to defer the associated taxes and you also get an immediate tax deduction from the government.

Their key benefits are:

  1. Tax deferral: avoid paying taxes upfront when you sell assets so you can instead reinvest those tax dollars for your benefit. 
  2. Lower effective tax rates: you can effectively smooth out your income and avoid spiking it in any individual year, which typically results in an overall effective tax rate. In exchange for donating some of the money in the trust to a charity of your choice at the end of the term, you also get an immediate tax deduction from the government.
  3. Use the money in the trust to make the same investments you would make otherwise if you were investing in a taxable brokerage account.

CRUTs are essentially a more flexible IRA, but the main differences are they have no contribution limit and they allow you to use your money today instead of having to wait until you are 59.5. However, you are only entitled to a certain amount of distributions from the trust per year (don´t worry, you can always borrow against or sell your future trust income if you need even more, as explained in this article).

So, now that you have a good idea of what CRUTs are and their main benefits, but there are still two key decisions to make: 

  1. Should you use a “lifetime” or “term” trust? 
  2. What are your preferred withdrawals from the trust? 

Democratizing tax mitigation with Valur

As you might guess, the truth is there is no “one size fits all” or correct answer. This is a personal decision that depends on your family circumstances, your financial goals, and what you want your life to look like for the next 20 years or more. 

Valur’s goal is to help founders, employees, and crypto investors keep more of their hard-earned gains by taking the sophisticated tax mitigation and asset protection tools of the ultra-rich and making them seamless and accessible to everyone. Below we will explain the specifics, trade offs and when each CRUT structure makes sense. 

Lifetime vs term trusts

Specifics and trade offs 

The length of CRUTs ultimately determine how they will make distributions to the beneficiaries. They can be either for life (the remainder of your lifetime) or a specified period of years (Between 1 and 20 years). 

In lifetime trusts, you have your whole life to withdraw the trust’s assets. This type of trust brings two key advantages:

  • Larger return on investment: the tax-exempt nature of CRTs allows you to defer your taxes longer and earn greater returns from your deferred taxes. Simply put, the longer your money grows tax free, the bigger your gains.
  • Flexibility in investments: you have the possibility to invest in illiquid assets with long time horizons -say angel or other venture investments that could be illiquid for a decade. 

Planning Note Losing out because something happens to you suddenly shouldn't be much of a concern. Valur offers a common tool—the Wealth Replacement Trust—that can ensure that assets are available to your family if the worst happens. Learn more ➔

One important trade off is they have a limitation if you would like to leave your money to another beneficiary in case something happens to you. However, it is also good to know there are strategies that can help you work around to make sure you don’t lose the value of your trust. The most common strategy is life insurance that is paid for by the trust.

In a term trust, instead, withdrawals from the trust’s assets are for a pre established number of years (usually 20), and there are two main reasons why you might decide to use this approach:

  • Predictability: for some people, it's better to commit to a 20-year financial plan than to one that lasts a lifetime.
  • It is easier to leave your money to another beneficiary if something happens to you

Planning Note If you’re interested in exploring more on the trade offs of Lifetime vs Term Trusts, please visit our blog post on this topic here.

The main trade off is that less time means less compound growth of your assets, so term trusts typically deliver a lower return on investment than the lifetime option.

Distribution strategies

Specifics and trade offs

You should always keep in mind the main benefit of CRUTs: they allow your money to grow tax free. Ideally, you wouldn't need to pull more out of your trust than what’s necessary to meet your immediate cash needs ie: down payment on a home, paying for college, etc.. Still, it's always nice to know that you have liquidity options in case you need them.

Withdrawals work differently depending on whether you choose a Standard CRUT, a NIMCRUT or a Flip CRUT, but the bottom line is that you'll have access to some of your money immediately, and the amount available to you will grow every year as long as your investments keep growing.

