CRUTs vs GRATs: Which Trust Option Is Right for You?

Choosing the right trust for your wealth management and estate planning is a very important step for your financial future and legacy. Charitable Remainder Unitrusts (CRUTs) and Grantor Retained Annuity Trusts (GRATs) are two potentially beneficial options, but which one is right for you?

Here's everything you need to know about CRUTs vs GRATs and how they compare to each other. Consider also consulting a financial professional, such as a tax advisor or an attorney, to create a strategy that best supports your financial goals.

What Is a CRUT and How Does It Work?

A Charitable Remainder Unitrust (CRUT) is a tax-exempt irrevocable trust that generates income for you or your beneficiaries while ultimately benefiting a charity.

With a CRUT, you donate assets to the trust and receive a fixed percentage (typically at least 5%) of the trust's value each year. This percentage is recalculated annually based on the current market value of the trust's assets. After a specified term or your lifetime, the remaining assets go to your chosen charity.

Example: Sarah transfers $500,000 worth of appreciated stock to a CRUT. She sets up the trust to pay her 5% of its value annually for her lifetime. In the first year, she receives $25,000 (5% of $500,000). If the trust assets grow to $550,000 the next year, she'll receive $27,500 (5% of $550,000). When Sarah passes away, the remaining trust assets will go to her selected charitable organization. Sarah receives an immediate partial tax deduction when she establishes the trust, avoids capital gains tax on the appreciated stock, and creates a stream of income.

Related Article | Irrevocable Trusts 101

What Is a GRAT and How Does It Work?

A Grantor Retained Annuity Trust (GRAT) is a legal arrangement that helps you pass the growth of your assets to your family members while paying little or no gift tax.

When you set up a GRAT, you place assets in the trust and receive yearly payments of a fixed dollar amount for a set period. The payments are calculated based on the initial value of the assets and an IRS-determined interest rate. After the term ends, any remaining assets pass to your beneficiaries.

Example: Michael places $1 million worth of stock in a GRAT with a 10-year term. If the IRS rate is 3%, he receives annual payments of approximately $117,000. If the assets in the trust grow at 8% annually, at the end of the 10-year term, approximately $580,000 will remain in the trust to pass to Michael's children. This transfer occurs with little to no gift tax because the initial gift tax value is reduced by the present value of Michael's retained annuity payments.

Related Article | How to Pass Money to Heirs Tax-Free

What Is the Difference Between a CRUT and a GRAT?

CRUTs and GRATs are fundamentally different and are meant for different needs and estate tax purposes.

A CRUT works best for philanthropically-minded individuals who want an income stream now while supporting a cause they care about later. When you establish a CRUT, you receive variable payments based on the trust's current value each year.

The payments continue for your lifetime or a set period, and a charity ultimately receives what remains.

A GRAT, by contrast, suits wealthy individuals focused on family wealth transfer with minimal gift taxes. With a GRAT, you receive fixed annuity payments based on the initial trust value for a specific term, typically 2-10 years. After this period, any remaining assets transfer to your family members.

GRATs work particularly well when funded with high-growth assets that are likely to appreciate significantly beyond the IRS-assumed rate of return. They create no charitable deduction but effectively transfer appreciation to your heirs, minimizing or eliminating gift taxes.

The right choice depends on your priorities.

Choose a CRUT - or alternative options like a Charitable Remainder Annuity Trust (CRAT) or a Charitable Remainder Trust (CRT) - if charitable giving and lifetime income are important to you.

Select a GRAT if your main goal is transferring wealth to family with maximum tax benefits, and you can accept a fixed term and payment structure.

What Are the Benefits of a CRUT?

Charitable Remainder Unitrusts have important advantages for high-net-worth individuals with charitable intentions and income needs. They're particularly attractive if you have appreciated assets and a favorite charity.

Immediate income tax deduction based on the projected value that will eventually go to charity
Avoidance of capital gains tax on appreciated assets like stocks or real estate
A steady income stream that can last for your lifetime and may increase if your investments perform well
Support for charitable causes while still benefiting financially from your assets

CRUTs essentially create a win-win scenario: you receive tax benefits and income now, while ensuring your charitable legacy later. According to research, 85.1% of affluent households give to charity.

Related Article | NIMCRUT for High-Net-Worth Individuals

What Are the Downsides of a CRUT?

Despite their advantages, CRUTs come with some limitations.

Irrevocable structure means you can't change your mind and reclaim the assets
Limited inheritance for beneficiaries since the remaining assets ultimately go to charity
Complex administration requirements, including annual tax returns and IRS compliance
Payment fluctuations based on investment performance, which creates potential income uncertainty
Minimum payout requirements of at least 5% annually and a minimum 10% charitable remainder value

These limitations make CRUTs less suitable for people who are primarily focused on maximizing family inheritance or those who need absolute certainty in how much income they'll receive.

What Are the Benefits of a GRAT?

Grantor Retained Annuity Trusts are a powerful tool for wealth transfers for high-net-worth individuals who want to pass assets to family members. They're particularly effective during periods of low interest rates and for assets that you expect to appreciate significantly.

