What Is a Unitrust? How Percentage-Based Trusts Work in New Jersey

What is a Unitrust?

A unitrust pays beneficiaries a fixed percentage of the trust’s value each year, rather than just the “income”—which can create more flexibility, fairness, and planning options.

A unitrust is a type of trust that pays its beneficiaries a fixed percentage of the trust’s value each year, instead of just distributing the “income” (interest and dividends). The trust is re-valued annually, and the payout adjusts as the value changes. Internal Revenue Service

Put simply:

Each year, the trustee calculates the fair market value of the trust assets.
The trustee then distributes a set percentage (for example, 4% or 5%) of that value to the income beneficiary.
If the trust grows, the dollar amount paid out goes up; if it shrinks, the payout goes down.

This structure is designed to align the interests of the current beneficiary (who wants steady distributions) with the future beneficiaries or charities (who care about long-term growth).

How a Unitrust Differs from a “Traditional” Income Trust

In a traditional income trust:

The income beneficiary usually receives only the trust’s income (interest, dividends, rents).
The remainder beneficiary (children, grandchildren, or charity) receives what’s left at the end.
This can create tension: the income beneficiary may want high-yield investments, while the remainder beneficiary may prefer growth assets.

In a unitrust:

The percentage payout is based on total value, not just income.
The trustee can invest for total return (growth + income) instead of chasing high-yield, potentially risky investments.

The result is often a more balanced, modern approach to investing and distributing trust assets.

Two Common Contexts: Family Unitrusts and Charitable Remainder Unitrusts (CRUTs)

The word “unitrust” shows up in at least two major ways in planning:

1. “Total-Return” or Family Unitrusts

In a family or non-charitable context, a unitrust can be used to:

Provide a percentage payout to a spouse, partner, or other beneficiary.
Align investment strategy with total return, not just income.
Help reduce conflict between a current beneficiary and remainder beneficiaries.

For example, a trust might say:

“The trustee shall distribute 4% of the trust’s fair market value, as determined at the start of each year, to my spouse for life.”

This can be especially useful in:

Second-marriage situations, where a surviving spouse is the lifetime beneficiary and children from a prior relationship receive the remainder.
Blended families, where fairness and long-term sustainability are key.

Some states (including New Jersey under its modern trust and investment statutes) allow trustees to convert a traditional income trust into a “unitrust” format in certain circumstances, often in connection with prudent investor and principal-and-income rules.

(Note: Exact conversion procedures and percentages are defined by statute and case law; any conversion requires careful legal analysis).

2. Charitable Remainder Unitrust (CRUT)

A Charitable Remainder Unitrust (CRUT) is a specific type of charitable remainder trust (CRT) governed by the Internal Revenue Code.

A CRUT is an irrevocable trust that:

Pays a fixed percentage of the trust’s annually determined value (at least 5% and no more than 50%, under IRS rules) to one or more non-charitable beneficiaries, often the grantor, for a term of years or life; and
At the end of that term, any remaining assets go to one or more charities. Because a CRUT is a tax-exempt entity, it can be used strategically to:

Sell highly appreciated assets inside the trust with less immediate tax impact,
Provide an income stream to the grantor or family, and
Ultimately benefit charity, with potential income, gift, and estate tax advantages.

Key Features of a Unitrust

Fixed Percentage, Variable Dollars

The hallmark of a unitrust is:

The percentage is fixed in the trust document (for example, 5%).
The dollar amount changes each year based on the trust’s updated value.

If the trust is worth $1,000,000 and the payout is 5%:

The beneficiary receives $50,000 that year.

If the trust grows to $1,200,000 the next year:

The beneficiary receives $60,000.

If the trust drops to $900,000:

The beneficiary receives $45,000.

Supports Modern Investment Strategies

By focusing on total value instead of “income only,” unitrusts:

Allow trustees to invest in a diversified portfolio focused on total return.
Reduce pressure to hold high-yield, low-growth investments just to produce income.
Help balance current and future interests.

