Charitable Remainder Unitrust Calculator with Monte Carlo Simulation

Charitable Remainder Unitrust Calculator with Monte Carlo Simulation

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What is a Charitable Remainder Unitrust (CRUT)?

A Charitable Remainder Unitrust (CRUT) offers a unique opportunity for individuals to support their favorite charitable causes while simultaneously securing their own financial future. By contributing assets into a CRUT, donors receive a steady income stream for life or a specified term, potentially reducing their current income taxes through a charitable deduction, while decreasing future estate taxes. Upon the trust’s termination, the remaining assets are transferred to designated charities, fulfilling the donor’s philanthropic goals. This makes a CRUT an excellent choice for those looking to balance the act of giving with prudent financial planning, ensuring their legacy makes a lasting impact while also benefiting from the trust’s financial advantages. More here.

  • – The trust is funded with a certain dollar amount by the settlors (you). Because it is a charitable trust,  capital gains taxes are deferred. This is valuable if you fund it with appreciated assets such as stock.
  • – Every year the settlors (aka non-charitable beneficiaries) receive a certain percentage of what’s left in the trust over the duration of the trust (term). If this payout percentage is lower than the investment return, the trust fund grows, and the yearly payout for the settlors increases.
  • – At the end of the term of the trust (maximum 20 years), the charity (the charitable beneficiary) gets what’s left over. This can be substantial. The amount in today’s dollars (net present value, NPV) to the charity is estimated by the IRS. This is done when the trust is established using a special discount rate, the § 7520 rate. The §7520 rate may change from month to month.
  • – Based on the results of the NPV calculation you can claim an immediate income tax deduction.

Why is our Monte Carlo CRUT Calculator special?

J P Morgan famously said about the stock market that “It will fluctuate”. Our Monte Carlo model is the first calculator on the web that takes these fluctuations into account for a CRUT. It simulates variations in the rate of return from year to year. We run 2,000 simulations and it therefore takes a few seconds for the results to appear.

 

In addition, we introduce the new metric of Economic Benefit to the Non-Charitable Beneficiary. Economic Benefit compares the results of simply paying capital gains taxes and investing the residual for the selected duration to the chosen CRUT strategy. The Economic Benefit to the Non-Charitable Beneficiary is calculated as follows: initial income tax savings are invested and allowed to grow untouched for the duration, and annual CRUT distributions are also invested and allowed to grow untouched. The sum of these two values constitutes the Economic Benefit. While this may not reflect your use of the funds, our method provides a comparative analysis between CRUT and non-CRUT strategies. Taxes and fees on distributions are not considered in this calculation.

What does the Monte Carlo CRUT calculator do?

 

It shows:

  • – The estimated immediate income tax deduction, leading to estimated tax savings
  • – How much the tax savings would grow if invested for the duration of the CRUT
  • – How much of the funds are left over if you were to take a non-CRUT approach and would have to pay capital gains taxes (assumed to be 20%)
  • – How much the leftover funds would grow (without a CRUT) if invested over the duration
  • – The economic benefit to the non-charitable beneficiary (as explained in the box, to be compared with the preceding)
  • – A schedule of the annual payouts for the settlors from the CRUT
  • – Total Payouts to Noncharitable Beneficiaries (Deterministic)
  • – Final Fund Value for Charitable Beneficiary (Deterministic)
  • – Average Total Payouts to Noncharitable Beneficiaries (Stochastic)
  • – Average Final Fund Value for Charitable Beneficiary (Stochastic)

Deterministic means that we assume the same growth rate, year after year, with no fluctuation. Stochastic means that we assume that the growth rate fluctuates around a mean. The returns are better in some years and worse in others. We run 2,000 simulations of fluctuating returns (Monte Carlo Simulation). Simulation results are also shown in graphical form.

What are the inputs for the calculator?

Initial Fund: Dollar amount invested in the CRUT.

Capital Gains in Initial Fund: How much of the initial investment are long-term capital gains

Payout Rate: Yearly payout rate. At least 5% but not more than 50%

Duration Years: The maximum duration is 20 years.

Base Growth Rate: The estimated annual growth rate for the types of investments chosen for the CRUT. For example, during the years 1993-2022, the S&P 500 Index posted an average annual return of 8.5% after adjusting for inflation [Direct Link][PermaLink].

Discount Rate: This is how much the IRS discounts future payments. It is used together with the other inputs to value the amount estimated to be left over to charity. This also determines the income tax deduction. The rate is published each month by the IRS. Look up the current  Section 7520 interest rate. The higher the rate, the higher the income tax deduction all other things being equal.

Tax Rate: This is your marginal income tax rate to calculate the tax savings. If you don’t know your marginal tax rate, look it up here: Federal income tax rates and brackets.

Where do you turn for help?

This calculator is best used in preparation for a meeting with your financial, tax, and legal advisors and does not by itself constitute legal or financial advice. We at Wealth Care Lawyer serve San Luis Obispo County with advanced estate planning solutions and would love to be of service to you. Set up an initial free consultation here.

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