CRUT, CRAT, and CGA—Three Ways to Give and Receive
Over the years, estate planning attorneys have developed an alphabet soup of abbreviations for types of trusts. FYI, these include ILIT (Irrevocable Life Insurance Trust) and, BTW, IDGT (Intentionally Defective Grantor Trust). IMO, it’s a clutter of letters that can be confusing to clients.
So I’d like to bring clarity to three estate planning strategies that are especially helpful for those who want to donate to charity while bolstering their retirement income. Each has its own abbreviation (surprise): the Charitable Remainder Unit Trust (CRUT), the Charitable Remainder Annuity Trust (CRAT), and the Charitable Gift Annuity (CGA).
CRATs and CRUTs are sometimes lumped into a single category, Charitable Remainder Trusts (CRTs), and I’ll do that here. The CGA technically isn’t a trust, but it generally behaves like a CRT, so I’ve included it in this trio.
All three have similarities, but also key differences that are important to consider before deciding whether one makes sense for you.
How They’re Similar
For each of these giving strategies, the basic mechanics are the same. You contribute cash or assets into the CRT or CGA. Going forward, you then receive payments back to yourself during your lifetime (or if collectively, for you and a spouse, until the second spouse passes). And at your death (or your spouse’s), the remaining funds go to one or more designated charities, selected beforehand by the person creating and funding the strategy, known as the donor (which can be one or more people).
It could be good for you. (Source: ChatGPT 5)
Because the ultimate beneficiary of the remaining funds is a 501(c)(3), the tax code allows the donor to receive a charitable deduction in the year the strategy is created even though the charity may not receive its benefit for years to come. The value of that charitable deduction is based on a projection of the value left in the trust at the end of the donor’s life, by totaling the projected growth of the funds in the trust and then subtracting the regular payments to the donor.
As a general rule, both CRTs and CGAs have a minimum annual payout of 5% per year of the initial value of the funds contributed. I should also add that, for the most part, at least a portion of each income payment will be taxable when received by the donor.
Last, the donor does not need to be the recipient of the income payments to take advantage of these three strategies. The payments can instead go to someone else during the donor’s lifetime. Similarly, the lifetime can be based on someone other than the donor. Typically, however, most clients use the payment stream to supplement their Social Security, pension, or annuity payments during retirement. Of course, you don’t have to be retired to use any of these strategies, but they are a useful way to replace earnings that won’t continue in retirement.
How They’re Different
While there are many differences between these three strategies, I believe four are most important to be aware of:
1) who will manage the strategy
2) how the income payments are calculated
3) whether the beneficiaries can be modified, and
4) whether additional cash or assets can be added after the strategy is created
Management
Because it’s a trust, a CRT must designate a trustee to oversee the trust’s funds and make payments to the donor. Depending on the state in which the trust is created, the trustee may be the same person as the donor or may be required to be a third party. Although there are no tax consequences to any investment activity within a CRT — no taxes on capital gains, interest, or dividends — a CRT must obtain its own tax identification number from the IRS and the trustee must file an annual income tax return. The trustee is also responsible for making the income payments.
In contrast, a CGA is sponsored and managed by the charity that will receive the funds at the end of the donor’s life. That makes administration of a CGA much simpler, since there’s no need for a trustee or tax return. Since the payments are guaranteed by the charity, however, there is always the risk that payments could end should the charity dissolve.
Payment calculations
CRAT and CGA payments are based on a percentage of the initial value of the contributions and remain the same each subsequent year. For example, an initial contribution of $1,000,000 with a payout rate of 5% would pay $50,000 per year for life.
CRUT payments are re-calculated each year based on the starting value of the CRUT’s assets that year and the designated payout rate. CRUT payments can therefore go up or down depending on what its investments earn each year. For example, using the same assumptions above, if the CRUT is worth $1,500,000 at the beginning of the year based on 10 years of growth, this year’s payment would be $75,000. This inclusion of investment appreciation in the payment calculation makes CRUTs very useful in keeping up with higher expenses due to inflation.
Who chooses the payout rate? For CRTs, the donor can choose the payout rate, as long as the calculated expected value remaining for the charity is at least 10% of the initial contribution value. For CGAs, the managing charity sets the payout rate. For that reason, if you’re considering a CGA, you may want to shop around for a CGA from a charity that has a higher payout rate.
Changing beneficiaries
Once established, a CGA gift is generally irrevocably made to the selected charity, and generally that charity has unrestricted ability to use the funds for whatever purpose the charity chooses, unless otherwise specified. CRTs by contrast allow the donor to designate multiple charitable beneficiaries (based on percentages) and to amend any charity beneficiary in the document at any point during the donor’s lifetime. This may come in handy if you’re concerned about the financial viability of a charity or if you want the option to change your mind about which charity to support.
