Planning for your financial legacy is fraught with important decision-making for your beneficiaries. While there are many avenues you can pursue to leave them with a generous gift and a steady source of income for years or decades to come, trusts are often the first consideration.
The problem is that there are no one-size-fits-all solutions when it comes to charitable remainder trusts. Most of the time, the decision comes down to charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs).
How do you decide which one is right for your unique situation? Here is what to know about a CRAT vs CRUT.
What is a CRAT?
A charitable remainder annuity trust (CRAT) can be a simple way to make a one-time gift to a trust that benefits you and/or your loved ones for the years ahead. It requires long-term planning and a clear vision because you can only make one contribution to the trust when establishing it. No contributions can be made after you fund it the first time.
The payout structure of a CRAT is also worth considering. Donors and their beneficiaries receive annual payments based on a fixed percentage of the trust’s initial value. Payments continue until you reach the end of the trust (typically upon the annuitant’s death).
You must take a minimum distribution of at least five percent from the CRAT.
What is a CRUT?
CRATs are not the only option for your legacy planning – charitable remainder unitrusts are another popular method for securing long-term income for the donor or their beneficiaries. CRUTs come in many shapes and sizes, but we will focus on a straight charitable remainder unitrust.
When it comes to payments, a CRUT pays a fixed percentage of the value, determined annually. As with a CRAT, there is a minimum annual payout of five percent. Payments continue to a donor or their beneficiaries until death when the remainder goes to charity.
The main difference between a CRAT and a CRUT is how the trust is funded. CRATs only allow for a one-time contribution whereas CRUTs enable you to continue adding assets and cash well into the future.
CRAT vs CRUT: Which is Best for You?
With some of the basics of charitable remainder trusts already covered, it is time to decide which type of trust is going to be the right fit for you. It is a highly individualized decision, so weigh your options carefully before reaching out to a professional familiar with the structure.
Payment Structure
The first point to consider when deciding between a CRAT vs. CRUT is the payout structure for you and your future beneficiaries. A CRAT gives a fixed annuity based on the initial value of the trust. Payments never change until the trust is dissolved and the remainder gets issued to charity. A poor investment experience could drain the trust to zero and the charity would get nothing.
On the other hand, CRUTs have a varying payout structure because it is based on the fair market value of the trust at the end of every year, so a recalculation occurs. If the value increases due to savvy investment choices, so does your payout. This could be a great way to ensure that the trust accounts for the ever-rising inflation rate. Longer-term trusts may benefit from this strategy.
Making Contributions
Are you ready to contribute everything you have to the trust right here and now? Some people will want to wait until their golden years when they know they can give the largest gift possible to the trust, their beneficiaries, and the charity of their choice.
There is nothing wrong with this approach, but it means a CRAT may be the better fit. It’s one and done.
CRUTs allow you to keep making contributions to the trust again and again over the years to come. If you know that you want to keep growing the trust so that you have a tax-sheltered way to give financial security to a loved one, a CRUT grants you that flexibility.
CRUTs are also generally better for real estate since real estate sales don’t always take place immediately. The ability to contribute more than once allows for flexibility in your timeline and the state of your assets.
Timeframes
Another important point when deciding between a CRAT vs. CRUT is the length of the payouts that your beneficiaries will receive. In a CRAT, the trust is usually dissolved upon death with the remaining funds being given to charity. This limits the financial legacy that you can leave for your loved ones but may result in a more generous gift to a qualified charity.
CRUTs last for longer timeframes. In many cases, it spans the lives of multiple people. This means you can leave the trust and its payout for your children and grandchildren to benefit from for the years ahead.
The benefit of a CRUT here is that your assets continue to grow in this tax-sheltered vehicle which minimizes the capital gains taxes your loved ones would inherit if you gave the asset outright. As it grows, the payouts may increase to keep pace with inflation.
Charitable Giving
Of course, it is also worth noting that both CRATs and CRUTs have the same rules regarding your bottom-line figure of what you will donate to charity. Both have a minimum of 10 percent of the value of the trust that must be donated to an IRS-qualified charity. This is determined by a not-so-simple calculation at the outset of the trust, before the trust is funded.
If you fail to miss the minimum payouts to both beneficiaries and charities, or fail to provide proper accounting and reporting to the IRS, you may be heavily penalized due to the tax benefits of both trusts. That is one common trait for sure.
Discuss Your Goals with Magellan
Finding the perfect vehicle for your charitable giving and financial legacy is challenging, even in the best circumstances. Magellan can help you with comprehensive estate, legal, financial, and tax planning to ensure that your loved ones have financial security well into the future. Our team specializes in charitable remainder trusts.
When you are ready to fund your trust and take advantage of the tax benefits at a fraction of the cost of our competitors, reach out to us to book your first appointment!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.