Running Head: SHORT PAPER 1
Module Eight – Short Paper
SHORT PAPER 2
In an estate plan, the appropriate integration of charitable giving in the form of a
charitable remainder unitrust (CRUT), a charitable annuity unitrust (CRAT), and a split-interest
trust can give rise to tax-related implications. It is essential to take into account the advantages
and disadvantages associated with these strategic options before incorporating them into the
estate plan.
Advantages of a CRUT, a CRAT, and a split-interest trust
A charitable remainder trust can act as a vital strategic instrument in estate planning
since it is tax-exempt and help in tax savings. It can decrease the taxable income of an individual
by making sure the income is distributed among the trust beneficiaries. It creates an opportunity
for the trustor to allocate assets to both beneficiaries as well as charity without having to pay
taxes. Although CRUT and CRAT are similar, the main difference arises in terms of the
distribution of the trust (Rojeck, 2019). In both of these trusts, a payment of at least 5 % has to
be made with a maximum of 50 % of the actual trust assets to the beneficiary. In a split-interest
trust which is also referred to as a charitable lead trust, the initial payment has to be made to the
charity, followed by the payment to the beneficiary. The main advantage of CRUT is the
flexibility to add assets after the trust’s creation, and the main advantage of CRAT is the
deduction of income tax for the donor. The split-interest trust enables beneficiaries to save
taxes.
Disadvantages of a CRUT, a CRAT, and a split-interest trust
The use of a CRUT, a CRAT, and a split-interest trust in estate planning can give rise to
a number of disadvantages. The main disadvantages associated with charitable remainder
unitrusts are the irrevocable nature and the need to make fixed payments that cannot be altered
(Nathanson et al., 2021). It makes the trust option rigid and inflexible. In case the payments are
not made on a regular basis, the trust can become void. The disadvantages of charitable annuity
unitrust include the irreversible nature of the trust and the inability to add assets after it has been
SHORT PAPER 3
created (Parthemer, 2019). A fixed amount of payment has to be made to the trust in order to
make sure that income is generated from it. Another disadvantage that arises in the case of
CRUT and CRAT trusts is related to their complex nature. The administration department of
such trust has to take care of diverse formalities and operations pertaining to the holding of
trusts, distribution as well as holding of the funds of the trust, filing of IRS tax returns, etc.
Managing these elements is of critical importance in these trusts. However, they increase the
complications of managing these trusts in the context of estate planning (Shane, 2023). A split-
interest trust is not tax-exempt in nature (Parthemer, 2022), and hence the trust’s income that is
earned after making a payment to the charity is taxable. When appreciated assets are sold,
giving rise to capital gain, the possibility of capital gains taxes also arises, increasing the tax
burden.
Strategies
In the estate planning context, the use of trusts and charitable giving has gained
prominence and importance since they help in reducing the amount of tax. The strategic
incorporation of a CRUT, a CRAT, or a split-interest trust can give rise to tax exemption
benefits and create value for charities as well as beneficiaries. However, it is extremely
important to make sure that tools are incorporated in tax planning in a professional, responsible,
and accountable manner. Appropriate adherence to the regulatory landscape is essential in order
to make sure that trusts are legally incorporated into tax planning and give rise to tax
exemptions in a legal manner (AICPA).
In the context of a prospective future client who wants to integrate charitable giving into
his estate plan, each of the trust types can give rise to both advantages and disadvantages. While
CRUT and CRAT trusts can help to reduce tax, they will also require fixed payments. These
trust options are beneficial for the client. A split-interest trust will not lead to tax exemption, but
SHORT PAPER 4
it will be more beneficial for the charitable beneficiary as compared to the client. This is
because the tax amount will be reduced for the charitable beneficiaries.
Reference
Nathanson, M. J., Craig, J. T., Geoghegan, J. A., Lee, N. G., Haber, M. A., Haspel, M. B., ... &
Stelljes, S. R. (2021). Too Much of a Good Thing: Managing Concentrated Holdings.
Personal Financial Planning for Executives and Entrepreneurs: The Path to Financial
Peace of Mind, 167-179.
Parthemer, M. R. (2022). Estate Planning in Volatile Markets and Rising Interest Rates.
Journal of Financial Service Professionals, 76(6).
Parthemer, M. R. (2019). Testamentary Charitable Lead Annuity Trusts-Have Your
(Charitable) Cake and Eat It, Too (Well, at Least Your Heirs Get to Enjoy It!). Journal
of Financial Service Professionals, 73(2).
Professional responsibilities (no date) AICPA. Available at:
https://us.aicpa.org/interestareas/personalfinancialplanning/resources/practicecenter/pr
ofessionalresponsibilities (Accessed: 09 June 2023).
Rojeck, R. P. (2019). Charitable Planning. Wealth: The Ultra-High Net Worth Guide to
Growing and Protecting Assets, 25-36.
Shane, P. B. (2023). A Trust for Every Season. SSRN 4458367. Available at:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4458367
