Charitable Remainder Annuity Trust (CRAT)

Charitable Remainder Annuity Trust (CRAT)

When a charitable remainder annuity trust is established, a gift of cash or property is made to an irrevocable trust. The donor (and/or another non-charitable beneficiary) retains an annuity (fixed payments of principal and interest) from the trust for a specified number of years or for the life or lives of the non-charitable beneficiaries. At the end of the term, the qualified charity specified in the trust document receives the property in the trust and any appreciation.

Most gifts made to a charitable remainder annuity trust qualify for income and gift tax charitable deductions (or in some cases an estate tax charitable deduction). A charitable deduction is permitted for the remainder interest gift only if the trust meets certain criteria.

A trust qualifies as a charitable remainder annuity trust if the following conditions are met:

* The trust pays a specified annuity to at least one non-charitable beneficiary who is living when the trust is created. Annuities can be paid annually, semiannually, quarterly, monthly, or weekly.

* The amount paid, as an annuity, must be at least 5%, but less than 30% of the initial net fair market value of the property placed in the trust. The charity’s interest at inception also must be worth at least 10 percent of the value transferred to the trust.

* The annuity is payable each year for a specified number of years (no more than 20) or for the life or lives of the noncharitable beneficiaries.

* No annuity is paid to anyone other than the specified non-charitable beneficiary and a qualified charitable organization.

* When the specified term ends, the remainder interest is transferred to a qualified charity or is retained by the trust for the use of the qualified charity.

* The Internal Revenue Service has also ruled that a trust is not a charitable remainder annuity trust if there is a greater than 5% chance that the trust fund will be exhausted before the trust ends.

The annuity paid must be a specified amount expressed in terms of a dollar amount (e.g., each non-charitable beneficiary receives $500 a month) a fraction, or a percentage of the initial fair market value of the property contributed to the trust (e.g., beneficiary receives 5% each year for the rest of his life).

The grantor will receive an income tax deduction for the present value of the remainder interest that will ultimately pass to the qualified charity. Government regulations determine this amount, which is essentially calculated by subtracting the present value of the annuity from the fair market value of the property and/or cash placed in the trust. The balance is the amount that the grantor can deduct when the grantor contributes the property to the trust.

Necessary calculations: need to know the value of the non-charitable beneficiary’s annuity (non-deductible) and the value of the charitable remainder interest (deductible) for a gift made through a charitable remainder annuity trust.

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