MSTR Cat

Trust Law/Level V · Tax and legacy/5.2 Annuity and unitrust structures/Lesson 3

Annuity trusts and unitrusts compared

Fixed dollars versus a fixed percentage: how annuity trusts and unitrusts share investment gains and losses, in GRATs and GRUTs and in charitable remainder trusts.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. The §7520 rate decides which form is cheaper: at 5.6% in October 2026 a fixed stream is worth less, so a CRAT yields a larger deduction while GRATs and CLATs face a steeper hurdle; charitable trusts may use either prior month’s rate (§7520(a)).
  2. An annuity trust needs no yearly valuation to set its payment, so it is the cheaper form for illiquid assets; the catch is that CRATs and GRATs bar additional contributions, so a second gift means a second trust.
  3. A unitrust cannot run dry and may take additions if its document allows, which suits ongoing giving into one trust; the price is a yearly valuation, which stays near zero if the trust holds listed securities rather than land or private shares.
  4. Choose the annuity form to push growth to the remainder, such as family in a GRAT, and the unitrust form to share growth with the payee; both must pay at least annually, and charitable versions must pay between 5% and 50%.

MaterialsThe text of IRC §664 and IRC §2702, free on law.cornell.eduThe IRS instructions for Form 5227, the return filed by charitable remainder trustsLessons 5.2.1 and 5.2.2, on GRATs and GRUTs

Wonder

  1. What happens to an annuity trust’s and a unitrust’s payments if the trust’s investments fall by half?
  2. Who bears the risk of investment gains or losses in a CRAT versus a CRUT?
  3. Why does a unitrust require an annual valuation that an annuity trust does not?

Explore

  1. US federal tax law uses two payment formulas for trusts that split benefits between a current recipient and a remainder. In charitable remainder trusts under IRC §664, and in trusts for family members under IRC §2702, an annuity trust pays a fixed amount: a stated dollar sum or a fixed percentage of the assets’ value when the trust is funded. A unitrust pays a fixed percentage of the trust’s value as revalued each year. The formula decides who bears investment gains and losses. Charitable trusts are covered in lessons 5.3.4–5.3.5.
  2. Take a charitable remainder annuity trust (CRAT) funded with $1,000,000 that pays 5% of that starting value, $50,000 a year, to the donor for life. The payment stays $50,000 whatever happens. If the assets double, the extra growth stays in the trust and the charity eventually receives a larger remainder. If the assets fall to $500,000, the payment still comes out of the shrinking trust, and if the trust runs out, payments stop. Gains and losses fall mainly on the remainder; the recipient’s risk is that the trust is used up.
  3. In a charitable remainder unitrust (CRUT) paying 5%, each year’s payment is 5% of the trust’s value on its valuation date for that year. If the assets grow to $2,000,000, that year’s payment is $100,000; if they fall to $500,000, it is $25,000. The recipient and the charity therefore share gains and losses: the payment and the remainder rise and fall together. Because each payment is a percentage of what is left, a unitrust does not run out the way an annuity trust can.
  4. The same logic applies to trusts for family under IRC §2702. In a GRAT, the grantor’s annuity is fixed, so growth above the §7520 rate stays in the trust for the remainder beneficiaries, while poor returns can use up the trust and leave them nothing (lesson 5.2.1). In a GRUT, payments rise and fall with the trust’s value, so part of any growth returns to the grantor and less passes to the remainder (lesson 5.2.2). This is one reason GRATs are used more often than GRUTs to pass growth to family.
  5. A unitrust must value its assets every year to set the payment. The CRUT regulations let the trust value its assets on any date or dates in its tax year, as long as it uses the same dates and methods each year. Listed securities are simple to value; real estate or a private business usually needs an appraisal, which adds cost. An annuity trust’s payment is fixed at the start, so it needs no yearly valuation to set the amount, although any assets paid out in kind must still be valued.
  6. Additions differ by type. Treasury regulations require a CRAT’s document to provide that no additional contributions may be made after the first one, and a GRAT’s document must prohibit them too. A CRUT may accept additions if its document allows them, with rules on how each is valued, and the GRUT regulations contain no prohibition. Each structure has its own valuation, reporting and drafting rules, and the law can change. This lesson compares how the two formulas work; it does not suggest using either.

Key facts

  • Under IRC §664, a CRAT pays a sum certain: a stated dollar amount or a fixed percentage of the trust’s initial net fair market value.
  • Under IRC §664, a CRUT pays a fixed percentage of the net fair market value of its assets, valued each year.
  • In an annuity trust, gains and losses fall mainly on the remainder; in a unitrust, the payment recipient and the remainder share them.
  • A GRAT’s annuity is fixed, so growth above the §7520 rate passes to the remainder, but poor returns can use up the trust and leave the remainder nothing.
  • Treasury regulations bar additional contributions to CRATs and GRATs; a CRUT may accept them if its document provides for them.
  • A unitrust must value its assets each year to set the payment; the CRUT rules allow any valuation date, used consistently each year.

Exercise nine, six, three, one

9CollectList up to 9 market events a trust might face during its term (some lists are shorter), such as a strong stock market year, a crash, a slow decline, a sale of real estate or a run of low returns.
6ClusterSort them into 6 categories: large gains, small gains, flat years, small losses, large losses, and events whose effect you are unsure about.
3DistillReduce the 6 categories to 3 groups: events that could use up an annuity trust, events that change a unitrust’s payment the most, and events that change the remainder the most.
1CrystallizeWrite 1 sentence explaining, in your own words, why a unitrust’s payment recipient shares in investment gains and losses while an annuity trust’s recipient mostly does not.

Fact check

Dates, figures and claims checked against the published sources listed below.

Open in the interactive academy →

PT ES ZH JA KO RU DE FR MS