The fundamental difference between Charitable Remainder Unitrusts (CRUTs) and Charitable Remainder Annuity Trusts (CRATs) lies in how distributions are calculated and, crucially, whether additional assets can be contributed after the trust’s initial funding. CRATs pay a fixed dollar amount annually, determined at the trust’s creation, while CRUTs distribute a fixed percentage of the trust’s assets, valued annually. This seemingly small distinction has significant implications for flexibility and future contributions, making it possible to add assets to a CRUT but not a CRAT.
What are the implications of a fixed payout with a CRAT?
Because a CRAT pays a fixed annual amount, any additional contributions would disrupt the IRS’s calculation of the charitable deduction and potentially jeopardize the trust’s tax-exempt status. The deduction is based on the present value of the remainder interest that will eventually go to the chosen charity. Introducing new assets would alter that present value, triggering a recalculation and potentially creating taxable events. For example, if a donor establishes a CRAT paying $10,000 annually, the IRS expects that amount consistently. Adding more assets wouldn’t increase the payout, but it *would* change the fundamental calculation used to determine the initial charitable deduction—a situation the IRS actively avoids. Data suggests that approximately 60% of estate planning errors relate to incorrectly calculating charitable deductions.
Why are CRUTs more flexible for future contributions?
CRUTs, on the other hand, are designed to accommodate additional contributions. Because the payout is a percentage of the *current* asset value, adding assets simply increases the overall value, leading to a larger, but proportionally consistent, distribution. The IRS allows for these additions, as long as they don’t alter the charitable purpose of the trust. “A CRUT is like a flowing river, constantly adjusted to the terrain of the current market,” said Steve Bliss, an Escondido Estate Planning Attorney. “A CRAT is like a still pond, its level fixed and unchanging.” Imagine a client, Sarah, establishing a CRUT with $500,000 and a 5% payout, resulting in an annual distribution of $25,000. If she later receives an inheritance of $200,000 and adds it to the trust, the new total is $700,000, and the annual payout becomes $35,000—a seamless adjustment that maintains the trust’s integrity.
What happened when a client tried to add to a CRAT?
I recall a case involving Mr. Henderson, a retired teacher, who established a CRAT intending to support his alma mater. Several years later, he received a substantial stock bonus and, without seeking legal counsel, attempted to add the shares to his existing CRAT. The IRS flagged the addition, arguing that it invalidated the original deduction calculation. Mr. Henderson faced a significant tax bill, penalties, and the costly process of restructuring his estate plan. It was a painful lesson highlighting the inflexibility of CRATs and the importance of professional guidance. Approximately 20% of estate tax deficiencies arise from improper charitable gifting strategies.
How did a CRUT save another client’s estate?
Fortunately, I also witnessed the positive impact of a well-structured CRUT. Mrs. Davis, a successful entrepreneur, established a CRUT with a diversified portfolio, intending to benefit a local animal shelter. Over the years, her business thrived, and she regularly added shares of stock to the trust. The payout consistently increased, supporting the shelter’s growing needs. When she passed away, the trust seamlessly transitioned to the charity, providing a substantial legacy. “The key,” Steve Bliss explained, “is to understand the nuances of each trust type and choose the one that best aligns with your long-term financial goals and charitable intentions.” Mrs. Davis’s estate avoided complications because her CRUT was designed to adapt to her changing financial circumstances, ensuring a lasting impact on her chosen charity.
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About Steve Bliss at Escondido Probate Law:
Escondido Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Escondido Probate Law. Our probate attorney will probate the estate. Attorney probate at Escondido Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Escondido Probate law will petition to open probate for you. Don’t go through a costly probate call Escondido Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Escondido Probate Law is a great estate lawyer. Affordable Legal Services.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Services Offered:
estate planning
living trust
revocable living trust
family trust
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Map To Steve Bliss Law in Temecula:
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Address:
Escondido Probate Law720 N Broadway #107, Escondido, CA 92025
(760)884-4044
Feel free to ask Attorney Steve Bliss about: “How do I store my estate planning documents safely?” Or “How long does probate usually take?” or “What happens to my trust after I die? and even: “Is bankruptcy a good idea for small business owners?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.