Charitable Remainder Trusts (CRUTs and CRATs)
Charitable Remainder Trusts
A Charitable Remainder Trust is an arrangement in which property or money is donated to a charity, but the donor (called the grantor) continues to use the property and/or receive income from it while living. A Charitable Remainder Trust that pays a fixed annuity amount is called a Charitable Remainder Annuity Trust (CRAT); a charitable trust that pays a percentage each year is called a Charitable Remainder Uni-trust (CRUT).
In the Charitable Remainder Trust, beneficiaries receive the income and the charity receives the principal after a specified period of time. Through this transaction, the grantor avoids any capital gains tax on the donated assets, and also gets an income tax deduction for the fair market value of the remainder interest that the trust earned.
The amount of the gift tax charitable deduction depends on the length of time payments will be made to the grantor, the size of the payment to grantor, and the rate prescribed by the IRS to calculate the present value of the charitable payments (the “section 7520 rate”). In addition, the asset is removed from the estate, reducing subsequent estate taxes.
While the contribution is irrevocable, the grantor may have some control over the way the assets are invested, and may even switch from one charity to another (as long as it's still a qualified charitable organization).
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