Charitable Remainder Annuity Trust (CRAT)

The Charitable Remainder Annuity Trust (CRAT) is a popular charitable planning tool that provides an income stream for you or a loved one. Assets are transferred into the trust, the Trustee manages the trust assets and pays you (or others you choose) a fixed income stream based on a stated percentage of the initial market value of the transferred assets. (For an income stream that can grow see Charitable Remainder Unitrust.) This income stream may either be for the life of the beneficiary or for a term of years. If the trust is done for life, it can be done over the life of the income beneficiary. This is one way to fund a Special Needs Trust for a disabled loved one. When the trust terminates, the remaining assets in the trust are transferred to the charity or charities of your choice.

Often a Charitable Remainder Unitrust or a Charitable Remainder Annuity Trust is funded with highly appreciated assets. When the Trustee sells the assets, there are no capital gains taxes due. In this way you can take highly appreciated property and make it income producing while avoiding the capital gains. Therefore, all of the proceeds are available for reinvestment to produce an income stream.

Is this right for me?

Do I have genuine charitable intent? - yes

Do I need to create an income stream for myself or a loved one for life or a specified term of years? - yes

Am I willing to give up possible growth in the income in exchange for the security of a fixed income? - yes

Do I want to make additional gifts to the trust? - yes

If your answers match or vary slightly from the answers above, a Charitable Remainder Annuity Trust may be an appropriate charitable planning tool for you.

How Do I Make a Gift Using a Charitable Remainder Annuity Trust?
Before you begin, you need to make sure your financial and legal advisors are part of your gift planning team. Advanced Legal Planning, LLC would be happy to be part of your team in this process or will work with your current advisors to make sure that your goals are met.

As soon as your gift planning team designs an appropriate trust, Advanced Legal Planning, LLC will draft the trust and have you approve it. Then, your planning team will help you transfer assets to the Trustee you have chosen to manage the trust. The assets are usually sold by the Trustee and reinvested to match your income objectives.

Other Facts You Should Know About a Charitable Remainder Annuity Trust
The income tax deduction you can use beginning in the year of the donation is based on an IRS formula that attempts to determine the Net Present Value of the gift going to the charity or charities of your choice. The older you are the better the deduction generally. Also, the Net Present Value of a gift to trust designed with a term of years can be more accurately measured and as a consequence, trusts for a term of years usually yield a higher income tax deduction.

Another tax consideration is the Net Present Value of the gift to any income beneficiaries besides yourself or your spouse. If, for instance, you use this trust to fund a Special Needs Trust for a disabled child for the child’s life, it is quite possible that the present value of the gift of the future income stream over the number of years your child is expected to live will be large enough to trigger gift taxes.

Because the income stream is fixed, the principal of the trust will grow if the return on investment is high enough or shrink if the performance is too weak. The formula that the IRS applies must find that there will be at least 10% of the value of the assets left to pass on to charitable interests when the trust terminates for the trust to have charitable status. This gives a lot of room to move if you are primarily interested in an income stream.

Assets Used With This Tool (Charitable Remainder Annuity Trust [CRAT])

Cash
Collectibles or other tangible personal property
Patents, royalties, or copyrights
Securities