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Charitable Remainder Annuity Trusts

Updated: Dec 5, 2020

With a charitable remainder annuity trust (CRAT), the donor retains an annuity interest for himself or someone else such as a family member for life or a term of years not to exceed 20 and names a charity to receive the remainder at the end of the annuity period. The sum payable to the non-charitable beneficiary each year can’t be less than 5%, nor greater than 50%, of the initial net fair market value of all property placed in trust.

In a CRAT, the grantor of the trust (donor of the property) donates either cash or preferably appreciable property to the trust.  For instance let’s say that you have stock that has appreciated to $1,000,000.  Your basis in the stock is $100,000.  You have held this stock for two years.  If you sell this stock you have a gain of $900,000.  Capital gains tax on this amount is $180,000.  Not to mention that the sale may trigger Alternative Minimum Tax.  In order to avoid this tax, you could donate the stock to the CRAT.  Donating the stock would trigger a tax deduction.  The trust (which is not a taxable entity) could sell that stock, and invest the money in a diversified portfolio of both stocks and bonds.  This could produce an income to the donor of $50,000 per year (assuming a 5 percent portfolio initial value) for the rest of your life.

The CRAT could allow for guaranteed income for your lifetime, and at death, or after 20 year (whichever comes first), the remainder is donated to a charity of your choice, or if you wanted to control where your money is donated, you could form your own foundation.  This can be a very powerful tax strategy.  It works best with appreciable property, but can also work with cash or collectibles.

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