Charitable Remainder Trust Options
Charitable Remainder Annuity Trust (CRAT)
The Code defines a CRAT as a trust that pays a fixed dollar amount of not more than fifty percent nor less than five percent of theinitial net fair market value of property placed in the trust at least annually to the recipient. I.R.C. §664(d)(1)(A). Treas. Reg. §1.664–2(a)(2) (i). The Regulations call this amount the “Annuity Amount.” Treas. Reg. §1.664– 1(a)(1)(iii)(b). The trust can express the Annuity Amount as a percentage of the initial net fair market value of the trust assets. Since the Annuity Amount is fixed, any subsequent appreciation in the value of the trust assets inures to the benefit of the charitable remainder interest.
Example: Bill creates a testamentary CRAT with the Annuity Amount expressed as 7.5 percent of the initial net fair market value of the trust. He names Hillary, his wife, as the sole lifetime recipient. At Bill’s death, his IRA provider transfers Bill’s $100,000 IRA account balance to the trust. Result: Hillary will receive $7,500 per year for the rest of her life. The trustee will add any income or appreciation exceeding $7,500 to the trust principal. Even if the trust value doubles or triples, the payout will remain at $7,500. Conversely, if income is less than $7,500, the trustee must distribute capital gains or principal to ensure that it pays out $7,500 each year. The trustee will continue to make annual distributions of $7,500 until the trust assets are exhausted, or the trust terminates.
Charitable Remainder Unitrust (SCRUT)
The Code defines a charitable remainder unitrust as a trust that pays to the recipient at least annually a fixed percentage that is not more than fifty percent nor less than five percent of the net fair market value of the trust assets valued annually. I.R.C. §664(d)(1)(A). The Regulations call this amount the “Unitrust Amount.” Treas. Reg. §1.664(a)(1)(iii) (c). Although the percentage remains fixed throughout the trust term, the Unitrust Amount may vary year–to–year since the trustee bases it on the annual net fair market value of the trust assets. We sometimes call this CRUT a “Straight–Pay” or “Standard” Charitable Remainder Unitrust (S–CRUT) to distinguish it from the variations described below.
Example: George creates a testamentary CRUT with a Unitrust Amount expressed as 5 percent of the net fair market value of the trust, valued annually. He names Martha, his wife, as the sole lifetime recipient. At George’s death, his IRA provider transfers George’s $100,000 IRA account balance to the trust.
Result: In the first year, the trust will pay $5,000 to Martha –– 5 percent of
$100,000. If, in the second year, the trust value rises to $110,000, Martha will receive $5,500. If, in the third year, the trust value falls to 95,000, Martha will receive $4,750. The trustee must add any income not paid out to principal. If the trust income is insufficient to pay the Unitrust Amount, the trustee will use capital gains or principal to make up the deficiency.
Net Income Unitrust with Make–Up Provisions (NIMCRUT)
The Code also allows the grantor to define the Unitrust Amount as the lesser of (i) the trust income or (ii) an amount calculated by reference to a fixed percentage (which cannot be less than 5 percent or more than 50 percent) of the net fair market value of the trust assets valued at least annually. In subsequent years, the trust makes up deficits from prior years (i.e. where trust income was less than the amount calculated by reference to the fixed percentage) if the trust income exceeds the amount calculated by reference to the fixed percentage. I.R.C. §664(d)(3)(B). Generally, “trust income” is fiduciary accounting income deter¬mined under the terms of the trust or the governing state law. I.R.C. § 643(b). We typically call a unitrust with this type of payment provision a “Net Income with Make–up” Unitrust (NIM–CRUT).
Example: Martin creates a testamentary CRUT that provides that Katie, his wife, as recipient, will receive a Unitrust Amount equal to 5 percent of the net fair market value of the trust, as valued annually, or actual trust income, whichever is lower. In subsequent years, the trustee is required to pay the excess income to the recipient to make up deficiencies (if any) of prior years. At Martin’s death, his IRA provider transfers Martin’s $100,000 IRA account balance to the trust. Result:
Here is how much Katie will receive each year as the trust’s income and values change.
Although the trust income for year 3 exceeds the required payment by
$500, the excess isn’t available to make–up the short–fall in year 4. The trustee can only make up a deficit in any year from excess income in subsequent years, never from earlier years.
Year | Value of Trust | 5% of Assets | Trust Income | Payment |
1 | $100,000 | $5,000 | $4,000 | $4,000 |
2 | $110,000 | $5,500 | $4,000 | $4,000 |
3 | $120,000 | $6,000 | $9,000 | $8,500 |
4 | $120,000 | $6,000 | $5,500 | $5,500 |

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