Planned Giving for Financial Advisors
Charitable Remainder Annuity Trust (CRAT) — Detailed Gift Description
A charitable remainder annuity trust (CRAT) enables your client to contribute assets to a trust, generate a fixed income stream, defer or eliminate gains on appreciated stock, and reduce estate taxes. The annuity amount is fixed at the time the trust is created, is based on a percentage of the initial trust value, and will not change during the trust term. If your client instead wishes to receive variable payments that track market upturns and downturns, she should consider a charitable remainder unitrust.
As with all life income gifts, your client or her beneficiaries will receive payments for the trust term, and the remainder will be distributed to Harper College Educational Foundation to be used for the purposes your client selects. In the case of a CRAT, as in the case of a charitable gift annuity, the annual payments are fixed at the time the trust is created. CRATs are permitted and defined by federal tax law. The annuity payment percentage must be at least 5% of the initial trust value, the value of the charitable remainder as determined at the time the trust is created must be at least 10% of the initial trust value, and the annuity must be paid for the beneficiaries' lives, for a term of up to 20 years, or for a combination of both. In addition, because the trust pays a fixed amount regardless of trust investment performance, a CRAT must satisfy the "probability of exhaustion" test - no charitable deduction will be allowed when there is a greater than 5 percent probability that the trust corpus will be fully exhausted during the trust term before the charitable remainder is payable.
Note that although your client is permitted to name several beneficiaries of her CRAT, doing so very likely will cause the trust to fail either the 10% remainder rule or the 5% probability of exhaustion rule, or both.
CRATs can be funded with cash or appreciated securities. CRATs cannot be funded with real estate or other illiquid assets. If your client wants to create a life income gift with illiquid assets, she should consider a charitable remainder unitrust or charitable gift annuity.
Charitable Deduction
The charitable deduction your client can claim is a function of three factors: her selected payout rate, the length of the trust term, and the applicable federal discount rate. Her deduction will increase with a lower payout rate, shorter trust term, and/or higher federal discount rate. Her deduction will decrease with a higher payout rate, longer the trust term, and/or lower the discount rate. In the latter case, there will also be a greater chance the trust will fail the 10% remainder and 5% probability of exhaustion tests. Harper College Educational Foundation can help your client choose the right combination of selections to maximize her deduction and minimize the chances that the trust will fail to qualify.
We will provide you and your client with information about a proposed trust. You can also perform calculations on your own on Charitable Remainder Annuity Trust Calculator.
Trustee
Your client can appoint you, a bank or trust company, or another individual (including herself) to serve as her trustee. Harper College Educational Foundation will be pleased to serve as trustee of your client's trust with a minimum initial contribution of $100,000.
Other Options
If your client's proposed CRAT does not qualify under federal law as a tax-exempt trust, or if she wants to use illiquid assets like real estate or business interests to fund a life income gift, she can consider a charitable gift annuity, which also pays her a fixed amount, or a charitable remainder unitrust, which will pay her a variable amount.
Is this gift right for your client?
A charitable remainder annuity trust might be the right planned gift for your client if:
- She wants to make a major gift to Harper College Educational Foundation while retaining or increasing an income stream from the assets she contributes.
- She holds appreciated securities and wants to avoid and/or defer the capital gains cost of a sale.
- She wants stable, predictable trust payments in all economic conditions and is willing to forego the benefits of potential market upswings.
- She cannot create a charitable gift annuity because of state law restrictions.