Charitable Remainder Trust

Goal: To receive a stream of income in return for your gift while enjoying the benefit of a substantial charitable deduction.

Minimum Gift: $100,000

While the charitable gift annuity (CGA) is the more popular means of making a life-income gift, a charitable remainder trust may be the better option for a particular segment of the population.

Although the simplicity of the CGA can be very appealing, those with a significant amount of highly appreciated assets that generate low returns may be better served to establish a charitable remainder trust. Since a charitable remainder trust is tax-exempt, assets may be sold without capital gains tax. This leaves the full value of the asset available for investment by the trust. This reinvestment may result in an income stream that exceeds the pre-trust performance of the asset.

There are two types of charitable remainder trusts – charitable remainder unitrust (CRUT) and charitable remainder annuity trust (CRAT). The CRUT and CRAT work similarly to the CGA in that a gift is made, an annual payment is made to the beneficiary, and Lafayette receives the remainder at the termination of the trust.

CRUT vs. CRAT

There are two types of charitable remainder trusts – a charitable remainder unitrust and a charitable remainder annuity trust.  The vehicles are similar except for a few key distinctions:

1. Charitable Remainder Unitrust
   1. Additional contributions to the trust may be made at any time.
   2. A CRUT is revalued every year with the annual payout (higher or lower) based on investment performance and the updated value of the trust.
      For example: Start with a $300,000 trust and a 5% payout. Year 1 investment earnings equal 6%.

      Year 1 payout to beneficiary is $15,000.
      Trust is revalued for Year 2 to $303,000.
      (6% earnings minus 5% Year 1 payout).

      Year 2 payout to beneficiary is $15,150 ($303,000 x 5%).

2. Charitable Remainder Annuity trust
   1. Additional contributions to the trust are prohibited.
   2. A CRAT offers an annual payout that remains the same through the life of the trust regardless of investment performance.
   3. The CRAT must pass a test which requires that there is less than a 5% probability of corpus exhaustion before the end of the trust.
      For example: Start with a $300,000 trust and a 5% payout. Year 1 investment earnings equal 6%.

      Year 1 payout to beneficiary is $15,000.
      Trust is revalued to $303,000
      (6% earnings minus 5% Year 1 payout).

      Year 2 payout to beneficiary continues to be $15,000.

Differences between a Charitable Gift Annuity and a Charitable Remainder Trust?