A charitable remainder annuity trust or CRAT is an irrevocable trust that is established as a Planned Giving agreement between a donor and a charitable organization. The donor contributes a substantial gift in the form of cash, equity, liquid assets, appreciated stock, bonds, or real property to the charitable remainder annuity trust. A trustee manages and oversees all transactions of the trust including the sale of assets in the trust and the reinvesting of proceeds. The trustee can be the charitable organization, bank, lawyer, or finical advisor. The trustee then makes regular annual fixed income payments to the annuitants. The annuitants can be the donor and/or any beneficiaries named in the trust. The payments are based on a fixed percentage of the fair market value of the assets and funds in the trust at the time the assets were transferred into the CRAT.
The fixed income payments from the charitable remainder annuity trust are for an established length of time with a maximum of 20 years or for the life of the donor or beneficiaries. When the time expires or the annuitants die, any funds or assets remaining in the trust are transferred to the charity. This type of Planned Giving program is very common as a method of charitable contributions to many community foundations, museums, colleges, and universities.
Charitable remainder annuity trusts are a flexible and effective instrument used in financial and estate planning. A CRAT provides a significant tax shelter for any assets and property placed within it. That allows any assets in a charitable remainder annuity trust to increase in value without being taxed on the increase. A well-constructed CRAT can provide financial security for the annuitants and the charitable organization for a very long time. The charitable remainder annuity trust will continue to make payments as long as there are sufficient funds in the CRAT to meet the financial responsibilities established when the trust was established.
- The advantages from a charitable remainder annuity trust include:
- The donor can claim an income tax charitable deduction
- Lower payouts and a shorter term of payment will increase the donor's income tax charitable deduction
- The donor and/or the beneficiaries receive a steady income every year
- The trust pays no capital gain tax when it sells long-term appreciated assets
- The assets transferred into a CRAT will reduce the donor's estate thereby reducing the amount of estate taxes
- Assets in a CRAT circumvent probate court and the related costs and fees
If you are wondering if a charitable remainder annuity trust is right for you and your financial planning strategy, contact a capable estate-planning lawyer today. An experienced estate-planning attorney can answer any questions you may have about CRATs or any other financial planning issues.