Below, you can find the main features of each structure:

  • Standard CRUTs: you receive payouts each year that are a set percentage of the trust's assets. That percentage is determined at the start of the trust and it doesn't change during the trust's term.  You’ll receive this percentage of assets each year, no matter what, and regardless of how the investments perform inside of the trust. Please visit our article to better understand how they work and an example. 
  • NIMCRUTs: you have the option, but not the obligation, to pull a percentage out of the trust every year. Because this trust only distributes income, you have some additional control over your withdrawal amount. By choosing not to take a large payout every year, you can achieve significantly greater long term gains. More on NIMCRUTs and another example here.
  • Flip CRUTs: Flip CRUTs 'flip' from a NIMCRUT structure to a Standard CRUT structure after a predetermined event, such as the sale of a non-marketable asset. Think of having the best of both worlds! Read more on Flip CRUTs in this article.

When they make sense

Standard CRUTs can be a good fit for customers who are willing to give up some returns in exchange for relatively predictable, consistent payouts. NIMCRUTs, instead, typically maximize total returns, and Flip CRUTs generally work best for people with illiquid assets that won't be easily distributed for a while.

If you’re interested in learning more about all 3 structures and how they compare to each other, please visit our post that include easy-to-understand examples.

Customer Case Study

CRUTs are useful structures for people who haven’t sold their assets yet. Typical customer profiles include startup founders and employees, or investors of all kinds (crypto, equity, institutional). Here is a specific example for startup employees:

Annie (30) is an employee who joined a successful Bay Area startup at a relatively early stage and the company recently completed it’s IPO. 

Suppose that her shares - all exercised for a total cost of around $50k - are now valued at around $2.5M. And although she could never be certain, her best guess is that she’ll likely be able to sell her shares at a significant markup: $5M.

Let's say she has enough other savings and ongoing income to cover her expenses, and she decides to put all of her shares into a trust. 

Annie works with Valur to place those assets in a NIMCRUT today. By doing so, she’ll:

  1. Get a tax deduction of approximately 10% of current value of her shares: in this case, that's a $250k deduction and since she lives in a high-tax state, that deduction translates into cash savings of about $90k on taxes. (The savings is dependent on the individuals tax rate.) 
  2. Sell the shares when she is ready and instead of sending $1.6 million to California and the federal government for taxes, she'll keep that money, reinvest it and let it grow.
  3. Have the option (but not the obligation) to pull a percentage out of the trust every year: after she sells her shares, she'll be able to cash out a set percentage of the trust's current value every year (for a term trust, it'll be a minimum of 11%; for a lifetime trust, it depends on her age, but it'll be right around 6%). One technical note here: because Annie chooses a NIMCRUT, the annual withdrawal allowances are cumulative, so if she decides not to withdraw a percentage of her money in a particular year, she'll have the ability to take larger distributions in the future. 

What would all of these tax savings, investment gains, and withdrawals mean for Annie's bottom line?  If Annie has her money in a Lifetime Charitable Remainder Trust, she'll end up with about $63.3M in total payouts.

If, instead, Annie had kept her money in a regular, taxable investment account, she would have instead ended up with about $40.4M. In other words, even after making what can only be described as a very generous donation to charity, Annie still pockets an extra $22.9M. Not a bad outcome for what amounts to a simple tax planning exercise!

You can also read a tailored example for cryptocurrency investors who can also take advantage of the benefits of CRUTs, here.

In our next guide, we will take a deeper look into CLATs, a powerful tool used when you have already sold your appreciated assets. In the meantime, if you would like to learn more, please feel free to check out our Frequently Asked Questions section, our Learning Center or schedule a time to chat with us!

About Valur

Valur has a singular goal: to help our customers access tax planning structures that are otherwise inaccessible to them. From picking the best strategy to organizing your distributions and other important financial events, we'll be with you the whole way.

We have built a system to streamline the tax planning tools of the ultra-rich to make them seamless, affordable and accessible to everyone. 

What we offer:

  • Simplicity and speed: comprehensive trust structuring to maximize tax protection and completed, vetted legal documents to establish the trust
  • Trust administrative management (federal and state filings, trust accounting and distribution management)

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Tip

You can choose from different types of Charitable Remainder Trust, including Standard, NIMCRUT, and Flip CRUT.

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