What is a Charitable Remainder Annuity Trust (CRAT)?

What is a CRAT?

What is a Charitable Remainder Annuity Trust (CRAT)? If you’re looking for a way to provide an income to yourself or another loved one over an extended period while ultimately supporting your favorite nonprofit organizations, a Charitable Remainder Annuity Trust may be a useful estate planning tool for you.

Definition of a Charitable Remainder Annuity Trust

A Charitable Remainder Annuity Trust (or CRAT) is a type of gift transaction in which a donor (aka “grantor”, “trustor”, or “benefactor”) contributes assets to an irrevocable trust. After creation, the trust can’t be altered, nor can additional contributions be made to the trust.

The trust pays a fixed income in the form of an annuity to one or more beneficiaries either until the donor dies or after a set period not to exceed 20 years. The annuity value is a fixed percentage of the original value of the trust assets and must be no less than 5% and no more than 50%. 

When the trust dissolves, any remaining assets in the trust are donated to one or more named beneficiaries, which may be public charities or private foundations.

What Assets Can Fund a CRAT?

You can fund a charitable remainder annuity trust with the following types of assets: 

  • Cash
  • Publicly traded securities
  • Some types of closely held company stock (but NOT S-Corp stock)
  • Real estate
  • Private business interests

CRAT vs. Charitable Remainder Unitrust (CRUT)

There is another type of Charitable Remainder Trust called a Charitable Remainder Unitrust (or CRUT). A CRUT distributes a fixed percentage based on the balance of the trust assets, which are revalued annually. Unlike a CRAT, a CRUT allows the donor to make additional contributions after initial funding.

What’s the difference between a CRAT and a CRUT? A CRAT pays the noncharitable beneficiary the same income every year. Since the value of the CRUT is recalculated every year, the payout differs based on a fixed percentage of that revaluation. A CRUT also lets you make additional contributions, which would change its annual value.

Advantages of a CRAT 

Here are three tax advantages to creating a CRAT:

1. Reduce Capital Gains Tax: If you place highly appreciated assets (such as real estate) in your CRAT, it will be exempt from capital gains tax when sold. This preserves the full fair market value of the assets for the beneficiaries.

2. Reduce Income Tax: When you fund a CRAT, you have the option to take a partial income tax deduction, based on a calculation of the remainder distribution to the charitable beneficiary. 

3. Tax Exempt: Any investment income to the trust is tax-exempt, although the named income beneficiary will pay income tax on the income stream received.

Disadvantages of a CRAT

Despite the advantages, there are drawbacks to using a CRAT as well. Here are three main disadvantages:

1. Irrevocable: After you create a CRAT, you as the trustor wouldn’t be able to access the trust funds and it would be difficult to change the trust terms. 

2. Static Payments: Because it’s a fixed annuity, the beneficiary’s payments don’t increase if the trust investments increase substantially that year as with a CRUT. 

3. Cost and Complication: A CRAT can be complicated and costly to create and administer over the years. Always consult with an experienced estate planning attorney to confirm if this type of trust is the best option for your estate planning needs.

If you’re interested in creating a CRAT, meet with an experienced estate planning attorney who can draft the trust and advise you on how to fund it. If you have any questions about a Charitable Remainder Annuity Trust or any other type of trust, feel free to contact our law firm. 

Law Offices of Daniel A. Hunt

The Law Offices of Daniel A. Hunt is a California law firm specializing in Estate Planning; Trust Administration & Litigation; Probate; and Conservatorships. We've helped over 10,000 clients find peace of mind. We serve clients throughout the greater Sacramento region and the state of California.