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This post is all about CRATs, CRUTs, CLATs and CLUTs. These acronyms all relate to “split-interest gifts” or “charitable trusts.” In essence, these are a way to donate some money to charity while reaping some other benefits, usually tax benefits. Let’s go through them one by one. But first, let’s define some terms.

Split Interest Gifts

A split interest gift is when the income from the gift goes to one place, and the principal of the gift goes somewhere else. For example, the income may go to you, your heirs, or the charity, and then after a certain period of time (or after a certain event) the principal goes to your heirs or the charity. Thus, the income and the principal are “split.” This splitting of the interest is what allows for all kinds of interesting benefits you may be interested in.

Unitrusts vs Annuity Trusts

The UT in the acronyms stands for “UniTrust.” The AT stands for “Annuity Trust.” With a Unitrust, the income payments vary with how well the investments in the trust are doing. If the investments are doing well, the payments are high and vice versa. With an Annuity Trust, the payments are fixed, no matter how the investments are doing. Annuity payments are based on a percentage of the ORIGINAL amount in the trust. Unitrust payments are based on a percentage of the CURRENT amount in the trust. If you think the investments in the trust will do well, go with a unitrust. If you have less faith in them, use an annuity trust.

Lead Versus Remainder

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The C in all these acronyms stands for charitable. The L stands for “Lead” and the R stands for “Remainder.” This refers to what the charity gets. If the charity gets the income, it’s a lead. If the charity gets the principal, it’s a remainder. In times of high interest rates, the remainder trusts are better for the giver since he gets paid a higher rate. In times of low interest rates, the lead trusts are better for the giver’s heirs, since the charity gets paid at a lower rate.

CRATs and CRUTs

A charitable remainder annuity trust (CRAT) may not require you to be all that charitable in order to work out well. Consider Bob and Jody Smith, both 75 years old, who have a 23.8% capital gains rate, a 45% marginal tax rate, and $500K in appreciated shares with a basis of just $100K. If they decided to use a CRAT, it would pay them 5.7%, or $28,500 per year. They would get a charitable donation deduction of $146K, saving them $65,700. They would also save $95,200 in capital gains taxes. So here’s what they get:

  1. A smaller estate, possibly reducing estate taxes due
  2. The ability to eliminate investment risk/rebalance without incurring capital gains taxes (imagine if the donation didn’t consist of the shares of an broadly diversified index fund, but rather $500K of shares in a single company
  3. $95,200 break in capital gains taxes
  4. $65,700 break in income taxes (limited to 30% of AGI for private foundations and 50% for churches, hospitals, schools, and government entities, but can be carried over for 5 years)
  5. $28,500 per year for the rest of both of their lives
  6. Good feelings from supporting their favorite charity

Would they be better off just selling off the shares and buying an annuity? Probably not in this case. If they sold them they would lose the $65,700 deduction plus have to pay $95,200 in capital gains taxes, leaving just $339,100. A joint annuity on two 75 year olds pays 6.9%. Sure, that’s more than the 5.7% the CRAT is paying, but keep in mind the CRAT is paying 5.7% on $500K, not $339K. In reality, the joint annuity would have to pay 8.4% to be as good as the CRAT. See what I mean about not having to be very charitable for this to work out well? Keep in mind that given our very low interest rate environment, you may not be able to get one of these if you’re too young due to IRS rules about the remainder going to the charity being at least 10% of the amount going into the trust.

If Bob and Jody decided to use a CRUT instead, they have to choose a withdrawal rate between 5% and 10%. What’s the downside of choosing 10%? Well, with a higher rate they’ll end up leaving less to charity. This is reflected in the size of their initial charitable donation deduction of just $128K ($58K off their taxes). Also, if the trust isn’t actually growing at a rate of 10% or higher, their payments will actually go down over time. But they do get to at least start with payments of $50K per year. If they choose 5% instead, their annual payment will start at just $25,000, however the payments are far more likely to go up over time (or at least not go down as fast.) Plus, they’ll get a much larger initial charitable donation deduction, $246K ($111K off their taxes).

CLATs and CLUTs

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Lead trusts can also be useful, especially in times of low interest rates. They are particularly useful for reducing estate taxes owed. By giving annual payments to charity for a set period of time (rather than the rest of your life), you can give the principle to your heirs free of estate taxes. Typically a term of between 5 and 25 years is selected and rates are typically between 5% and 15%. The longer the term and the higher the rate, the larger the charitable deduction (and the smaller the amount your heirs will get.)

If Bob and Jody choose a CLAT with a rate of 5% ($25K per year) for 10 years, they will give the charity $250K total and will get a charitable donation deduction of $222K. Whatever is left, goes to their heirs ($278K of which would be subject to estate taxes.) If the trust made 8% a year for those 10 years, the heirs would get $672K, the charity would get $250K, Bob and Jody would save $100K in income taxes, and the IRS may not get squat. Even if the trust only made 5%, the heirs would still get $500K.

If they chose to use a CLUT instead, with the same 5% rate and 10 year term, the deduction would be smaller, just $197K ($89K off their income taxes). The better the investments do, the more the charity gets each year and the more your heirs get in the end.

Charitable Annuities

A charitable annuity is another option, similar to a CRAT, but can usually be done more cost-effectively for a smaller amount of money (less than $100K-$1 Million). However, the charity usually makes out a little better (and thus your charitable deduction donation is larger.) Using the same example with Bob and Jody Smith donating $500,000 above, the rate suggested by the American Council on Gift Annuities for their ages is 5.0%. So they would get payments of $25,000 every year until they died. Their donation would be about 50% deductible, reducing their taxes by $112,500, and of course getting the entire $500,000 out of their estate for estate tax purposes.

Other Options

There are several other unique options for donating to charity. A pooled income fund is like a charitable annuity except the payments to the donor are variable and lower. However, the charity gets more and you thus get a higher charitable donation deduction.


Charitable life insurance is another option. With this you give an annual donation to a charity which uses the donation to pay the premium on a permanent life insurance policy on you. Each year you get to write off this donation and feel good about your giving (and maybe even get a building named after you.) When you keel over, the charity gets a large sum of money that can be used to build a building, endow a chair, or whatever.

You can even combine a charitable gift with a spendthrift trust. Upon your death, your money goes into a charitable trust. The money is out of the estate (avoiding estate taxes) and a certain amount of it (depending on the age of the spendthrift and current interest rates) is a deduction on the estate’s income taxes that year. The spendthrift gets an annuity payment every year for the rest of his life. You can even set it up so the spendthrift heir gets to pick the charity.

What do you think? Has anyone in your family used a charitable trust, a charitable annuity or one of these other options? How did it work out? Do you plan to give to charity using one of these methods? Why or why not? Comment below!