CRAT or CRUT?

When people first look at charitable remainder trusts, the CRAT vs CRUT question feels like a big fork in the road. It usually isn't. We don't see many CRATs. If you're reading about a CRT, you can pretty much assume we're talking about a CRUT, a charitable remainder unitrust, because that's the right structure in most scenarios.

That said, it's worth understanding why - both so you know what you're choosing and so you can recognize the rare case where the other answer is better.

The difference in one sentence

A unitrust pays out a percentage of the trust's assets, revalued each year. An annuity trust pays a fixed dollar amount, set on day one based on what went in, which never changes.

Everything else follows from that.

Why the unitrust wins almost every time

Four reasons, in rough order of how much they matter.

1. The income stream grows. Because a CRUT pays a percentage rather than a dollar figure, the payment tracks the portfolio. Pick a 5% payout and assume a 7% long-run return and you have about 2% net growth in the trust each year - which means the income beneficiary's check grows over time instead of quietly shrinking in real terms. Over a decades-long time horizon, that difference is significant.
2. You can add to it, adding to your annual toolbelt. A CRUT isn't a one-time transaction. If a client already has one, you have a new tool in the belt: alongside loss harvesting, you can do something like gain harvesting - periodically bleeding appreciated winners off into the CRUT as additional contributions. A CRAT is locked at funding.
3. The useful variations only exist on the unitrust side. Deferred income, illiquid assets, real estate that may or may not close on schedule - every one of those problems gets solved with a variation of the CRUT. There is no annuity-trust equivalent.
4. Everyone's interests point the same direction. This one is easy to miss: in a unitrust, the income beneficiary and the charity are on the same side. If the investments do well and the assets grow, the income stream grows with them, because the payment is a percentage. And if the assets grow, there's more in the trust to eventually reach the remainder beneficiary too.

Unitrusts are significantly more popular because the income stream can grow, and because you can add to a CRUT later. You cannot add to a CRAT at a later time.

The honest case for a CRAT

Sometimes a donor genuinely wants a fixed, predictable payment. Nothing wrong with that. But before reaching for an annuity trust, we'd usually point somewhere simpler: a charitable gift annuity.

A gift annuity gets you the same fixed-payment outcome with far less machinery. No trust to administer, no annual tax filing, and a lower cost to set up and run. For most donors who want a fixed payment, that's the better path.

So what's left for the CRAT? Really one thing: control over the investments. With a gift annuity, the issuing charity holds and invests the money, and the payment depends on that charity's financial health. With a CRAT, the trust owns the portfolio and the trustee decides how it's invested. If that control matters to the donor, a CRAT is the vehicle that provides it - and in that case, go ahead and do one.

The other reason people reach for a trust is wanting flexibility over which charity ultimately receives the remainder, or wanting to split it among several. That's a real concern, but it's also largely solvable with a gift annuity through a community foundation, which can spread the eventual gift across a number of charities and let the donor change direction later.

What's identical either way

A fair amount of the CRT mechanics doesn't depend at all on which structure you pick, and it's worth knowing what's common ground:

• The deduction is the present value of the remainder interest. Not the value of the gift. Think of it as a two-part pie: the income interest and the remainder interest are flips of each other, and the charitable deduction is the remainder portion. It's calculated from IRS actuarial tables using the ages involved, the payout percentage, and the applicable interest rate - the §7520 rate, more on that below. An older donor produces a larger remainder, and therefore a larger deduction; a younger one produces a larger income interest and a smaller deduction. Our charitable deduction quick reference guide shows the rough percentages across vehicles.
• The 10% remainder test. At funding, the projected value reaching charity has to be at least 10% of what went in. It's a one-time hurdle, but an absolutely critical one - and it's what rules out very young income beneficiaries. At current rates, roughly age 28 is the floor for a 5% payout over a single life. Younger than that and you need a different design.
• How long it runs, and who receives the income. Either structure can pay for one or more lifetimes, a term of up to twenty years, or a combination. You aren't limited to one income beneficiary - a spouse is common, but children and grandchildren can be income recipients too, and the payments can run in sequence or concurrently. That opens up designs that move an appreciated asset out of the taxable estate while keeping an income stream in the family for a generation or two. The 10% test is the practical constraint on how far down you can reach.
• It's irrevocable. Both are. That trade - giving up access to the principal in exchange for a tax-free sale inside the trust, charitable tax deduction, plus an income stream off a much larger pile than in a taxable sale - is the real decision, and it's the same decision either way. We wrote about that and the other places CRTs go wrong separately.

