Marietta Financial Services | CPA Indianapolis

A taxpayer can establish a CRAT either during the taxpayer’s life, or through a provision in the taxpayer’s will. If the taxpayer establishes the trust during the taxpayer’s life, the taxpayer receives a charitable deduction for income tax purposes, or for gift tax purposes. If the taxpayer establishes the trust through the taxpayer’s will, the taxpayer receives a charitable deduction for estate tax purposes. The amount of the deduction equals the fair market value of the property (as of the time of the transfer), less the value of the noncharitable beneficiaries’ interest.

The income generated by the charitable remainder trust is not subject to income tax at the trust level. However, the noncharitable beneficiaries are taxed on the amount of distributions they receive. To qualify for special treatment as a charitable remainder trust, and for taxpayers to receive the advantages, a trust must adhere to the strict requirements of the tax laws.

© 2011 Thomson Reuters/RIA. All rights reserved.

Tags: Charitable Remainder Annuity Trust, tax savings

A specified percentage of the initial value of the trust assets, or a fixed sum, must be payable at least annually to a non-charitable beneficiary or beneficiaries, who are living at the time the trust comes into being. The payments should be made for a specified number of years not greater than 20 years, or the life or lives of the beneficiary or beneficiaries. Also, the value of the charitable remainder interest must be at least 10% of the fair market value of the property contributed, valued at the date of the contribution. In addition, taxpayers may not make additional contributions after the initial contribution.

The rules for a CRAT do not provide any hedge for inflation, especially when a fixed sum is set for the annual payment. However, a CRAT can be preferable if the assets contributed are difficult to value, such as with closely held stock, because the assets need to be valued only once, at the time of funding. This single valuation of the stock asset also makes the CRAT less expensive to administer than a trust that requires repeated annual valuations, such as a charitable remainder unitrust (CRUT).

© 2011 Thomson Reuters/RIA. All rights reserved.

Tags: Charitable Remainder Annuity Trust, tax savings

Looking for an opportunity to save income, gift or estate taxes through a charitable contribution, while retaining, for a time, an income interest? These considerable tax savings are available through the use of a charitable remainder annuity trust (CRAT). Over the next few blog posts, we will discuss CRATs, their rules, and how you can benefit from one.

Establishing a CRAT is a technique by which a taxpayer contributes property to a trust, and the trust pays specified amounts to noncharitable beneficiaries for a number of years. After this period, the remainder of the property is paid to, or for the use of a charitable organization, or retained in the trust for charitable uses.

© 2011 Thomson Reuters/RIA. All rights reserved.

Tags: Charitable Remainder Annuity Trust, tax savings