What Is a Unitrust? -- Wills, Trusts & Probate Guidance

The Short Answer

The main appeal of a unitrust is alignment between current and future beneficiaries. In an income-only trust, the current beneficiary may prefer high-yield investments to maximize current distributions, while remainder beneficiaries prefer long-term growth. A unitrust lets the trustee invest for total return because the payout is tied to overall value rather than accounting income alone.

That does not make a unitrust automatically better than other structures. The percentage chosen, valuation date, asset liquidity, tax treatment, trustee powers, and individual beneficiary needs all matter. A payout percentage that is too high can erode the trust over time. A payout that is too low may fail to meet the original planning goal.

Two Common Uses

Family Or Total-Return Unitrusts

A family unitrust may be used when one person should receive a measured stream of distributions and others should receive the remainder later. Examples include a surviving spouse trust, a blended-family plan, or a long-term trust for descendants.

The trust document must answer practical questions:

• What percentage is paid?
• When is the trust valued?
• Who values assets that are not publicly traded?
• Can the trustee reserve cash for expenses, taxes, or illiquid assets?
• Are distributions mandatory, discretionary, or subject to adjustment?
• How are disputes between current and remainder beneficiaries handled?

New Jersey trust administration is governed by the New Jersey Uniform Trust Code and related fiduciary law. The trustee still owes duties of loyalty, impartiality, prudent administration, recordkeeping, and communication. A unitrust formula does not remove those duties.

Charitable Remainder Unitrusts

A charitable remainder unitrust, often called a CRUT, is a federal tax structure under Internal Revenue Code Section 664. A CRUT is irrevocable. It pays a fixed percentage of annually determined value to one or more non-charitable beneficiaries for life or for a permitted term of years, and the remainder passes to charity.

Federal rules require careful drafting. The payout percentage, actuarial remainder, charitable remainder beneficiary, asset mix, and administration must satisfy tax requirements. A CRUT may be useful for a client with charitable intent and appreciated assets, but it is not a generic tax shelter and should be modeled with the client's CPA, financial advisor, and attorney.

How The Payout Works

If a trust with a 5 percent unitrust amount is valued at $1,000,000, the annual amount is $50,000. If the next valuation is $900,000, the amount is $45,000. If the value rises to $1,200,000, the amount is $60,000. The percentage is stable; the dollars are not.

That variability is the point. The beneficiary participates in growth and also shares in declines. The trustee must still manage liquidity. A trust holding real estate, private company interests, or concentrated stock may need special valuation and distribution language.

Drafting Issues That Decide Whether It Works

Unitrust language should not be casual. The document should address valuation method, valuation date, treatment of additions and distributions during the year, expenses charged before or after the unitrust amount, tax character of distributions, trustee discretion in unusual markets, and what happens if assets are difficult to value.

For charitable trusts, federal compliance is central. For family trusts, New Jersey law, fiduciary duties, creditor issues, and beneficiary expectations are central. In either context, the trustee should be able to explain the calculation and keep records that a beneficiary can review.

When A Unitrust May Be A Poor Fit

A unitrust may be a poor fit when the trust holds illiquid assets (such as real estate or a closely held business interest), when the current beneficiary needs a predictable fixed income, when family dynamics will produce valuation disputes each year, or when the planning goal is better served by a discretionary standard. It is also usually unnecessary for a simple revocable trust that distributes outright following death.

The real question is not "unitrust or no planning." It is whether a percentage-based payout solves a real planning problem better than income-only, discretionary, staged, or outright distribution language given the specific trust, assets, and family involved.

Related Topics

• New Jersey Estate Planning Attorneys
• Trust Administration in New Jersey
• Charitable Giving
• Why Trust Wording Matters
• Contact Simon Law Group

Contacting Simon Law Group or submitting an inquiry does not create an attorney-client relationship.

Responsible Attorney: Britt J. Simon, Esq., Managing Partner, Simon Law Group, LLC.

Authoritative References

• 26 U.S.C. Section 664 - Charitable Remainder Trusts
• IRS - Charitable Remainder Trusts
• New Jersey Legislature - Official Statutes Downloads
• P.L. 2015, c.276 - New Jersey Uniform Trust Code
• New Jersey Division of Taxation - Inheritance and Estate Tax

How We Help Test and Draft a Unitrust Payout

We review the governing terms, funding assets, valuation method, payout percentage and frequency, trustee duties, beneficiary needs, tax effects, and any charitable remainder. The design is bespoke, not a unitrust-formula template.

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