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If Google search traffic is any guide, many people beginning to dig into tax planning know 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 apparent differences between CRAT vs. CRUT are elusive.
That confusion shouldn’t last long, though, because there is an obvious case for CRUTs as the tax mitigation tool for most people with appreciated assets who want to maximize their returns over the long haul. This article will discuss the differences between CRAT and CRUT and some trade-offs these two structures have.
Let’s recap three things you need to know about CRTs (or Charitable Remainder Trust):
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?
There’s not all that much to differentiate the structures between CRAT vs. CRUT, but one main difference can significantly affect your returns. Why? Because one of them distributes the trust annually, and the other doesn’t. Therefore, a CRAT is an Annuity Trust, and a CRUT is a Unitrust.
What does that mean?
CRAT | CRUT |
---|---|
The primary reason to choose an annuity trust is that you want certainty with your annual payments from the trust. | 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 here. |
You are pessimistic about your future potential investments growth rates over the length of your trust. | Want more flexibility with the timing and amount of distributions. |
Want the trust to run for a more extended 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.
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 probably, your returns are lower than with a CRUT since your assets might grow over time. And most of those gains will remain in the trust and revert to the charitable beneficiary.
An example will be helpful.
Erica is a 36-year-old New Yorker with $1m assets that have 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):
Standard CRUT: (More on the different CRUT structures)
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 from a CRAT. Why is that so? It’s simple: A CRUT’s annual distributions are defined as a percentage of the trust’s assets, 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 aim to match historical market returns. Then, the distributions will be much larger if they connect to the trust’s growing value rather than how much the assets were worth on day 1.
Another benefit is adding additional assets to a CRUT whenever you’d like. Say you added $1m of stock in year one and then had another $1m in year five you wanted to defer taxes on; with a CRUT, you can continue contributing those assets. CRATs don’t offer the same benefit.
Charitable Remainder Trusts are robust tax planning structures. While CRATs and CRUTs are very similar, their crucial difference in calculating your distributions has massive implications. If you are willing to give up more significant 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 choose a CRUT if you wish the Charitable Remainder Trust to run for a more extended time or value more flexibility with the timing and amount of distributions. To know more about CRUTs, check out our comprehensive guide. Access our CRT calculator to evaluate the potential return on investment given your situation, or schedule a meeting with Valur’s experts.
We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (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 it easy.