Charitable Trusts

A Charitable Remainder Annuity, also known as a Charitable Remainder Annuity Trust, or CRAT, is similar to a charitable remainder trust, except that the assets are invested in an annuity, instead of a collection of stocks, bonds, real estate, etc.

When the trust is created, the assets are handed over to an annuity company, which serves as the trustee. The company agrees to pay fixed income to the beneficiaries for their lifetimes. When they pass away, the remaining assets are donated to one or more charities specified by the person who created the trust. Alternatively, the annuity may be set to last for a particular term of years, after which the remainder goes to charity. The normal maximum term of years for this strategy is 20.

The benefit of this form of CRT is essentially the same as for annuities in general: the beneficiaries receive fixed income for life, without having to worry about stock market fluctuations and such. Then, when they pass away, the assets are passed on to charity without having to pay estate taxes.

This form of charitable trust also enjoys the main advantages of other charitable remainder trusts. Namely, that appreciated assets may be donated to the trust and thereby immunized from capital gains taxes. Further, the donor will be able to take a substantial tax deduction up-front when the trust is created, which will be derived from the total appreciated value of the donated assets.

The downside to this strategy is that annuities generally don't perform very well over time when compared to other forms of investment. They offer the benefit of income stability, but the loss of performance is the price. For that reason, it is especially important to consult a financial planner in addition to an attorney when considering this strategy. A qualified financial professional may well be able to offer other strategies with superior investment performance, without a great sacrifice in safety and stability.

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