By Marcus Dickerson
For many families, charitable giving is about much more than generosity. It’s also about leaving a legacy, aligning money with values, and doing so in a way that makes sense financially. The tax code provides several powerful tools that let you support the causes you care about while also creating income, reducing taxes, and in some cases, transferring wealth to the next generation more efficiently.
Three of the most versatile tools are Charitable Remainder Unitrusts (CRUTs), Charitable Remainder Annuity Trusts (CRATs), and Charitable Lead Annuity Trusts (CLATs). Collectively, these are known as split-interest trusts because the benefits are split between you and a charitable organization. Understanding how each one works can open the door to strategies that go far beyond simply writing a check to charity.
The Big Idea Behind Split-Interest Trusts
At their core, these trusts divide the life of the gift into two stages:
- The income stage – Either you or the charity receives ongoing payments from the trust each year.
- The remainder stage – When the trust term ends, the other party receives what’s left.
This structure allows you to align charitable giving with your personal financial goals. Maybe you want steady income in retirement. Maybe you want to reduce a looming capital gains bill. Or maybe you want to pass wealth to your children without triggering heavy estate taxes. One of these trusts can often accomplish the goal while still benefiting charity.
Charitable Remainder Unitrust (CRUT)
A CRUT provides flexibility by paying you (or another beneficiary) a fixed percentage of the trust’s value each year. Because the payout is recalculated annually, the income rises and falls with the performance of the trust’s investments.
Example: Suppose you donate $1 million of appreciated stock into a CRUT. The trust sells the stock without triggering immediate capital gains and reinvests the proceeds. If you set a 5% payout rate, you would receive $50,000 the first year. If the trust grows to $1.1 million the next year, your payout becomes $55,000.
Benefits of a CRUT:
- Potential to keep pace with inflation.
- Deferral of capital gains tax when contributing appreciated assets.
- An immediate charitable deduction for part of the gift.
- Remaining assets go to the charity when the trust ends
A CRUT is especially useful if you own highly appreciated assets—like stock, real estate, or even a business—that you want to diversify without triggering an immediate tax bill.
Charitable Remainder Annuity Trust (CRAT)
A CRAT is similar to a CRUT but with one key difference: instead of paying a percentage of the trust’s value, it pays a fixed dollar amount every year. That number is determined at the start and never changes.
Example: You contribute $1 million to a CRAT with a 5% payout. You’ll receive $50,000 every year, no matter how the investments perform.
Benefits of a CRAT:
- Reliable, pension-like income.
- Avoids immediate capital gains on donated assets.
- Predictability makes budgeting easier.
- Charitable remainder passes to the nonprofit at the end.
CRATs are best suited for people who prefer stability and certainty over growth-linked income. Unlike CRUTs, you cannot add more contributions later, so they work well as a one-time planning move.
Charitable Lead Annuity Trust (CLAT)
While CRUTs and CRATs give income to you first and charity later, a CLAT flips the order. The charity receives annual payments for a set number of years, and then your heirs receive what remains.
Example: You set up a 20-year CLAT with $1 million. Each year, the charity receives $50,000. At the end of 20 years, any remaining balance goes to your children.
Benefits of a CLAT:
- Allows you to pass wealth to heirs at a potentially steep discount for gift and estate tax purposes.
- Provides meaningful support to charity during your lifetime.
- Especially powerful in low-interest rate environments, where the IRS assumptions make the remainder passing to heirs very favorable.
Families often use CLATs when they want to support charity now but ultimately keep assets in the family. They are a wealth-transfer tool with a philanthropic heart.
Comparing the Three
- CRUT: Flexible payments based on performance, good for appreciated assets and growth potential.
- CRAT: Fixed payments, best for predictable income.
- CLAT: Charity gets paid first, family inherits later, best for wealth transfer planning.
In short:
- CRUT and CRAT = Income to you, remainder to charity.
- CLAT = Income to charity, remainder to heirs.
Why Consider These Trusts?
- Tax efficiency: You may receive an immediate charitable deduction and avoid or defer capital gains.
- Income planning: They can create retirement-style income while still leaving a charitable legacy.
- Legacy and wealth transfer: You decide whether the long-term benefit goes to your heirs or to charity, while keeping the IRS from claiming more than necessary.
- Impact: Structured giving can result in a much larger charitable gift than you could provide through traditional donations.
Final Thoughts
CRUTs, CRATs, and CLATs turn charitable giving into a powerful planning strategy. They allow you to align your financial goals—income, tax reduction, wealth transfer—with the causes you care about. These trusts aren’t just for the ultra-wealthy; they can be tailored to fit a wide range of situations.
If you’re considering making a significant charitable gift or are facing a large tax bill from appreciated assets or estate concerns, exploring these options with your advisor could unlock both financial and philanthropic opportunities.