How to Use CRATs and CRUTs in Your Charitable Giving Strategy

Have you ever wondered about CRATs or CRUTs? As a high-earning tech employee in Seattle, you may find yourself in the enviable position of having more wealth than you and your immediate family could ever need. If you’re already maxing out your donor-advised fund (DAF) and still want to be strategic — and tax-smart — about giving back, you might consider a CRAT or a CRUT. 

Below, we explore how charitable remainder trusts can help you support causes you care about while still preserving some benefits for yourself or your heirs. 

What is a CRAT?

A CRAT — short for charitable remainder annuity trust — is a type of irrevocable trust you set up to benefit both you and a charity. You contribute highly appreciated assets (like stocks), and the trust pays you (or another named beneficiary) a fixed dollar amount every year. At the end of the trust’s term, whatever’s left goes to charity.

Because the payout is a fixed annuity, you’ll get the same amount each year no matter how the trust’s investments perform. This can be helpful if you want predictability in your cash flow.

What is a CRUT?

A CRUT — or charitable remainder unitrust — works similarly, but instead of paying a fixed dollar amount, it pays you a fixed percentage of the trust’s assets each year. That means if the trust grows in value, your payments grow too. Of course, the flip side is that if the trust shrinks, so do your payments.

A CRUT is more flexible and is often used when you want to benefit both a charity and your heirs, for example, by structuring it so your kids can receive the income for a set number of years before the remainder goes to charity. (Fidelity has a good breakdown.)

How CRATs and CRUTs Differ from Donor-Advised Funds

Above, we mentioned donor-advised funds (DAFs), which let you set aside money for charitable giving while taking an immediate tax deduction. CRATs and CRUTs are different because they also provide you (or your heirs) with an income stream during your lifetime, and only the remainder goes to charity at the end. Unlike a DAF, which is purely for giving, these trusts let you blend philanthropy with personal or family financial goals.

Pros and Cons of CRATs

For individuals without children or heirs to inherit their wealth, a CRAT can be a wonderful way to support charitable causes while maintaining a steady income stream for life. Here are a few highlights and drawbacks to consider:

Pros:

• Provides predictable, fixed income every year.
• Allows you to avoid immediate capital gains taxes on appreciated assets contributed to the trust.
• You receive an immediate charitable deduction for a portion of the value of your gift.
• Simpler than some other trust structures.

Cons:

• Payout doesn’t adjust for inflation or investment performance — over time, your purchasing power may decline.
• Once established, you can’t change the payout amount.
• Not ideal if you want your kids or heirs to receive a portion after you pass.

Bottom line: If you have no dependents relying on an inheritance, a CRAT is a strong way to give away a chunk of your wealth now, knowing it’ll support good work in the future while still paying you.

Pros and Cons of CRUTs

A CRUT is often the better choice if you want to keep your giving flexible and leave something for your kids. Since the payout is a percentage, the income you get can grow (or shrink) over time — which can work in your favor if investments do well.

Pros:

• Payouts can grow with the trust’s investments.
• Allows you to leave some income for heirs before the remainder goes to charity.
• Immediate charitable deduction, just like a CRAT.
• Greater flexibility in structuring payments and beneficiaries.

Cons:

• Payments can fluctuate and are less predictable.
• More complex to administer and may have higher costs.
• If investments perform poorly, your income could shrink considerably.

Our take: If maintaining an inflation-adjusted retirement income while still making a meaningful charitable gift appeals to you, a CRUT is worth a closer look.

Talk to Your Financial Advisor About CRUTs and CRATs

Whether you’re driven by philanthropy, tax strategy, or a little of both, CRATs and CRUTs can be smart tools in your financial planning toolkit. They’re especially powerful for high-earning tech professionals who want to make a difference while keeping an income stream or benefiting family members. CRUTs and CRATs can be complex to set up and administer, though, so talk to your financial advisor about which one aligns best with your goals.

Northern Lights Advisors is a fiduciary, fee-only Registered Investment Advisor (RIA) firm based in Seattle, Washington. The information in this article is not intended as tax, accounting, or legal advice. Read the full disclosure here.