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Charitable Remainder Trusts: Types and Uses

The foundation of philanthropy has long been charitable giving. People love contributing to causes that are close to their hearts. For those who wish to support charitable organizations while also benefiting from tax advantages and income streams, charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs) are two compelling options. These useful wealth management tools let people support charitable causes while securing their own financial futures.

What is a CRAT?

A charitable remainder annuity trust (CRAT) is a legal arrangement in which an individual transfers assets, typically appreciated securities or real estate, into an irrevocable trust. The donor receives a fixed annuity payment each year, predetermined when the trust is established. This fixed annuity provides the donor with a stable income stream throughout their lifetime or for a specified number of years. Since a CRAT is an irrevocable trust, it can’t be changed once it’s created, and no additional contributions can be made.

Benefits of CRATs

One of the key benefits of a CRAT is the immediate charitable income tax deduction the donor receives at the time of the transfer. This deduction is based on the present value of the remainder interest that will ultimately pass to one or more chosen charitable organizations. By establishing a CRAT, individuals can reduce their current tax liability while supporting the causes they care about.

What is a CRUT?

A charitable remainder unitrust (CRUT) operates similarly to a CRAT but with a crucial distinction. Instead of receiving a fixed annuity payment, the donor receives a variable payment based on a fixed percentage of the trust’s assets. The value of the CRUT is reassessed annually, allowing the income stream to fluctuate with the performance of the trust’s investments.

Benefits of CRUTs

The flexibility of a CRUT can be particularly appealing to donors who anticipate the need for adjustments in their income stream over time. If the trust’s investments experience growth, the income payments will increase proportionally, ensuring the donor benefits from their philanthropic investment. Moreover, donors can make additional contributions to the CRUT during their lifetime, allowing them to further benefit from tax deductions and increase the ultimate charitable contribution.

Making a CRAT or CRUT Part of Your Estate Plan

Both CRATs and CRUTs allow you to support charitable causes while enjoying tax benefits and a stable income stream. Whether you choose a fixed annuity payment through a CRAT or a variable income stream through a CRUT, the ability to leave a meaningful legacy while achieving personal financial goals makes these charitable trusts attractive options.

Setting up and administering CRATs and CRUTs requires careful planning and the assistance of legal and financial professionals. Donors must comply with specific rules and regulations established by the Internal Revenue Service (IRS) to ensure the eligibility of the trust for tax benefits. Consulting with your estate planning attorney and financial advisor is essential to navigating the complexities associated with these agreements.

Contact our office today to learn more about your estate planning and wealth management options. We will help you achieve your estate planning goals and establish a meaningful legacy.

This article offers a summary of aspects of estate planning. It is not legal advice. It does not create an attorney-client relationship. For legal advice, we invite you to contact our offices in Midway, Erie, and Franklin PA.

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