during those meetings began to lay down a comprehensive financial plan , something that continues to unfold this year .
That plan included a charitable remainder unitrust , or CRUT . This vehicle pays a percentage of its value each year to a beneficiary — perhaps the trust creators themselves or their spouses . The annual payments generally must be at least 5 % and no more than 50 % of the fair market value of the assets , which are re-evaluated each year . When the trust expires , the assets pass to a charity .
Jastrem thought this particular vehicle would be of great use for his Massachusetts client . As long as the client continues to work for the same company , he will receive more stock benefits , which will go into the trust .
“ The client can transfer some of the stock he now owns to the trust and defer the capital gains tax until he is in a lower income tax bracket , thereby lowering his overall tax bill this year ,” Jastrem says . Although the client had previously worked with another advisory firm , “ no one there had presented this option to him as a way to lower his immediate tax bill and set up an annual payment that would carry over into retirement .”
The main difference between a charitable remainder unitrust and the betterknown charitable remainder annuity trust is that additional contributions can be made to a unitrust after it is set up , which is not true for the annuity trust . “ With this particular client , I believe it is likely we would start off the CRUT with $ 1 million , but may add more over time , so using the CRUT gives us that flexibility . There is more certainty in what the income distributions will be with a CRAT , but that isn ’ t the main priority in this case ,” Jastrem says .
The unitrust is revalued at the end of each year — at which point the fair market value of its assets is determined and the beneficiary receives a percentage . That means the trust ’ s assets could produce less income during a down market .
A unitrust can also be paired with a donor-advised fund , which can be named as the beneficiary of the trust assets when the client passes , Jastrem says . His client is considering doing that this year . “ With this strategy , you get the immediate tax benefits of the unitrust , and you gain the ability to advise how the charitable dollars are invested , as well as control the amount , beneficiaries and timing of the distributions to charity , all of which are attractive benefits for this client .”
Donor-advised funds also allow the children to get involved in making charitable grants , so the family can pick charities together . Then the client can name the children as successor grantors of the donor-advised fund to continue the gifting legacy after the client passes away , when the remainder of the unitrust flows into the donor-advised fund .
Jastrem says the Massachusetts client also wanted to create an income stream in retirement , something the charitable remainder unitrust allowed him to do . “ Depending on the CRUT investment performance , the income distributions may be able to increase with inflation . The amount left in the trust at the end of the person ’ s life is given to charity . That exact amount is an estimate , as we don ’ t know how long the client will live or what the investments will return . The donor receives a charitable tax deduction in the year of transfer . The transfer to the trust is irrevocable .”
The more the beneficiary receives each year from the trust , of course , the less that will be left for charity in the end .
“ Those are the calculations we are doing now ,” Jastrem says . “ 2023 may be the last year he is in the highest tax bracket , but based on preliminary calculations it looks like his charitable contribution deduction could save him $ 60,000 in taxes the initial transfer year , which will be 2023 .”
The client also wants to sell some of his company stock outright , but he will wait until stock prices recover to do that . He may still have a couple of high tax liability years now , but the changes that are being made will lower his tax bill in the future , with some of the stock being sold in years when his income puts him in the lower bracket .
These changes could also normally reduce his state-level taxes , though whether that happens in Massachusetts is still up in the air , Jastrem says .
“ Massachusetts has not had a statelevel charitable deduction in prior years ,
“ The fact that so much of this client ’ s stock has a basis cost that is so low is another reason a CRUT , which defers capital gains taxes , fits so well .”
— Ed Jastrem
but it may enact one for 2023 . As of 2023 , there is also a new surtax of 4 % on income over $ 1 million in Massachusetts , which is another reason that careful planning around capital gains taxes is now more important for highincome clients .”
“ The fact that so much of this client ’ s stock has a basis cost that is so low is another reason a CRUT , which defers capital gains taxes , fits so well ,” Jastrem says . Any taxes that are deferred or avoided completely means more money will be available for the client , for the children or for the charities the client will designate in the future .
“ I am pleased with the groundwork we have been able to lay so far and the team that we have been able to build with his estate planning attorney and tax attorney . The client is a lot closer to his goals now than he was a year ago ,” Jastrem says .
MARCH 2023 | FINANCIAL ADVISOR MAGAZINE | 31