A Charitable Remainder Annuity Trust - CRAT - is a type of gift transaction in which a donor contributes assets to a charitable trust which pays an annuitydesigned to leave a substantial proportion of the funds to charity upon termination of the annuity. The tax consequences of this transaction may be advantageous for contributing appreciated assets due to differences involved in the taxation of charitable trusts.
The charitable remainder annuity trust is similar to other charitable annuities. However, the remainder trust has the advantage of being structured as a separate trust fund. This means the charity cannot incur liability as a result of the annuity because the funds are in a separate legal structure.
To open a CRAT, you must irrevocably transfer cash, securities, or other property to a trust. The donor gets an income tax deduction for the entire amount in the year the trust is opened and pays no capital gains tax. During the term of the trust, the donor or a named beneficiary is paid a fixed amount each year. When the donor dies or when the trust ends, the remaining principal passes to the nonprofit organization such as a university or charity.
This information is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
