CRAT vs. CRUT: Making Sense of the Alphabet Soup of Trust Options
- Laura Malone
- Jan 24
- 3 min read
Deciding between the variety of charitable giving vehicles and which is best for you can prove to be a complicated and confusing process. If you decided on a charitable remainder trust (CRT), your selection process is still not done. Do you want a steady, reliable income payout? Or do you desire a trust that provides a payout based on the strength of your investment growth?
Deciding between a charitable remainder annuity trust (CRAT) and charitable remainder unitrust (CRUT) boils down to one main point: Do you want the comfort of a paycheck or the potential growth of a partnership?
This article will look into the pluses and minuses between CRATs and CRUTs and help you decide on the best choice for you.
The First Steps
You may have already decided that a CRT is your best initial choice; you recognize the value of converting appreciated assets into future income while eliminating capitals gains tax.
The next step is deciding between a fixed annuity (CRAT) or a variable payout (CRUT). You need to choose between the “math” vs. “mission” and which options fits your financial DNA.
CRAT: The Value of Fixed Income
A CRAT allows you to receive a fixed dollar amount each year. This amount is determined at the start of the CRAT, with at least 5% of the initial fair market value (FMV) to a maximum of no greater than 50% ( the general rule of thumb is 5-8%.)
Effecting this annual amount is the IRS “10% remainder rule.” The IRS requires that at least 10% of the original dollar amount is left for charity at the end of the trust term, thereby ensuring the “charitable” aspect of the CRAT. The IRS also has a formula known as the “5% probability of exhaustion” test. If there is greater than 5% chance of the trust running out of money before the charity ever receives a payout, the trust will fail. Having a trust fail will result in sizable tax consequences for the trust holder.
All of the factors above determine how large of an annual payout that your trust and original principal will allow.
The benefits:
Predictability: Your annual income from the trust never changes.
Simplicity: Unlike a CRUT, no annual reevaluations are needed, reducing administrative complexity and accounting expense.
The pitfalls include:
No Further Deposits: This is “one and done”; no additional assets can go into the CRAT once it is initially funded.
Inflation Risk: Due to inflation, the purchasing power of the annual payout can erode.
Exhaustion Test: A CRAT can be difficult to qualify for; in a low interest rate environment, a CRAT must pass the 5% probability test previously mentioned.
CRUT: The Growth Engine
A CRUT allows you to receive an annual payout based on a fixed percentage of the trust’s value, reevaluated each year.
The CRUT must also abide by the “10% remainder rule” and the “5% probability of exhaustion rule” previously mentioned.
The benefits are:
Inflation Hedge: If the investments grow, your annual income payout grows with it.
Deposit Flexibility: You can add additional assets into the CRAT over time.
The pitfalls include:
Market Risk: If the markets drop, your income drops the next year.
Reevaluation Complexity: An annual reevaluation of the assets must occur, adding to annual accounting costs.
Common Problems of Both
In addition to the IRS rules, both trusts are faced with:
The Irrevocability Trap: Assets that go into either trust can never be used personally except through the annual scheduled payouts.
S-Corp Hurdle: Neither trust can hold any S-corp shares.
So … Which Trust is Better?
Generally speaking, if you are 75 or older and want a guaranteed check to cover your lifestyle, a CRAT is probably best for you.
If you are younger ( 55 or less), just sold a company, and want a legacy that grows with the stock market, a CRUT is a better choice.
These are complicated legal instruments with an expense; the best choice is determined by a combination of your tax liability, your present wealth, your appetite for risk, and your depth of desire in creating both a personal & charitable legacy.
This is not a DIY effort; you need the team of experts that Generosity Nexus can provide in sorting through the benefits and consequences of CRTs and deciding what is best for you.
Don’t hesitate to schedule an appointment to learn more about how we can help you.
