CRAT vs. CRUT: Payments, Tax Rules, and Qualification Tests

A charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT) do the same job in different ways: both let you contribute assets, receive payments for life or up to 20 years, and leave the remainder to a qualified charity. The difference that drives every other decision is how they pay you. A CRAT pays a fixed dollar amount that never changes. A CRUT pays a fixed percentage of the trust’s value, recalculated every year, so your payment rises and falls with the trust’s balance.¹

The Fixed Payment: How a CRAT Works

A CRAT locks in a specific dollar amount at the moment you fund it. Put $1,000,000 into the trust at a 6% payout and you receive $60,000 every year for the trust’s entire term. That number does not move, whether the trust’s investments double or lose half their value.²

The payout rate must fall between 5% and 50% of the initial value of the assets you contribute. Most people choose rates in the 5% to 8% range, because higher rates eat into the charitable remainder and make the other qualification tests harder to pass.¹

Predictability is the whole point. If you need a specific amount each year to cover fixed obligations, a CRAT delivers it. The downside is equally straightforward: inflation erodes the purchasing power of a check that never grows, and the trust has no mechanism to adjust.

The Percentage Payment: How a CRUT Works

A CRUT pays you a fixed percentage of the trust’s current value, which gets recalculated each year. Fund a CRUT with $1,000,000 at a 5% payout and your first-year payment is $50,000. If the trust grows to $1,100,000 by the next valuation, your payment rises to $55,000. If it drops to $900,000, you receive $45,000.²

The same 5% to 50% range applies, and the trust assets must be professionally valued every year to set the payment amount.¹ Publicly traded securities are easy to value. Real property or closely held business interests need a formal appraisal each year, which adds recurring cost.

CRUT Variations That Change How You Get Paid

The standard CRUT is only one option. Federal regulations allow several variations that give donors more control over cash flow:

Net Income CRUT (NICRUT). Pays the lesser of the stated percentage or the trust’s actual net income for the year. If the trust earns less than the percentage amount, you receive less, and the principal is protected when investments underperform.
Net Income with Makeup CRUT (NIMCRUT). Works like a NICRUT but tracks shortfalls. When the trust later earns more than the stated percentage, it can make up past underpayments. Useful when income needs are expected to rise later, such as at retirement.
Flip CRUT. Starts as a net income trust and permanently converts to a standard percentage-payout CRUT at the start of the tax year following a specific triggering event.³

The Flip CRUT is popular when a donor contributes illiquid property like real estate. The trust pays little or nothing while it holds the property, then flips to a standard payout after the property sells. Allowable triggers include the sale of an unmarketable asset, the beneficiary reaching a certain age, or a life event like marriage or the birth of a child. The trigger cannot be something the trustee or donor can turn on at will, and any accumulated makeup amount from the net income phase is forfeited at conversion.³

Can You Add More Assets Later?

Once a CRAT is funded, you cannot add more assets to it. If you want to contribute additional property later, you have to create an entirely new trust, with its own legal fees and setup costs. Getting the initial funding right matters.

A CRUT accepts additional contributions at any time. When you add assets mid-year, the trustee recalculates the annual payout to account for how many days the new contribution was held during that tax year. This is valuable if you plan to contribute appreciated stock in stages across several high-income years.¹ Each new contribution must independently pass the 10% remainder test, so you cannot simply add assets without checking the math.

The Tax Benefits Both Structures Share

Capital Gains Deferral on Contributed Assets

This is the benefit that drives most CRT planning, and it works the same in either structure. When you transfer an appreciated asset to a charitable remainder trust, the trust can sell it without triggering an immediate capital gains tax bill for you. The trust itself is generally exempt from income tax.² The trust takes your original cost basis, but because it pays no tax on the sale, the full proceeds get reinvested and generate income for your benefit.¹

Compare that to selling the asset yourself. Stock with a $200,000 basis now worth $1,000,000 could cost you well over $100,000 in federal and state capital gains taxes on an outright sale. Transfer it to a CRT and the trust sells it tax-free, reinvests the full $1,000,000, and pays you an income stream from the larger pool. You still owe tax on the distributions you receive, but the deferral puts far more money to work in the meantime.

