8 Top Pros and Cons of a Charitable Remainder Annuity Trust

HomeBlogAsset & Legacy Planning8 Top Pros and Cons of a Charitable Remainder Annuity Trust

When deciding whether or not to set up a charitable remainder annuity trust, there are a few things to consider. First, you need to determine whether this type of trust is the right fit for you and your charitable giving goals. Second, you’ll want to understand the pros and cons of creating a CRAT. Let’s explore the benefits of a CRAT as well as some of the potential drawbacks.

What is a Charitable Remainder Annuity Trust (CRAT)?

A charitable remainder annuity trust (CRAT) is a type of charitable giving arrangement created by drawing up an irrevocable trust. The grantor, or donor, contributes assets to the trust.

The trustee you choose then manages the assets and distributes them to one or more charitable organizations as well as to one or more designated non-charitable beneficiaries in the form of an annuity. (1)

Pros of a Charitable Remainder Annuity Trust

There are several benefits to setting up a CRAT, including:

  1. Receive an immediate tax deduction for the value of the charitable gift.
  2. Avoid capital gains taxes on appreciated assets you transfer to the trust.
  3. Receive or give a fixed income stream for life or a set term of years.
  4. After your death, the charitable remainder of the trust assets will fund the designated philanthropic organizations.

Cons of a Charitable Remainder Annuity Trust

There are some potential drawbacks to setting up a CRAT as well, including:

  1. You cannot change the terms of the trust after funding.
  2. If the value of the trust assets decreases, your income stream will also decrease.
  3. The trust may need to pay administrative costs associated with managing the trust.
  4. You will need to find a qualified trustee willing to serve in this capacity.

How to Set Up a Charitable Remainder Annuity Trust

If you are considering setting up a charitable remainder annuity trust, there are a few things that you will need to do.

First, you’ll work with an asset protection planning attorney to establish trust. Next, you’ll choose a trustee. The trustee can be an individual or a financial institution. Then, you’ll transfer the assets to the trust. Finally, you’ll file the paperwork with the IRS.

Paperwork for the IRS includes:

  • The charitable remainder annuity trust agreement
  • A schedule of charitable gifts
  • A CRAT information return

Your trust will need to file an annual tax return each year. The trustee will prepare and file this return, including a report of the trust’s activities and income for the year.

Charitable Remainder Unitrust (CRUT) Vs. Charitable Remainder Annuity Trust (CRAT)

There are two basic types of charitable remainder trusts: the charitable remainder unitrust (CRUT) and the charitable remainder annuity trust (CRAT). Considering which is best for your particular circumstances makes sense.

When setting up either charitable remainder trust, you can choose any 501(c)( charitable organization, including religious organizations, educational institutions, and philanthropic foundations. 

The most significant difference between the 2 types of trusts is how the charitable payments are structured. With a CRAT, you receive a fixed payout each year for the rest of your life or for up to 20 years.

With a CRUT, you receive a variable payout based on the trust’s assets’ performance for that year. The charitable payments from a CRUT can increase or decrease from year to year.

The advantage of a CRUT is that less tension may exist between the beneficiary now and the charitable organization beneficiaries later. If the charitable organization is a family charitable trust, the trustee can feel torn about how to structure the investments each year. However, with a Unitrust, both parties generally feel happier about how the trust works.

Another difference between these two types of trusts is how you fund them. You must fund a CRAT with cash or highly appreciated assets such as stock or real estate. You can fund a CRUT with about any asset, including cash, stocks, bonds, and real estate.

Charitable Remainder Trust Choices

Which type of trust makes the most sense for you will depend on your particular circumstances and charitable giving goals.

A CRAT may be the better option if you want to provide a fixed income stream for yourself or another beneficiary. If you are looking for more flexibility and want the charitable payments to fluctuate with the trust’s asset performance, a CRUT may make more sense.

The best way to determine which type of charitable remainder trust is right for you is to consult an asset protection planning attorney who can help you weigh the pros and cons and make the best decision for your unique situation.

We Can Help

If you have additional questions about charitable remainder annuity trusts, contact us at Vail Gardner Law, and we would be happy to help you. Vail Gardner Law specializes in asset protection planning and legacy planning. We help our clients protect their hard-earned assets and plan for the future. Contact us today to schedule a consultation. We would be honored to help you achieve your Asset Protection and Legacy Planning goals.