Types of Unitrust Payout Structures

(Charitable Context)

In the charitable world, you may see several flavors of CRUTs (Charitable Remainder Unitrusts):

Standard CRUT
- Always pays the stated percentage of the trust’s annual value, regardless of actual income.
NICRUT (Net Income Charitable Remainder Unitrust)
- Pays the lesser of the stated percentage or the trust’s actual accounting income.
NIMCRUT (Net Income with Makeup Charitable Remainder Unitrust)
- Pays net income if it is less than the stated percentage, but can “make up” prior shortfalls in later years when income is higher.
Flip CRUT
- Starts as a net-income version (often holding illiquid assets) and later “flips” to a standard CRUT after a triggering event, such as the sale of an asset or a specific future date.

While these are federal concepts, New Jersey residents using CRUTs must ensure that the trust is drafted to comply with IRS rules and also coordinates cleanly with New Jersey tax and estate laws.

When Might a Unitrust Make Sense for New Jersey Families?

A unitrust is not right for everyone, but it can be powerful in several scenarios:

Second marriages / blended families
- Provide a reliable, percentage-based income stream for a surviving spouse, while preserving the remainder for children from a prior marriage.
Highly appreciated assets
- Use a CRUT to sell appreciated stock or real estate in a tax-efficient manner while generating lifetime income and benefiting charity.
Aligning beneficiary interests
- Avoid the conflict where a life beneficiary wants income and the remainder beneficiary wants growth; a unitrust can put everyone on the same page.
Long-term charitable goals
- For clients with charitable intent, a CRUT can combine income, tax planning, and philanthropy in one integrated structure.

Each situation needs careful modeling to ensure the percentage chosen, the investment strategy, and the tax consequences all work together.

Unitrusts Under New Jersey Law

Big-Picture Considerations

New Jersey has adopted modern trust statutes, including the New Jersey Uniform Trust Code (NJ UTC) and Prudent Investor rules, which emphasize:

Investing for total return,
Balancing the interests of income and remainder beneficiaries, and
Giving trustees tools and duties to manage trusts in a flexible, prudent way.

While the federal tax rules govern CRUTs, New Jersey law governs:

The validity and interpretation of trusts,
Trustee duties and powers,
How principal and income are allocated, and
The rights of beneficiaries and creditors.

Whenever a unitrust is considered for a New Jersey resident, it’s important to coordinate:

Federal tax compliance (for CRUTs),
New Jersey trust law and UTC provisions, and
The client’s overall estate plan (Wills, beneficiary designations, other trusts).

How Simon Law Group Helps Clients Evaluate Unitrust Options

At Simon Law Group, LLC, we help New Jersey families and charitably inclined clients:

Understand whether a unitrust payout structure is appropriate for their goals.
Decide between a traditional income trust and a total-return/unitrust approach.
Evaluate whether a Charitable Remainder Unitrust (CRUT) may be a fit, including coordination with donor-advised funds, private foundations, or specific charities.
Integrate any unitrust with their Wills, other trusts, retirement accounts, and beneficiary designations.

We also work closely with your other advisors (CPAs, financial planners, investment managers) so that the legal terms of the trust match the real-world investment and tax strategy.

Book A Strategy Call

Ready to See If Your Trust Is UTC-Ready?
If you have a New Jersey trust (or you’re about to create one), now is the right time to make sure it’s aligned with the New Jersey Uniform Trust Code – and with your current life, tax, and family realities.

📞 Call 800-709-1131 or visit our website to schedule a confidential Estate & Trust Strategy Session with Simon Law Group.

We’ll review where you are, where you want to go, and how to use the NJ UTC to your family’s advantage – not as a surprise.

Unitrusts

What Is a Unitrust? How Percentage-Based Trusts Work in New Jersey

Understanding Percentage-Based Trust Payouts for Families and Charitable Planning