The fundamental difference between Charitable Remainder Unitrusts (CRUTs) and Charitable Remainder Annuity Trusts (CRATs) lies in how distributions are calculated and whether additional assets can be contributed after the trust’s inception, and the answer is generally yes, you can add assets to a CRUT but not to a CRAT.
What are the key differences between a CRUT and a CRAT?
A CRAT provides a fixed dollar amount each year to the beneficiaries for the term of the trust or for their lives, and it’s irrevocable—meaning no further contributions can be made once established. The payout rate must be at least 5% and no more than 50% of the initial fair market value of the assets transferred to the trust, as determined by IRS regulations. Conversely, a CRUT pays a fixed percentage of the *current* fair market value of the trust assets, recalculated annually. This allows for potential growth of the trust assets and a fluctuating income stream. According to a 2023 study by the National Philanthropic Trust, CRUTs are gaining popularity due to their flexibility and potential for asset appreciation, representing approximately 30% of all charitable remainder trusts established.
Why can’t I add more assets to a CRAT?
The rigidity of a CRAT stems from its fixed payout structure. When you establish a CRAT, the IRS requires a specific calculation based on the initial asset value and the fixed annuity payment. Adding more assets would disrupt this calculation and potentially invalidate the trust’s tax-exempt status. This is because the IRS views a CRAT as an irrevocable exchange – you transfer assets, receive a fixed income stream, and the remainder goes to charity. Changing the asset base alters the terms of that exchange. Think of it like baking a cake – once you’ve mixed the ingredients and put it in the oven, you can’t just add more flour without affecting the final product. “The inflexibility of CRATs is a common concern for donors who anticipate future financial gains or desire to adjust their charitable giving strategy,” notes Ted Cook, a San Diego Estate Planning Attorney.
How does a CRUT allow for additional contributions?
A CRUT, because its payout is based on a percentage of the *current* value, is designed to accommodate additional contributions. Each time you add assets, the trust recalculates its value and adjusts the annual payout accordingly. This flexibility makes CRUTs ideal for donors who expect to continue adding to their charitable giving over time. A CRUT is also beneficial for individuals with illiquid assets like real estate or closely held stock, as it allows them to contribute these assets gradually without triggering immediate capital gains taxes. “We often recommend CRUTs to clients who plan to sell property over several years, allowing them to contribute the proceeds as they become available,” explains Ted Cook. Roughly 65% of people who utilize CRUTs do so because of their financial flexibility and growth potential.
A cautionary tale: The Case of Mr. Abernathy
I remember Mr. Abernathy, a retired software engineer who came to us hoping to create a charitable trust. He had a substantial portfolio of stock and wanted to ensure a consistent income stream while benefiting his favorite local museum. Initially, he leaned towards a CRAT, believing the fixed payment would provide certainty. However, he then learned he was due a significant bonus from his former company. He realized that adding these funds to the CRAT wasn’t possible, potentially limiting his overall charitable impact. It was a tough realization, highlighting the importance of considering future financial events before finalizing a trust structure. He ultimately opted for a CRUT, allowing him to seamlessly incorporate the bonus into his charitable plan.
Turning things around: The success of the Hanson family
The Hanson family had a similar challenge. They owned a successful vineyard and wanted to contribute a portion of its future earnings to a conservation organization. They established a CRUT, initially funding it with a portion of their existing assets. As the vineyard prospered, they consistently added proceeds from each harvest, increasing the annual payout to the charity and maximizing their tax benefits. The CRUT became a powerful tool for both their financial planning and their philanthropic goals. It was a seamless integration of their vineyard’s success and their commitment to conservation. The Hanson’s strategy demonstrated that with careful planning and a flexible trust structure like a CRUT, you can build a lasting legacy of giving.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
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