CRATs and CRUTS - Charitable Giving

Charitable remainder annuity trusts (CRATs) are trusts that pay an annuity amount to one or more beneficiaries (at least one of which is not a charity) for either a term of years or for the life or lives of individual beneficiaries, with the remainder to charity. The value of the remainder interest in a CRAT must be at least ten percent of the value of the initial fair market value of the trust estate. In addition, the annuity amount must be not less than five nor more than fifty percent of the initial fair market value of the trust estate, the term cannot exceed 20 years, and any individual beneficiary must be alive at the inception of the trust. While the trust agreement may provide for an earlier termination of the CRAT on the occurrence of a stated contingency, that contingency will not affect the valuation of the charitable deduction or the remainder interest. No additional contributions may be made to a CRAT.

Charitable remainder unitrusts (CRUTs) differ from CRATs in that the required annual payment is not in the form of an annuity. The payment is a “unitrust” amount — a percentage of the trust assets as valued at the time of the payment. Because the unitrust amount varies with the value of the assets held in the trust, additional contributions can be made to CRUTs. However, under certain circumstances these additional contributions may be treated as part of a separate trust. 

CRAT:

A charitable remainder annuity trust for one life is where the grantor retains an annuity interest that is expressed as a percentage (which cannot be less than five percent nor more than fifty percent) of the initial net fair market value of the assets of the trust.

The trust is irrevocable, but the trust can be amended pursuant to solely to ensure that the trust qualifies and will continue to qualify as a charitable remainder annuity trust. The annuity for a short taxable year is to be prorated to the actual number of days in the year. Thus, the annuity for the initial year will be prorated (unless the property is contributed on January 1), and the annuity also will be prorated in the year of the grantor’s death. This sample trust directs that at the grantor’s death the prorated annuity shall be paid to the grantor’s estate. Regulation permits, in the alternative, for the annuity to terminate as of the end of the regular payment period preceding the death of the annuitant.

CRUT:

A charitable remainder trust can be put inside a living trust and/or a will at the creator’s death. In both cases the trust is created for the lifetime of the surviving spouse. The spouse’s interest will qualify as a federal estate tax marital deduction as long as there is no other non-charitable interest. Because the trust is established at the death of the taxpayer, the income and gift tax charitable deductions are not a concern.

A variation of this trust permits a unitrust to pay, as its unitrust amount, the lesser of the fixed percentage or the accounting income of the trust for the year in question. This variation is extremely useful when the grantor contributes property to the trust that produces little or no income — for example, undeveloped real estate or low-yielding stock. The trustee may choose to retain the asset, in which case the requirements of Code §664 will be satisfied as long as the trustee actually pays the accounting income to the beneficiary. The trust may provide, as the following form does, that in later years if the accounting income exceeds the fixed percentage required to be paid, the excess can be paid to the unitrust beneficiary to make up for the lesser payments in prior years.

The unitrust payment can be adjusted in subsequent years for additional contributions must be carefully worded to allow for make-up payments. The "flip" trust is a net income trust that upon the occurrence of an event (such as the sale of non-income producing assets) would convert to a unitrust that makes its annual payments based on a fixed percentage rather than the income of the trust. The final regulations provide, among other requirements, that in order for the "flip" trust to qualify as a charitable remainder trust, the governing instrument must meet the following three conditions:

a. The conversion from a net income trust to a fixed percentage unitrust will be triggered by a specific date or a single event whose occurrence is not discretionary with, or in the control of, the trustees or any other person. The regulations offer as examples the sale of unmarketable assets or the marriage, divorce, death, or birth of an individual.

b. As of the beginning of the first taxable year following the year in which the event described in item a above occurs, the trust must switch exclusively to calculating the unitrust amount according to the fixed percentage.

c. Once the switch described in item b occurs, the beneficiary cannot receive any payment other than the straight unitrust amount. This means that the beneficiary must forfeit any unpaid make-up amount.