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What is a Charitable Remainder Annuity Trust?

Trusts are excellent financial tools and can be amazingly effective when they are used correctly. The variety of available trust options can be overwhelming, each with its own specific advantages and limitations. Charitable Remainder Trusts are an excellent way to make charitable giving a part of your overall financial plan and legacy.

Charitable Remainder Trusts are best employed by those who have appreciating assets with a low basis, such as real estate. A CRT can be funded with such an asset, allowing the creator of the trust to transfer the asset and receive the benefits of the charitable income tax deduction, while reducing or negating capital gains taxes and overall estate taxes. There are two forms of CRT to be considered, Charitable Remainder Annuity Trust and Charitable Remainder Unit Trust.

A Charitable Remainder Annuity Trust is generally used when the donor wants to create a source of income for a non-charitable beneficiary. This trust must be established for either the life of the recipient or for a fixed amount of time, lasting no longer than 20 years. Also, the trust can only be funded once, making later contributions to the trust impossible. The beneficiary's income from the trust must be at least 5 percent of the value of the corpus (or underlying asset) each year, until the term expires or the beneficiary passes away, depending on how the trust is constructed.

Upon the expiration of the trust, the remaining interest in the corpus can either remain in a trust for a designated charity or transferred to a charity. In either case, the value of the underlying asset must be at least 10 percent of its value when the trust was established.

Employing trusts as a part of your financial strategy is certainly a complex proposition, but it does not have to be overwhelming. If you are considering funding a trust, the guidance of an experienced trust and estate planning attorney can help ensure that you are making the most of your assets while you create the legacy you desire.

Source: Investopedia.com, "Estate Planning: Charitable Trusts," Cathy Pareto, accessed Oct. 12, 2016

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