Moreover, a CRT donor can leave the remainder to a donor-advised fund, which provides for even further growth of the funds after death, with annual set payments outlined to specific charities or, more generally, to specific causes.
Adding cash, assets
Only CRUTs allow for additional contributions of cash or assets after their initial creation. For CRATs and CGAs, their donors must create a second CRAT or CGA to contribute additional cash or assets in the future.
Since a CRUT’s payout rate is recalculated based on its value each year, additional contributions simply get factored into the payment calculation. We’ve found that this feature of CRUTs make them a good option for clients who feel more comfortable easing into a strategy or who may need to space out a large charitable contribution over two or more years to get the full deduction.
You may have noticed I haven’t discussed the taxability of income payments received from these strategies. I’m not a CPA, and this is an issue best analyzed and explained by a tax expert. Suffice to say, taxability generally depends on the contribution type (cash or asset), what type of account the contribution came from, the investment activity in the trust each year, and whether the strategy is a CRT or a CGA. Best to consult your tax advisor.
A Common Use: Highly Appreciated Assets
By far the most frequent reason these strategies are used is to dispose of a stock position with significant capital gains in a taxable account.
We generally recommend that clients have no more than 5% of their overall portfolio in any one stock. Fairly frequently, however, an outperforming stock or stock options held for many years can end up comprising well over 5% of the portfolio. That’s a lot of exposure to one company.
The CRAT/CRUT/CGA trio of strategies can be a great way to meet a multitude of goals all at once. Clients can avoid capital gains taxes by donating some or all of the position to a CRT or CGA. For CRTs in particular, once contributed, the stock can be completely diversified and potentially moved into more income-producing investments that can help generate the income needed for payments.
Moreover, from a financial planning perspective, converting an asset to a lifetime income stream may also increase the likelihood of not running out of money — the donor can rely on steady payments and is less likely to have to withdraw from the portfolio during down markets. Contributions to a CRT or CGA also take value out of the estate, which may reduce the value of the estate below federal or state estate tax thresholds and decrease the likelihood of hitting these thresholds as assets appreciate over time.
Less Frequent Use: Recreating a Stretch IRA for Your Kids
One of the more significant components of the original SECURE Act of 2019 was the change to the calculation of required minimum distributions from inherited retirement accounts.
Before 2020, when a non-spouse inherited pre-tax retirement accounts (for example, a child receives the assets in a traditional IRA on the death of a parent), the inheriting non-spouse was required only to withdraw a minimum amount from the account each year, based on the non-spouse's life expectancy.
As a result, these non-spouse beneficiaries could continue to benefit from tax-deferred growth in inherited pre-tax accounts with RMDs during their entire lifetime. Similarly, non-spouse beneficiaries could receive tax-deferred growth in inherited Roth accounts without any RMDs during their lifetime. This was known as a “stretch IRA.”
Beginning in 2020, however, non-spouse beneficiaries were required to withdraw all of the inherited retirement account funds within 10 years of the original owner’s death. The goal was to increase tax revenue by forcing beneficiaries to pay the taxes on the total value of pre-tax accounts by the 10th year (and to push funds held in Roth accounts back into taxable accounts).
While we have never used this structure, we are aware of attempts to re-create a stretch IRA using a CRT or CGA for the benefit of children.
Here’s how it would work. You list a CRT or CGA as the beneficiary of a pre-tax retirement account, such as a Traditional IRA, SEP IRA, SIMPLE IRA, 401(k) or 403(b) plan account. The CRT or CGA is set up to distribute income payments to one or more of your kids during their lifetime, at a particular payout percentage. Your kids end up getting an income stream for life and avoid the taxes triggered by the withdrawal of 100% of the funds within 10 years. Any account value transferred to a CGA or CRT would also reduce the size of your estate for estate tax calculations. Before attempting this strategy, a full discussion with your estate planning attorney and CPA is well advised.
One More Use
With the rise of childless individuals and couples, Tableaux Wealth is increasingly working with clients whose estate plans specify charities as primary beneficiaries. We see this trio of strategies as a solid choice, both to experience the impact of a gift during one’s lifetime and to re-create a dependable paycheck in retirement.
With concerns that a long-term rising interest rate environment could diminish the benefit of fixed income, CRTs and CGAs can be a fantastic way to replace conservative assets.
We welcome a discussion of these strategies with anyone who may be interested. Our comprehensive financial planning process can make clear the many potential benefits of CRATs, CRUTs, and CGAs to your specific financial situation.
