CHARITABLE REMAINDER TRUSTS

CRAT AND CRUT

Charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs) have the same key tax benefit -- they can remove low-basis, high-value property from the transferor's possession without recognition of a gain or loss, while at the same time allowing the donor to retaining an income stream, which is enhanced by the charitable deduction. However, which one is more beneficial depends on the goals of the owner.

CRATs and CRUTs are both charitable remainder trusts -- that is, trusts formed to make current distributions to one or more non-charitable income beneficiaries and to pay the entire remainder to a qualified charitable organization or to use that remainder for a charitable purpose. <1> In either case, the donor contributes property to the trust and receives an immediate charitable deduction for the present value of the remainder. <2> A CRAT pays its income beneficiaries a specified sum that is at least 5 percent and no more than 50 percent of the initial fair market value placed in the trust. <3> In contrast, a CRUT generally pays its income beneficiaries a fixed percentage of not less than 5 percent and no more than 50 percent of the fair market value of the fair market value of its assets, as determined annually. <4> In both cases, for transfers to a trust made after June 18, 1997, the value of the charitable remainder with respect to any transfer must be at least 10 percent of the net fair market value of the property transferred on the date of the contribution to the

trust. <5>

A donor who is concerned primarily with the certainty that the income beneficiary receive a specified amount during the term of the trust should use a CRAT, because the amount of the required annual distribution is predetermined by the donor at the date the assets are transferred to the trust, and the income beneficiary will always receive this amount, regardless of the trust's income. For the same reason, the CRAT also provides the income beneficiary with the best protection against loss in value of the trust's principal. Thus, the CRAT may be the better choice if the income beneficiary is dependent on the income of the trust. However, the CRAT may only accomplish the goal of protecting the income of the beneficiary over the short term, because it affords the income beneficiary no protection against inflation -- rather, the purchasing power of a fixed payment determined at the time the assets are placed in trust faces continuing erosion.

In contrast, the CRUT's distributions fluctuate annually, with the value of the assets; thus, it provides the best hedge against the vagaries of the economy. In an inflationary economy, the value of the trust's assets should increase along with prices in general, thus providing higher annual payments to the income beneficiary. In a declining economy, the opposite naturally occurs, but the income beneficiary's position relative to the purchasing power of his or her annual receipts presumably is not impaired.

The CRUT also affords flexibility of annual payments to the income beneficiary because the distribution can be limited to the trust's income in years when income is not sufficient to meet the payment otherwise required. <6> Thus, it is more certain to preserve the value of the assets for the remainderman. If the donor wishes to protect the income beneficiary, the trust can provide that the deficiency will be made up in years when income exceeds the required payment. <7>

<<<ENDNOTES>>

1/ Reg. Section 1.664-1(a).

2/ Code Section 170(f)(2)(A).

3/ Code Section 664(d)(1)(A).

4/ Code Section 664(d)(2)(A).

5/ Code Section 664(d)(1)(D), (d)(2)(D).

6/ Code Section 664(d)(3)(A).

7/ Code Section 664(d)(3)(B).