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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
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assets after it has been 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
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exemption, but 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
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