• Donors make an irrevocable gift of cash, stock, or other appreciated asset, such as real estate. Ideally, these are highly appreciated assets that generate little income.
   
• Based on the type of trust, donors receive income tax deductions on the amount that passes to the charity.
   
• Trustees liquidate the asset(s) and invest in ones that produce income, paying no capital gains.

CRATs pay a fixed dollar amount monthly, quarterly, or annually for the life of the trust, which is the life expectancy of the donor, or 20 years — whichever is less. The annuity payment is limited to 50 percent of the value of the trust, but at least 10 percent of the value of the initial gift must eventually go to the charity, so annuities are often much lower. CRATs allow for only one initial donation, but the income tax deduction for a CRAT is higher than a CRUT with equal funding. CRATs are an excellent choice for donors preferring predictable fixed payments.

CRUTs pay a fixed percentage of the underlying asset annually, which ranges from 5 percent to 50 percent of the trust value. Since there is no 20-year cap on CRUT payments, the income tax deduction is somewhat lower than a CRAT. Assuming an 8 percent payout and initial trust value of $500,000, first-year payments to a designated beneficiary would be $40,000. If the value of the trust grows to $800,000 in the next 10 years, then the payments would increase to $64,000 annually. Additional funds can be contributed to a CRUT in later years, providing the initial trust document allows it. CRUTs are a good option for donors who might make multiple large gifts and want their income to increase as the value of the trust increases.

Example: Capt. Rita Martin, USN-Ret., age 65, purchased a lot in San Diego in 1990 for $600,000. The value has increased to $1.6 million and poses a potential estate tax problem when combined with her other assets. If she funds a CRUT with the lot, she will receive an income tax deduction of approximately $400,000 and, assuming a 7 percent payout rate, a first-year income of $112,000. She will avoid paying capital gains taxes on the property sale and remove the lot from her estate.

At the beneficiary’s death or term expiration, assets revert to the charity, and the value is not subject to estate taxes.

— Former Army Capt. Phil Dyer, CFP, is deputy director for financial education, Benefits Information. For financial advice, members can contact Garrett Planning Network at (866) MOAA-GPN (662-2476) or www.garrettplanning.com.