How do CRAT and CRUT payments differ?
Key takeaway
A charitable remainder annuity trust pays a fixed dollar amount based on the trust's initial value. A charitable remainder unitrust pays a fixed percentage of the trust's value, determined annually. For owners of businesses, real estate, and private investments, the payment difference is whether the formula uses the initial valuation or an annual valuation. Federal rules set a minimum distribution of 5 percent for each formula.
How each payment is calculated
A CRAT distribution must be a sum certain of at least 5 percent of the trust's initial net fair market value. A CRUT distribution must be a fixed percentage of at least 5 percent of the trust's assets valued annually.
A payment formula that mixes the annuity and unitrust formulas does not qualify.
How the dollar amount changes
A CRAT's payment is tied to its initial valuation, so the payment amount is fixed by that starting value. A CRUT's payment is tied to the value determined annually, so its dollar amount changes when the valuation changes.
The CRAT formula uses a sum certain, while the CRUT formula uses a percentage of assets valued annually. Each formula has a minimum distribution of 5 percent under the federal rule.
Payment term and asset risk
A CRAT may make payments for a specified term of no more than 20 years or for the life or lives of its noncharitable beneficiaries. The payment duration described for a CRAT depends on the term or beneficiary lives stated for the trust.
A fixed CRAT payment can risk exhausting trust assets early if investment performance does not keep pace with the required annuity payment. The risk described for the CRAT concerns the relationship between investment performance and its fixed payment obligation.
A CRUT's annual valuation determines the asset value used in its payment formula. Its stated payment is a fixed percentage of the assets valued annually.