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Annuity Trust (CRAT) vs. Unitrust (CRUT)


Charitable trusts can be used to establish a legacy of giving while yielding some potentially valuable estate planning benefits. A charitable remainder annuity trust (CRAT) is one option; a charitable remainder unitrust (CRUT) is another. CRATs and CRUTs can both be used for estate planning and charitable giving purposes, though they aren’t exactly the same. Whether you choose one over the other can depend on your needs and goals. It’s helpful to know how each type of trust works and what it’s designed to do. Leaving a legacy is just one part of estate planning; work with a financial advisor on all your estate planning needs.

What Is a Charitable Remainder Trust?

A charitable remainder trust (CRT) is a type of irrevocable trust that can be used to donate wealth to charitable organizations. When you establish this type of trust, you’re able to make contributions of assets to it on a tax-advantaged basis. This assumes that the trust will pass on the assets you contribute to one or more charities you designate as beneficiaries.

The kinds of assets that can be held in a CRT include:

  • Cash
  • Real estate
  • Publicly traded securities
  • Artwork
  • Certain types of closely held stock

It’s possible to split assets in a charitable remainder trust between yourself or someone else and the charity of your choice. For example, you could draw income from the trust assets for a set number of years, then name one or more charities to receive the remainder of the assets in the trust. This is called a split-interest gift.

Charitable remainder trusts can be designated as one of two types: Charitable remainder annuity trusts (CRATs) or charitable remainder unitrusts (CRUTS).

How a CRAT Trust Works

Charitable remainder annuity trusts pay out a fixed percentage of the trust’s initial value each year. These payouts are made until the trust terminates, which occurs when the original donor who established the trust passes away. The minimum distribution amount required each year from a CRAT is 5%.

Once the initial contribution to a CRAT is made by the donor, no further contributions are allowed. The donor can opt to receive income distributions from the trust during their lifetime. They can also name a non-spouse beneficiary to receive annuity distributions each year.

Charitable remainder annuity trusts are established as their own separate legal entity. The trust itself is tax-exempt and contributions are eligible for a partial tax deduction. Trust income, however, is taxable to the beneficiaries.

How a Charitable Remainder Unitrust Works

Adult holding the hand of a childA charitable remainder unitrust pays a fixed percentage of the trust’s value, as determined on an annual basis. Similar to CRATs, the minimum annuity payout is 5%. Donors who establish a CRUT can make additional contributions to it after the initial contribution. This type of grantor trust can provide income to a named beneficiary, including themselves or a family member. Once the donor passes away, any assets remaining in the trust go to charity.

While CRATs come in one variety, it’s possible to establish different types of CRUTs, including:

  • Straight charitable remainder unitrust. This type of CRUT makes annual distributions based on a percentage of trust assets. A minimum of 5% is the baseline and this is multiplied by the fair market value of trust assets to determine the payout amount.
  • Net income unitrust. Net income unitrusts pay out a set percentage or the actual income produced by the trust, whichever is less. This type of CRT may produce higher payouts over time.
  • Net income unitrust with a make-up provision. A NIMCRUT is designed to make up for shortfalls during years in which the trust income was below the set payout percentage.
  • Flip unitrust. Flip unitrusts start off as net income unitrusts, then switch to a straight CRUT later. Payments are made based on the actual trust earnings. This type of trust may be preferable for holding less liquid assets.

Differences Between a CRAT and a CRUT

The main differences between a CRAT vs. CRUT lie in what the trust pays out on a yearly basis and whether additional contributions are permitted once the trust has been created. With a CRAT, the annuity amount paid each year is fixed. Once you establish a CRAT and make the initial contribution, no further contributions are allowed.

With CRUTs, the amount distributed each year can vary. And there’s no prohibition against making additional contributions after the initial contribution.

So which is better, a CRAT vs. CRUT?

The answer depends on what your goals are and what you need the trust to do. CRUTs are often the preferred option for a couple of reasons.

First, it’s possible that annual payouts from the trust may increase if the assets in the trust grow in value. If you’re relying on payments from a charitable remainder unitrust for income, that means those payments could make it easier to keep pace with inflation. When inflation rises, purchasing power can shrink.

A NIMCRUT could also be useful for structuring payouts so that you’re receiving more income from the trust in later years. You might appreciate this option if you’re looking for ways to create additional streams of income for retirement.

Second, a CRUT allows for additional contributions. If you decide you’d like to leave a larger share of your wealth to charity, then a charitable remainder unitrust would allow you to do that without having to establish another trust. A CRAT, on the other hand, would not give you that option.

There are a couple of rules to keep in mind with either type of charitable remainder trust. For one thing, the IRS requires the present value of the remainder interest in a trust to be at least 10% of the initial value of the trust assets. This determination is made at the time assets are transferred to the trust.

For another, income payouts received from the trust are generally time bound. They can last for up to 20 years from the inception date of the trust or the lifetime of the donor and beneficiaries. Again, once the donor passes away anything remaining in the trust is passed on to designated charitable beneficiaries.

The Bottom Line

Hand holding another handCharitable remainder annuity trusts and charitable remainder unitrusts are both types of trusts something to consider if you’re hoping to create a legacy of wealth during your lifetime and beyond. Understanding the differences between CRATs vs. CRUTs matters for choosing the type of trust that best aligns with your needs.

Estate Planning Tips

  • Aside from charitable remainder trusts, there are other types of trusts that can be useful in estate planning. For example, if you have a special needs dependent you may consider establishing a trust on their behalf to help pay for lifetime care before and after you pass away. If you’re married or have children, you may also consider a revocable living trust for managing assets and wealth. Keep in mind that comprehensive estate planning also includes drafting a last will and testament.
  • Consider talking to a financial advisor about the differences between a CRAT vs. CRUT and which type of trust may be suitable for you. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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