Definition and Example
The Charitable Remainder Annuity Trust (CRAT) is an estate planning option that allows the grantor to hold assets for the benefit of one or more beneficiaries. A Charitable Remainder Annuity Trust is a type of trust that provides a regular income stream to you and your named beneficiaries, either during your lifetime or after your death. Once the terms of the trust are met, the remaining balance is donated to the charity of your choice.
How Charitable Remainder Annuity Trusts Work
Establishing a Charitable Remainder Annuity Trust can help you leave a legacy while providing an income stream for yourself during your lifetime. The amount you receive is either a specified dollar amount or a certain percentage of the fair market value of the trust on the date you established the trust. The payment amount cannot be less than 5% or more than 50% of the initial trust value, according to what is specified in Internal Revenue Service regulations.
Benefits of Charitable Remainder Annuity Trusts
During the setup stage, you can reduce your tax burden since you receive a tax deduction on a portion of your contribution. The amount of the deduction varies based on the terms of the trust. Additionally, you do not pay capital gains tax on the appreciated assets you donate. For example, if you have shares in a technology company you purchased at $5 per share in 2010 and now your shares are worth $25. If you donate these shares to the Charitable Remainder Annuity Trust, you will not pay taxes on the $20 per share capital gain.
Charitable Remainder Annuity Trust vs. Charitable Remainder Unit Trust
There are two types of charitable remainder trusts: the Charitable Remainder Annuity Trust and the Charitable Remainder Unit Trust. Both types of trusts allow for the distribution of funds to charities after your payment period and your beneficiaries’ payment period ends. Once established, many terms of the trusts cannot be modified. While they are similar in many ways, there are some key differences between them:
Charitable Remainder Annuity Trust:
- Is it an irrevocable trust? Yes
- Can I make additional contributions? No
- Will the assets be valued annually? No
- Will it provide a fixed income? Yes
Charitable Remainder Unit Trust:
- Is it an irrevocable trust? Yes
- Can I make additional contributions? Yes
- Will the assets be valued annually? Yes
- Will it provide a fixed income? No
Key Takeaways
The Charitable Remainder Annuity Trust offers you an immediate tax deduction along with a fixed income stream for a specified number of years (or for your lifetime) for you and the beneficiaries you name. Income from the trust comes through annuity payments, which are usually calculated as a fixed percentage of the initial value of the trust’s assets. Once you and your beneficiaries have passed, the remaining value is donated to the charity (or charities) of your choice. There are specific rules set by the IRS regarding how much you can take from a Charitable Remainder Annuity Trust each year, as well as the minimum value of the trust.
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Source: https://www.thebalancemoney.com/what-is-a-charitable-remainder-annuity-trust-5224913
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