Charitable Remainder Annuity Trust vs. Charitable Remainder Unitrust

Charitable giving is one of the best ways to leave a legacy or support a worthy cause. Those are reasons enough to give, but as wealth managers, we also appreciate that donating to charities can reduce your tax bill.

For our clients, we often recommend two useful options: Charitable remainder annuityA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death). trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process. (CRATs) and charitable remainder unitrusts (CRUTs). These worthwhile options enable you to support your favorite charity while also receiving income. But it’s critical to understand the differences between a CRAT and a CRUT.

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What Is a CRAT? What Is a CRUT?

Let’s get the definitions out of the way before turning to how these options can help you.

A CRAT is an irrevocable trustA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process. that provides the donor with a fixed income stream for either a predetermined term or the life of the beneficiary. The income? A fixed percentage of the initial contribution that is set when the trust is launched. At the end of the trust’s term or when the beneficiary passes, all remaining assets go to the designated charitable organization.

A CRUT is another type of irrevocable trust—one that provides the donor with a variable income stream based on the value of the trust assets. This income, revalued annually, is typically based on a fixed percentage of the trust assets’ value. At the end of the term or when the beneficiary passes away, the remaining assets are sent to the assigned charity.

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What Benefits Do CRATs and CRUTs Offer?

Let’s break down how each can help you.

A CRAT’s benefits are fivefold.

1. Taxes. When assets are transferred into a charitable remainder annuity trust, they leave an estate, potentially cutting back on estate taxes. What’s more, donors can claim a charitable deduction for the present value of remainder interest that is ultimately sent to the charitable beneficiary.
2. Lifelong income. A CRAT provides fixed annual income to the donor (or another beneficiary) for a set term of years or the beneficiary’s life. This aspect can be especially appealing for donors who’ve already retired.
3. Charitable giving. You’re getting income while also making a significant charitable gift that can have a lasting impact even after you’re gone.
4. Asset protection. When you transfer assets to a CRAT, you ensure that they’re safe for future generations or your favored charitable causes—and safe from creditors, lawsuits or estate battles.
5. Estate planning. A CRAT scratches two legacy itches: Allowing donors to transfer assets to beneficiaries or other heirs while simultaneously supporting a charity of their choice. This is particularly handy when dealing with appreciated assets like stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. and real estate—cutting capital gains taxes out of the equation.

As for CRUTs?

1. Taxes. You’ll remove assets from your estate and create a charitable deduction for the present value of the remaining interest that will end up with the charitable beneficiary. There are also opportunities for capital gains tax savings with appreciated assets that are moved to the trust.
2. Higher (or lower) expected income. Unlike a CRAT, the income paid by a CRUT varies from year to year based on the value of the assets in the trust. So, that means higher potential income when the trust assets perform well. But there’s riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline.: Since the income stream from a CRUT is based on the value of the underlying trust assets, there’s always a chance that your income will decrease as the value of the holdings in the trust declines.
3. Charitable giving. As with a CRAT, you’ll be making a difference to a cause you care about while you’re here to see your impact, plus you’ll be leaving a legacy to the charity of your choice.
4. Asset protection. Like a CRAT, assets in a CRUT are kept safe and assigned according to your exact legacy wishes for your heirs and favorite philanthropic causes.
5. Estate planning. A CRUT is also a valuable estate tool to move assets to heirs and charity. Similar to a CRAT, a CRUT allows you to circumvent capital gains taxes, something that is especially handy for assets that have large profits attached to them.

Tip: For a detailed example of “bunching” read our post, Charitable Giving: Going Big and Paying Less.

What’s the Difference Between a CRAT and a CRUT?

When deciding between these two types of charitable trusts, keep these key distinctions in mind:

• RiskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline.. Since the income stream from a CRUT is based on the value of the underlying trust assets, there’s always a chance that your income will decrease as the value of the holdings in the trust declines. (And, obviously, the opposite is true should the value rise.) A CRAT’s income stream is set in stone, so you know exactly how much to expect every year.
• Tax benefits. Both CRUTs and CRATs are useful for their potential tax benefits, even if the underlying advantages vary depending on factors such as the size of the contribution, the types of assets included and the donor’s overall financial picture.
• Flexibility. This one’s simple: A CRUT allows for additional contributions over time. Not so for a CRAT.

Regardless of whether you’re more comfortable with a CRAT or a CRUT, the decision comes down to your personal financial situation, your intended goals for charitable giving and your tolerance for risk. Either one will offer potentially significant tax benefits while also ensuring your contribution to a worthy charity you care about, but it’s important to get the decision right. We’d be happy to walk you through the additional complexities so you can make the best choice, and then we’ll help you get set up so you can support your favorite cause.

Don’t hesitate to contact us to discuss your legacy as well as your current needs and objectives.

And for more philanthropic planning tips, visit our Charitable Giving & Tax Strategies Information Center.