Optimum CRAT Payouts
Payouts are one of the most important areas for the advisor to communicate to the recipient. With a charitable remainder annuity trust, the payout rule is that the annuity trust percentage is multiplied times the trust value and that amount is then distributed. The distribution may be monthly, quarterly, semiannually or annually.
This distribution sounds reasonably simple. However, the accounting can be fairly complex. The challenge for the advisor is to explain these rather complex concepts in simple terms to donors and clients.
This annuity trust plan has several advantages. It is fairly easy for the donor to understand, it is quite easy for the CPA or attorney to explain to the client, and it is fairly easy to distribute capital gain. For these reasons, the annuity trust is preferred by donors who desire a fixed return.
Four-Tier Accounting for Remainder Annuity Trusts
CRAT distribution rules are set forth in Reg. 1.664-1(d)(1). Distributions from charitable remainder trusts are first ordinary income, then capital gain, then tax-free income and finally corpus. The distribution method is commonly described as the "Four-Tier" structure. In truth, the distribution rules have been made somewhat more complex by the different capital gains rules. The capital gain tier is further subdivided into the four levels for capital gain. The actual final structure is as follows:
| Category | Tax Rate |
| Ordinary Income | 37% |
| - Dividends | 15%/20%/23.8% |
| Capital Gain - | |
| - Short-Term Gain | 37%/40.8% |
| - Tangible Personalty Gain | 28% |
| - Depreciation Gain | 25% |
| - Long-Term Gain | 15%/20%/23.8% |
| Tax-Free | 0% |
| Return of Principal | 0% |
