What is the Difference Between a Charitable Remainder Unitrust and a Charitable Remainder Annuity Trust?

Pen with GraphAs we’ve discussed recently, charitable remainder trusts provide a vehicle to give assets to your favorite charity during your lifetime, get a tax break on the capital gains taxes now and provide income for yourself until your death, if desired.

Both charitable remainder unitrusts (CRUTs) and charitable remainder annuity trusts (CRATs) can qualify as split-interest trusts by the Internal Revenue Service because trust income is split between charitable and non-charitable beneficiaries. To qualify for tax-exempt status, trusts must provide annuity payments for a period of up to 20 years or for the life of the donor, benefit a recognized non-profit charity and leave at least 10 percent of the initial fair market value of the trust assets to the charity.

The difference between CRUTs and CRATs is tied to the method of calculating the donor’s annuity payment. Either option can qualify for tax-exempt status, but the donor must select an option at the inception of the trust.

With a CRUT, the annuity payment is a percentage of the fair market value of the donated assets. The annuity payment usually changes annually, based on the changes in current fair market value.

On the other hand, with a CRAT, the donor’s annuity payments represent a fixed percentage of the fair market value of the donated assets as of the beginning of the trust. Since only one date matters for setting the fair market value of the trust assets, the donor’s annuity payments won’t change due to market fluctuations.

CRUTs are best for donors who expect their annuity payments to be long-term and don’t mind fluctuations in the annuity payments. If the fair market value of the trust assets go up, the donor receives a greater annuity in the coming year. If the value goes down, the donor receives less.

With a CRAT, annuity payments don’t fluctuate. However, it is possible the CRAT could run out of money and terminate if one or more economic downturns had a sustained negative effect on the value of trust assets, since annuity payments can’t be adjusted for market fluctuations.

Our team of experienced estate planning professionals takes the time to understand your circumstances and recommend a course of action to meet your goals. For more information about a charitable remainder trust or any other estate planning need, call an estate planning lawyer at the Peterson Law Group.  Our experienced Conroe, Texas attorneys help clients develop comprehensive estate plans, including drafting will and various trusts to fit their estate planning needs. Call us at 936-337-4681 or 979-703-7014 or contact us online to arrange an appointment.

About Chris Peterson

Chris Peterson is an attorney and the owner and founder of Peterson Law Group, a Texas law firm with offices in Bryan/College Station and Kingwood. He mainly practices in the areas of Estate Planning and Business Planning. Chris is also a Certified Estate Planner. Besides his law practice, Chris is a serial entrepreneur and community volunteer. He is known for his cutting edge law practice that utilizes technology to deliver efficient, excellent work.