One exception applies to either structure: if the trust earns unrelated business taxable income, it owes an excise tax equal to that income for the year.²

Charitable Income Tax Deduction

You receive a charitable income tax deduction in the year you fund the trust. The deduction equals the present value of the remainder interest, which is what the IRS estimates will eventually reach charity after all your payments. The calculation depends on the payout rate, the trust term or your life expectancy, and the IRS’s Section 7520 interest rate for the month you create the trust.

A higher 7520 rate generally produces a larger deduction for a CRAT because the IRS assumes the trust will grow more, leaving a bigger remainder. For a CRUT the effect is more nuanced, because the payout also rises with growth.

How Your Payments Are Taxed

Distributions from either type of trust follow a four-tier ordering rule. The trust does not choose which type of income it sends you; the IRS dictates the order:⁴

Tier 1, ordinary income. Distributions are ordinary income first, to the extent the trust has current or accumulated ordinary income.
Tier 2, capital gains. Once ordinary income is exhausted, distributions come from current and accumulated capital gains.
Tier 3, other income. Tax-exempt interest and other categories that don’t fall into the first two tiers.
Tier 4, return of principal. Only after all income categories are depleted do distributions come back as a tax-free return of your original contribution.

This ordering matters because it frontloads the highest-taxed income. In the early years of a trust that just sold a large appreciated asset, most of your payments will carry ordinary income and capital gains character. Tax-free return of principal only arrives after all accumulated income is gone, which for a well-performing trust may never happen during your lifetime. CRT payments are not partly tax-free from day one.

Qualification Tests: One Test for CRUTs, Two for CRATs

The 10% Remainder Test

Both structures must pass the 10% test. The present value of the remainder interest going to charity must equal at least 10% of the value of the assets contributed.¹ If the payout rate is too high, the term too long, or the 7520 rate too low, the projected remainder falls below 10% and the trust fails to qualify.

For a CRAT, this test applies once at creation. For a CRUT, it applies at the time of each contribution. If the 7520 rate has dropped or you’ve aged, a contribution that would have qualified a year earlier may not qualify now.

The CRAT-Only Exhaustion Test

CRATs face an additional hurdle CRUTs avoid entirely. Because a CRAT pays a fixed dollar amount regardless of investment performance, the trust could run out of money before charity receives anything. The IRS requires the probability of full depletion to be less than 5%, using actuarial calculations based on the Section 7520 rate and the beneficiary’s life expectancy.¹

This is often why younger donors cannot create CRATs. A 45-year-old with a 40-year life expectancy receiving fixed payments has a much higher chance of exhausting the trust than a 70-year-old. A young beneficiary combined with a high payout and a low 7520 rate can push the exhaustion probability past 5% and disqualify the trust.

CRUTs face no such test. Because payments are a percentage of whatever remains, the payout shrinks as the trust shrinks, so by definition the trust cannot be fully exhausted through regular distributions.

Choosing Between a CRAT and a CRUT

A CRAT works best when you need a predictable payment you can count on regardless of what markets do. Retirees covering fixed expenses like housing and insurance often prefer this structure. The tradeoffs are no inflation protection, no ability to add assets later, and an age and rate combination that has to pass the exhaustion test.

A CRUT makes more sense when you have other income sources that can absorb payment fluctuations, when you expect to make additional contributions, or when you are young enough that inflation would seriously erode a fixed payment over a long term. The Flip CRUT in particular is the better vehicle for illiquid assets like real estate or closely held business interests that need to be sold before the trust can generate meaningful cash flow.

Both structures share the same core tax advantages: deferral of capital gains on contributed assets, an upfront charitable deduction, and tax-exempt growth inside the trust. The differences are mechanical. The question is whether you value payment stability or payment growth, and whether you need the flexibility to add assets once the trust is running.

1
Internal Revenue Service. Charitable Remainder Trusts
2
Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts
3
eCFR. 26 CFR 1.664-3 – Charitable Remainder Unitrust
4
Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts