The two basic forms of CRTs are the Charitable Remainder Annuity Trust (CRAT) and the Charitable Remainder Unitrust (CRUT). The major difference between the two forms is the nature of the income payments you receive.
A CRAT pays income at a fixed amount per year, based on the value of the initial funding assets. For this reason, it enables you to secure a fixed dollar amount of lifetime income while avoiding market risks. So, for example, if the value of your initial funds is $100,000, and we determine your rate to be six percent, you would receive $6,000 (six percent of $100,000) every year for the rest of your life.
The payout from a CRUT, on the other hand, is variable. A unitrust pays a fixed percentage of the annually redetermined value of the trust assets. Because the assets are revalued annually, there is potential either for growth or decline in dollar payments. Using the above example again, you would still receive $6,000 the first year. The trust would then be revalued each year. If the value of the assets grows to $104,000, your income for that year will be six percent of the new value, or $6,240. If the trust assets go down in value, your income will be less than $6,000.
Another difference between the annuity trust and the unitrust is that after the initial funding, you may add supplemental funds to a CRUT but not to a CRAT.
How Do You Choose Between a CRAT and a CRUT?
A primary factor in choosing between the two basic forms is the age of the income recipient(s). Older grantor-recipients tend to favor the certainty of the annuity trust, while younger persons favor the growth potential of a unitrust to offset inflation.
Other considerations can be the risk tolerance of a grantor-recipient, the nature of other income sources, and economic expectations.
Drafting a proper trust arrangement to satisfy your wishes, protect your family and you assets, and save taxes can be complicated and requires the skill of a knowledgeable attorney or financial advisor. We would be happy to work with you and your advisor to help you determine how a trust or other deferred gift can meet your needs. All discussions are strictly confidential and, of course, at no obligation to you.
Let's Look At An Example...
Let us assume you have highly appreciated stock, purchased for $30,000 (the cost basis), now worth $100,000. The stock is producing a two percent dividend.
If you sell that stock to reinvest in stock that produces a greater income for you, your capital gains tax will be $14,000 (20 percent of the $70,000 gain), leaving you with only $86,000 to reinvest.
If, however, you place your $100,000 of stock in a trust and name one or more charitable organizations as remainder beneficiaries, you can arrange for the trust to pay you a six percent income for the rest of your life.
The tax advantages of this option are good because:
You receive an income tax deduction in the year you create the trust based on the value that is expected to pass to charity, and
The trust is a tax-exempt entity and can buy and sell stock without losing any part of its value to capital gains tax.
In addition, you have the knowledge that your funds will someday make a significant difference in the lives of others through your charitable gift.
For moreinformation, please contact your attorney or financial advisor. You may also call Dr. Scott Janney, CFRE, Director of Planned Giving, at 484-580-4196 or email Scott.
For more information, call 1.866.CALL.MLH.