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In CRTs We Trust

By March 6, 2019No Comments

Do you want to give money to charity while also maintaining a steady flow of income for yourself or your beneficiaries? There are two major ways to give back that will do just that through charitable remainder trusts: CRUTs and CRATs. But what do these acronyms mean? Let’s take a look at the definitions and differences between Charitable Remainder Unitrusts (CRUTs) and Charitable Remainder Annuity Trusts (CRATs).

CRT Basics

A charitable remainder trust (CRT) has similarities to other irrevocable trusts – where assets are contributed to the trust and a beneficiary receives income distributions. The difference is that in a CRT, at termination of the trust, any remaining amount is distributed to one or more charitable organizations rather than your beneficiaries. A CRT is irrevocable and the term of the trust can vary. Because the remainder is going to charity, you can take part of the contribution to the trust as a charitable deduction. It is the best of both worlds – you can commit to making a charitable donation without completely relinquishing the current benefits of holding the assets. In addition, the assets you are permitted to donate to a CRT are not limited to cash. You can also donate real estate, publicly traded securities, and stock in some closely-held corporations.

Benefits and Downsides of CRTs

The benefits to creating a CRT are that you can:

  • Maintain an income stream
  • Make a tax-efficient charitable deduction
  • Avoid capital gains on a highly appreciated stock position and invest the proceeds in a diversified portfolio.
  • Reduce the size of your taxable estate

The downsides of forming a CRT are:

  • Loss of control. CRTs are irrevocable, so once the assets are put in the CRT, they can’t be taken out.
  • Costs to setup and maintain the trust.
  • Risk of poor financial performance.
  • Unrelated business income (UBI). This can result in significant tax being paid even though the CRT has tax-exempt status.

What are CRUTs and CRATs?

When there are charitable and noncharitable beneficiaries in the same trust, the CRT must be designated as a CRUT or CRAT. A charitable remainder unitrust (CRUT) has variable annual payments that will fluctuate instead of remaining constant. This means that you might earn more or less from your CRUT based on the performance of the financial market in a given year. A charitable remainder annuity trust (CRAT) has fixed annual payments that do not fluctuate based on the market. Annuity payments are based off of the original balance of trust assets, whereas unitrust payments are based on the current value of the trust assets.

Choosing Between a CRUT or CRAT

There are a few things that can help you decide whether you want your CRT to be a CRUT or a CRAT. Some of these factors are your age, economic outlook, risk tolerance, flexibility, and the importance of the charitable deduction. In terms of age, donors under the age of 65 typically prefer CRUTs because they could offer more opportunity for growth over the years. Similarly, if it appears that there will be continuous economic growth in the stock market, a CRUT will generate higher annual payments versus fixed payments from a CRAT. If you will be primarily dependent on the income from the CRT, then it makes more sense to use a CRAT rather than a CRUT because a CRAT provides fixed annual payments while a CRUT could result in significant fluctuations in annual payments. Your choice in CRT also depends on whether or not you want to make additional contributions. A CRAT cannot accept additional gifts, while a CRUT can.

It is important to carefully consider the benefits and costs of choosing which type of charitable remainder trust will best suit your needs and fund your chosen charity. If you have any questions regarding whether a CRUT or CRAT is right for you, please do not hesitate to contact our office at (858) 558-9200.

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