In general, a charitable remainder trust is a trust in which the creator of the trust reserves the cash flow from the property contributed to the trust, and upon the death of the creator (and the creator’s spouse). The property that remains is distributed to the charity.
There are two basic types of charitable remainder trusts, a charitable remainder unitrust (CRUT) and a charitable annuity trust (CRAT). The primary difference between the CRUT and the CRAT is how the cash flow is measured:
• In a CRUT, the non-charitable beneficiary is entitles to receive a fixed percentage (not less than 5 percent) of the annual fair market value of the trust assets. Thus, in an inflationary economy, the payments to the non-charitable beneficiary will increase as the value of the assets increases. However, in deflationary times, the amount paid to the non-charitable beneficiary will decrease as the value of the assets decreases.
• In a CRAT, the non-charitable beneficiary is entitled to receive a fixed percentage (not less than 5 percent of the initial fair market value of the trust assets) each year, and this amount does not fluctuate with the fluctuation of the value of the trusts assets.
As a general rule, charitable remainder trusts created for older individuals tend to be CRATS because older individuals want certainty as to the annual payments, and their life expectancies, usually are not long enough to benefit from the historical inflationary economy. Conversely, CRUTS are generally selected by younger donors whose life expectancies are long enough to benefit form increasing asset values, therefore increasing distributions later in life.
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