Key Takeaways
People look at Charitable Remainder Trusts (CRTs) for a variety of reasons: they may want to sell and diversify away from an appreciated asset, create a reliable income stream, or donate to charity. There are two categories of Charitable Remainder Trust: Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs).
We spend most of our time writing and talking about Charitable Remainder Unitrusts (CRUTs) because they are the right fit for most of our users — CRUTs provide more income and a higher return on investment. Still, many people come to us under the impression that a CRAT is the right fit, so we thought it important to describe how CRATs work and when they are a good choice — and when they are not.
A Charitable Remainder Trust (CRT) is a split-interest irrevocable trust that typically has two beneficiaries: the donor and a charity. What this means is the trust has two beneficiaries i.e. split interest and is irrevocable in that once it is setup or assets are contributed those elements are permanent. When the donor puts assets into the CRT, he or she receives an immediate tax deduction and an income stream for a term of years or for life, and the named charity receives the trust assets that remain at the end of the trust term.
A Charitable Remainder Annuity Trust (CRAT) is a type of gift transaction in which a donor contributes assets to a charitable trust that subsequently pays a fixed amount to a designated beneficiary in the form of an annuity. The value of the annuity is calculated as a fixed percentage of the initial value of the trust's assets, but that amount must be no less than 5% of the trust assets. A CRAT may last for a term of years or for the donor’s life, and when that term is over, any funds remaining in the trust are then donated to a charity the donor chooses (often a Donor Advised Fund or foundation controlled by the donor).
Critically, CRATs are tax exempt, meaning that you will pay no taxes on most gains realized inside the trust. This is why people often use them to sell highly appreciated assets — it allows for long-term tax deferral.
John is a 36-year-old Californian with $1m of Chime equity that he acquired at almost no cost. If he set up a CRAT for 20 years, he would receive:
There are a few relatively simple reasons why most people with appreciated assets choose Charitable Remainder Trusts and specifically CRATs.
Now let's dive into how CRATs and CRUTs compare to help you understand what is a better fit for your situation.
There’s not actually all that much to differentiate the structures, but one main difference can significantly affect your returns. This key difference comes down to how much is distributed from the trust annually, and it’s encapsulated in the trusts’ labels: A CRAT is an Annuity Trust, and a CRUT is a Unitrust.
What does that mean?
With a Charitable Remainder Unitrust, you will receive distributions that are a percentage of trust assets. In some cases, the trust’s value and these payouts will grow over time; in other circumstances, they will go down. (You are entitled to distributions equal to a fixed percentage of trust assets every year, though we offer a variety of distribution methods to suit your needs, including Standard CRUTs, Flip CRUTs, and NIMCRUTs.
With a Charitable Remainder Annuity Trust, you’re signing up for a fixed payout every year, no matter how the trust does. This can bring welcome certainty, but your returns are likely to be lower than with a CRUT, since your assets are likely to grow over time and much of those gains will be stuck in the trust and will revert to the charitable beneficiary at the end of the term.
An example will be helpful.
Erica is a 36-year-old New Yorker with a $1m asset that has no cost basis (that is, she paid $0 for it). She wants to set up a 20-year term trust.
No doubt you noticed the bottom line: The total payouts from Erica’s CRUT are significantly higher than the payouts from a CRAT. Why is that so? It’s simple: Because a CRUT’s annual distributions are defined as a percentage of the trust’s assets, as measured that year, whereas a CRAT’s annual distributions are a fixed percentage of the trust’s starting value. Assuming that the trust grows in value over time — a fair assumption for our users, most of whom will be aiming to at least match historical market returns — the distributions will be much larger if they are keyed to the trust’s growing value, rather than to how much the assets were worth on day 1.
Another benefit, is you can add additional assets to a CRUT whenever you’d like. Say you added $1m of stock in year 1 and then had another $1m of stock in year 5 you wanted to defer taxes on, with a CRUT you have the flexibility to continue contributing those assets. CRAT’s don’t offer the same benefit.
There are a few relatively simple reasons why most people with appreciated assets choose Charitable Remainder Trusts and, specifically CRATs and CRUTs.
We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerburg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy. Schedule a time to chat with our team and learn more about how we can help you!