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CRAT vs. CRUT: What’s The Difference?

If Google search traffic is any guide, many people beginning to dig into tax planning are aware that charitable remainder trusts (CRTs) can help them sell and diversify appreciated assets while minimizing their taxes. They might even know that there are different types of CRTs. But the precise differences between CRAT vs. CRUT are elusive.

That confusion shouldn’t last long, though, because there is a very clear case for CRUTs as the tax mitigation tool for most people with appreciated assets who want to maximize their returns over the long haul. In this article, we’ll walk through the differences between CRAT and CRUT, and talk about some trade-offs these two structures have.

CRTs Overview

Let’s recap on three main things you need to know about CRT’s (or Charitable Remainder Trust):

  • It is a tax-exempt irrevocable trust designed to reduce individuals’ taxable income.
  • It distributes income to the trust beneficiaries at least annually for a specified period — up to 20 years or for your lifetime — and, when that period is over, donates the remainder — everything that hasn’t been distributed yet — to your chosen charity.
  • Plus, it is the best of all worlds. It allows you to stash your assets in the trust, receive an up-front tax deduction, defer your taxes on any gains you realize inside the trust (for example, when you sell appreciated assets), put the trust’s income to use for yourself, and then donate a portion of the assets to charity at the end of the trust’s term.

All of these features apply to CRAT or CRUT. To put it another way, CRUTs and CRATs are each a subspecies of CRTs. So what’s the difference between the two?

CRAT vs. CRUT: What’s The Difference?

There’s not actually all that much to differentiate the structures between CRAT vs CRUT, but there is one main difference that 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?

  • An annuity is, essentially, a fixed amount of money that a person receives for a specified period of time, usually in exchange for a lump-sum payment up front. Similarly, an Annuity Trust is a trust that provides a fixed income stream for the trust’s term — either a person’s lifetime or a specified period of time. That fixed income amount is based on the initial value of the assets that are placed into the trust when it is set up. So, for example, if you put $1 million in startup equity into your Annuity Trust and chose a 10% payout rate, you’d receive $100,000 per year, no matter how the trust performs — whether the equity grows 100x or not at all, you’re getting that $100,000 per year.
  • A Unitrust, by contrast, is a trust that pays out a fixed percentage of trust assets every year, rather than a fixed amount. Since the fair-market value of the trust’s assets is measured every year, the amount that you receive from the trust will change every year. For instance, if you put the $1 million in cryptocurrency into your Unitrust and chose a 10% payout rate, you’d receive $100,000 in the first year. But if your investments do very well and the trust grows to $2 million the next year, you’d receive 10% of that new value, or $200,000. Other key differences are Charitable Remainder Unitrusts:
    • Can be set up for longer periods such as multiple people’s lifetime (the longer the trust is set up for, typically the higher the returns are)
    • If set up for the same time period a Charitable Remainder Unitrust can have a higher annual payout rate than CRATs, e.g. entitling you too a higher distribution percent of the trust assets
      • This is very technical but due to the IRS’s accounting methods and their charitable remainder trust 10 percent rule (which requires that the Charitable Remainder Trusts are estimated to leave behind 10% of present value of contributed assets to charity)
    • Have a variety of distribution methods multiple distribution options that enable you to control and defer distributions if you prefer (read more here about NIMCRUTs, Flip CRUTs and Standard CRUTS here)
    • Assets can be added at any time to a CRUT but cannot be added to a CRAT after it is setup

When Does Each Type of Charitable Remainder Trust Make Sense?

CRATCRUT
The primary reason to choose an annuity trust is because you want certainty with your annual payments from the trustWant a higher ROI from the structure — that is, more total distributions. To check out the ROI of a CRUT check out our online model here.
You are pessimistic about your future potential investments growth rates over the length of your trustWant more flexibility with the timing and amount of distributions
You want the trust to run for a longer time period

Why are CRUTs “particularly suited for appreciated property”?

With a CRUT, 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.

CRUT vs CRAT Example

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.

CRAT (Charitable Remainder Annuity Trust):

  • Payout Rate: Given the trust length and the IRS’s discount rate, she is entitled to receive 5.39% of the trust’s initial value every year.
  • Annual Payments: The trust was originally worth $1 million, so Erica will receive $53,900, or 5.39%, every year.
  • Up-front Charitable Deduction: $100,000
  • Total Payouts After Donating Charitable Remainder: $647,268

Standard CRUT: (More on the different CRUT structures)

  • Payout Rate: Erica is entitled to receive 11.04% of the trust’s assets annually for 20 years.
  • Annual Payments: In year 1, Erica would receive $117,742 (assuming the assets are valued at the end of the year, after they’ve had a chance to grow a bit); because her payout rate of 11.04% exceeds the asset growth rate of 8%, the trust’s value and payments will decrease over time.
  • Up-front Charitable Deduction: $100,000
  • Total Payouts After Donating Charitable Remainder: $1,483,400

Why does a CRUT perform so much better on average?

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.

Conclusion

Charitable Remainder Trusts are powerful tax planning structures. While CRATs and CRUTs are very similar, their key difference around how distributions are calculated has massive implications. If you are willing to give up larger distributions and are focused on a short timeline you may prefer a CRAT. Why? Because you want certainty with your annual payments from the trust.

On the other hand, you may prefer a CRUT if you want the Charitable Remainder Trust to run for a longer time period, or value more flexibility with the timing and amount of distributions and/or want a higher ROI from the structure — that is, more total distributions.

To check out the ROI of a CRUT check out our online model or feel free to book time to chat through it with us here.

About Valur

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