The choice that actually deserves more attention

Here's the thing: once you've settled on a unitrust, the more consequential decision is the payout percentage - which has to be at least 5% and no more than 50% - and it gets far less airtime than the CRAT vs CRUT question does.

A higher payout means more income, a smaller charitable deduction, and less to charity at the end. A lower payout means less income, a bigger deduction, and more growth retained inside the trust - which, played out over the long-term, can actually mean more total dollars to the income beneficiary down the road.

The potential trap is a deduction that's too large to use. On a $3 million trust, a 5% payout can generate a deduction north of $800,000, and appreciated non-cash gifts are subject to a 30% AGI limit with a carryover. If the donor can't absorb the deduction, a chunk of that deduction is theoretically valuable and practically wasted. That's often the argument for a slightly higher payout - or for pairing the gift with other income events, such as Roth conversions or realized capital gains, to soak the deduction up.

Some donors look at the same numbers and say they want the lower payout anyway, either because they're genuinely charitable or because they've looked at our modeling and prefer the long-term growth. Both are defensible. The point is that this is where the modeling actually earns its money, and it's a conversation about the client's real tax picture rather than a structural preference.

Where interest rates come in

The IRS publishes a monthly rate - the §7520 rate - that drives the actuarial math on the charitable deduction for charitable trusts. It's the assumed rate of return the tables use, and it matters far more to one of these structures than the other.

For a CRUT, rates barely register. Because the payment is a percentage of assets that gets revalued each year, the math is largely self-correcting. Move the §7520 rate a full point in either direction and the deduction shifts modestly, the 10% test outcome usually doesn't change, and the payout percentage you'd choose stays the same. It's a rate-insensitive structure by design, which is another quiet argument in its favor: you're not waiting for a rate environment.

For a CRAT, rates are decisive. A fixed dollar payment has to be discounted against an assumed return, so a low §7520 rate makes the projected remainder shrink - and the 10% test starts failing. In genuinely low-rate periods, a CRAT can become mathematically impossible for anything but an older donor or a short term, no matter how the donor feels about it. There's also a second hurdle unique to annuity trusts: the 5% probability-of-exhaustion test, which can disqualify a CRAT outright when rates are low and the beneficiary is young. When rates rise, the same design works again.

The practical upshot for advisors: if a client is weighing a fixed payment, the rate environment is part of the conversation and the window can close. If it's a unitrust, run it whenever the client is ready.

And if it's a CRUT, which kind?

Three variations cover essentially everything we see:

The flip CRUT deserves a note, because it solves a problem that catches people off guard. A CRT's income stream is not optional - the trust agreement requires payments to begin once it's funded, typically quarterly. Put real estate into a standard CRUT and there's no cash to make those payments until the property is sold. That can be a significant problem, and it's completely solved by a flip CRUT, which only pays out net income until the property sells. Then it flips, and you carry on as a standard CRUT.

Real estate transactions also have a way of not going to plan. The flip structure absorbs that too.

How we fit in

In a real engagement, the CRAT-versus-CRUT question takes minutes. Choosing the payout percentage, running the numbers against the client's actual tax projections, and picking the right CRUT variation is the real work - and we'll bring visuals so everyone at the table can see the tradeoffs rather than take our word for it.

We're small and specialized on purpose. If a client comes to us through their financial advisor, attorney, existing CPA, or a gift officer, that relationship doesn't change. We handle the charitable trust piece, coordinate with everyone already involved, and if the honest answer is a gift annuity or a donor-advised fund rather than a charitable trust, that's the answer they'll get.

Working through a structure and want a second read on it? We're glad to talk it over. Ten minutes is usually enough to say which way we'd lean and why.