Charitable remainder trusts are a way for you to donate to a charity while still providing income for yourself or your loved ones. As part of setting up this trust, you should determine which kind of charitable trust best suits your priorities.
People can create a charitable remainder unitrust or a charitable remainder annuity trust. Both allow donors to gift assets into an irrevocable trust, take a tax deduction and receive payments from the trust. However, CRUTs and CRATs each have a different formula for paying beneficiaries.
The payment of a CRUT
In a CRUT, the annual payments to beneficiaries fluctuate based on the value of the trust assets. This allows payments to increase if the trust investments grow.
Each year, the CRUT must distribute a fixed percentage of the value of the trust as revalued annually. For example, a 5% CRUT would pay out 5% of the total value of the trust each year, even if the principal increases.
The payment of a CRAT
In contrast, a CRAT provides fixed payments that do not change. The CRAT pays out a set dollar amount annually, based on a fixed percentage of the initial trust assets. This creates reliable income flow, but it also means payments do not rise if assets appreciate.
Upon the death of the trust beneficiaries, any remainder in the trust passes to the charity. With a CRUT, the remainder depends on the fluctuating trust value. For a CRAT, the charity may receive more or less than the initial principal depending on investment performance.
Generally, those seeking variable, growth-oriented payments may prefer a CRUT, while a CRAT provides stable income. When structured properly, both of these trusts achieve philanthropic legacy goals. The key is understanding how the payout mechanics align with your financial objectives and the needs of your preferred charity.