QUESTION:

What is a Charitable Remainder Annuity Trust?

ANSWER:

A Charitable Remainder Annuity Trust (sometimes referred to as a CRAT) provides a fixed annuity to its "income" beneficiaries.  It can be set up during a person's lifetime or by will.  Both require that the grantor set aside certain assets, with specified amounts payable either for a term of years, no more than 20, or for the life of the grantor, the grantor's spouse, or other person(s) named by the grantor, with the remainder to go to a qualified charity.  

The grantor will receive a current income tax deduction for the value of the charitable remainder interest.

Some important features include:

The beneficiaries must be living at the time of the creation of the trust, and the payments to the beneficiaries must be made at least annually,

The rate of return must be of a fixed or determinable amount and can be no less than 5%, calculated on the basis of the initial net fair market value of the assets transferred to the trust.

Once an annuity trust is set up, there can be no further contributions to it.

(The next two weeks will discuss charitable remainder unitrust and pooled income funds.)