Tax-efficient wealth transfer by passing asset appreciation to heirs with minimal or zero gift tax
Retention of income through fixed annuity payments during the trust term
Freezing asset values for estate tax purposes at their current level
Multiple GRAT strategies are available to maximize success probability and minimize risk

GRATs help wealthy families transfer wealth to the next generation with strong tax savings. If you're worried about gift tax consequences, this type of trust could be a good option for you.

Related Article | The Importance of Tax Compliance

What Are the Downsides of a GRAT?

Still, there are certain downsides all high-net-worth individuals should consider when thinking about a GRAT.

Mortality risk as the grantor must survive the trust term for the strategy to work
No charitable deduction because, unlike CRUTs, GRATs provide no income tax benefits
Underperforming assets may result in no wealth transfer if growth doesn't exceed the IRS rate
Inflexible structure with no ability to skip generations or change beneficiaries after creation
Limited to family transfers and can't be used for non-family beneficiaries

The effectiveness of a GRAT depends heavily on market performance, interest rates, and your life expectancy. If your assets don't outperform the IRS hurdle rate or if you don't survive the trust term, the GRAT strategy may yield limited benefits or even fail.

CRUTs vs GRATs: Which One Is Right for You?

It depends on your financial situation, objectives, and priorities.

CRUTs are typically best for:

Retirees with appreciated assets who want income while supporting charity. For example, a 70-year-old retired executive with $2 million in highly appreciated stock who wants reliable income and plans to leave a legacy to her alma mater.
Philanthropically-minded high-income earners who need immediate tax deductions. For example, a surgeon earning $800,000 annually who wants to reduce his current tax burden and support medical research.
Owners of appreciated real estate who want income without capital gains tax. For example, a 65-year-old property owner with a $3 million commercial building purchased decades ago for $300,000 who needs retirement income.

GRATs work better for:

High-net-worth individuals who are concerned about estate taxes. For example, a business owner with a $20 million estate who wants to transfer wealth to children without gift tax consequences.
Owners of high-growth assets who are expecting significant appreciation. For example, an executive with pre-IPO stock or founders' shares that are expected to multiply in value over the next few years.
Family business owners planning succession. For example, a business owner who wants to transfer company ownership to his children but maintain income and control during a transition period.

Recent research shows that only 11% of people have a trust in America.

Overall, choose a CRUT if charitable giving is important to you and you want tax benefits now. Go with a GRAT if your priority is family wealth transfer with minimal gift and estate taxes. Some families also use both strategies.

Related Article | How to Legally Avoid Taxes

FAQs

Is a CRUT Revocable or Irrevocable?

A CRUT is irrevocable. Once you establish a Charitable Remainder Unitrust, you can't change your mind and take back the assets you've contributed. This permanence is part of why CRUTs provide tax benefits. You've made an irrevocable commitment to eventually benefit a charity. You can't revoke the trust, but you may retain certain rights, such as the ability to change the charitable beneficiary in some cases.

Is a GRAT Revocable or Irrevocable?

A GRAT is irrevocable. When you create a Grantor Retained Annuity Trust, you permanently transfer assets to the trust and can't reclaim ownership of those assets. This irrevocable nature is necessary for the GRAT to achieve its estate planning benefits. The IRS only allows the gift tax advantages because you've made a completed gift to the trust that can't be undone. However, as the grantor, you do retain the right to receive the specified annuity payments for the trust term. These payments are fixed at the trust's creation and also can't be changed.

Can You Put Real Estate in a CRUT?

Yes, you can put real estate in a CRUT, and it's often a great type of asset to contribute. Real estate that has significantly appreciated works particularly well for a CRUT because you avoid capital gains tax that would otherwise be due if you sold the property directly. The CRUT can sell the property tax-free and reinvest the full proceeds to generate income for you.

Can You Put Real Estate in a GRAT?

Yes, you can put real estate in a GRAT, though it presents both opportunities and challenges. Real estate with strong appreciation potential works well in a GRAT structure, especially income-producing properties that can help satisfy the required annuity payments. However, valuation can be complex, requiring qualified appraisals to establish the property's initial value. Additionally, if the property doesn't generate enough income to cover annuity payments, you may need to take partial distributions of the property or contribute additional assets.

Can a Spouse Be a Beneficiary of a CRUT?

Yes, your spouse can be a beneficiary of a CRUT. In fact, it's common to name both yourself and your spouse as income beneficiaries for your lifetimes. This arrangement, known as a joint and survivor CRUT, continues providing income until both spouses have passed away, at which point the remaining assets go to charity.

Can a Spouse Be a Beneficiary of a GRAT?

Yes, your spouse can be the remainder beneficiary of a GRAT, but this approach doesn't optimize the GRAT's wealth transfer advantages. When your spouse is named as the remainder beneficiary, the unlimited marital deduction applies, meaning there's no taxable gift. However, this merely postpones estate taxes until your spouse's death rather than reducing them. A more effective strategy is naming children or a trust for their benefit as remainder beneficiaries, which transfers wealth to the next generation immediately.

The Bottom Line

CRUTs and GRATs are two distinctly different types of trusts. CRUTs provide income and tax benefits while supporting charitable causes, and GRATs efficiently transfer wealth to family members with minimal gift tax implications.

Given the complexity and significant legal and tax implications of these strategies, always work with experienced estate planning attorneys, tax professionals, and financial advisors before establishing either trust type.