Charitable Remainder Unitrust (CRUT)

A couple of weeks ago the Wall Street Journal ran an interesting article on Charitable Remainder Unitrusts (CRUT). Setting up the CRUT allows owners to sell art tax deferred when they are designated for a charitable donation.

The WSJ reports

A growing number of art and collectibles owners are having their cake and eating it, too: by earning money from sales of their art, tax deferred, within trusts earmarked for eventual charitable donations.

Here’s how it works: Owners transfer a work of art to what is known as a charitable remainder unitrust, or CRUT, whose appointed trustee is authorized to sell the art when, presumably, the market is at a high point. Any profit on the sale is tax deferred and the proceeds get reinvested. The trust beneficiaries, meanwhile, receive an annual fixed percentage of the assets’ value for their lifetimes. And upon the last beneficiary’s death, the rest goes to charity.

The tax deferral is just one of the popular features, considering how big a bite taxes can take when art is sold at a profit: The IRS takes 28% in capital-gains tax, the Affordable Care Act takes 3.8% from sellers with incomes above $200,000, and some states take a cut as well: New York tags on 12%.

“If I make a $1 million profit on the sale of a painting, I’ll pay the 41% [the combination of IRS, ACA and state taxes for a New York resident] and be left with $590,000 of the profit,” says Ramsay Slugg, wealth strategist for U.S. Trust. “If I put the painting in a CRUT and then sell it, I’ll get that $1 million working for me, and I’ll pay capital gains on a deferred basis.”

Yearly distributions equaling 5% to 50% of the trust’s fair market value, which is recalculated annually, are paid to the beneficiaries, who tend to be the donor and spouse. Typical distributions are in the 5% to 8% range. Although some CRUTs are designed to last a specified number of years, most will end at the death of the last noncharitable beneficiary, and the remaining funds will then go to designated charities.

Meanwhile, “it functions very much like a 401(k) or IRA,” says John Sare, partner in the tax-exempt organizations practice and the trusts and estates group of Patterson Belknap Webb & Tyler LLP. “The assets can be reinvested and grow on a tax-deferred basis.”

Frequently, those considering a CRUT are planning for their retirement. They want to maximize income and reduce costs. Long-time art collectors may have highly appreciated assets that carry a high cost for storage, security and insurance and would generate large capital-gain taxes if sold.

“People in that situation may be looking to simplify their lives by shedding some of their art assets, but they also prefer not to have a big tax bill when they do,” Mr. Sare says. In such cases, he says, a CRUT can provide “a stream of income and a smaller tax than you might have paid.”

Another attractive feature of CRUTs, some say, is the intended charity recipients don’t have to be designated at the time the trust is created.

“People change their minds about which charities they want to support,” says Andy Augenblick, president of Emigrant Bank Fine Art Finance.

Some art collectors also see such trusts as a way to help a museum, or other charity, that won’t accept a gift of the art itself.

Source: Wall Street Journal