Charitable remainder trusts let you receive an income stream for life or a term of years, with the remainder passing to a charity you choose. The two main versions, the charitable remainder annuity trust (CRAT) and the charitable remainder unitrust (CRUT), sound similar but calculate the income payment in fundamentally different ways, and that difference matters more than most people expect.
How the fixed CRAT payment and the revalued CRUT payment differ
A CRAT pays a fixed dollar amount, set once at the time the trust is created, based on a percentage of the trust's initial value. That percentage, and the resulting dollar payment, does not change for the life of the trust, regardless of how the trust's investments perform in later years. If the trust's assets grow substantially, the payment stays the same. If the assets lose value, the trust still must pay that fixed amount, which can accelerate the depletion of principal in a down market. Because the payment never changes, a CRAT also cannot accept additional contributions after it's funded. A CRUT instead pays a fixed percentage of the trust's value, but that value is recalculated every year. If the trust grows, the dollar payment grows with it in the following year. If the trust's investments decline, the payment declines too. This revaluation feature means a CRUT payment can never fully exhaust the trust in the way a CRAT payment theoretically could in a severe, sustained downturn, since the payment is always a percentage of whatever remains. CRUTs can also accept additional contributions over time, which a standard CRAT cannot.
Practical differences that follow from the math
- A CRAT offers payment certainty, which some retirees value for budgeting purposes, but it carries more risk that a bad market stretch depletes principal faster than expected
- A CRUT's income fluctuates with investment performance, rising in good years and falling in weak ones, which some beneficiaries find harder to plan around
- Both structures must satisfy the same IRS requirements for the charitable remainder to qualify for a deduction, including minimum payout percentages and a required minimum remainder value passing to charity
- A net income unitrust variation of the CRUT can limit payments to actual trust income in low-earning years, which some grantors use for real estate or other illiquid contributions
Choosing between the two
The right choice depends heavily on the underlying assets, the beneficiary's need for predictable income, and how the family weighs growth potential against payment stability. Because both are irrevocable trusts with charitable components, they should be structured with attention to both the income tax deduction and the long-term tax planning goals behind the gift.
If you're weighing a charitable remainder trust and want to understand how the payout structure would play out for your assets, Marianna Schwartsman can walk through the numbers with you. Schedule a free consultation or call (212) 518-3868.
