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Charitable remainder annuity trusts (CRATs): Definition, pros & cons

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When your long-term financial plans include charitable giving, it helps to know all your options. That way, you can maximize the positive impact on your chosen organizations while also meeting your family's financial needs.

A charitable remainder annuity trust (CRAT) allows you to do just this. It's a type of gift transaction that provides an income for you or a loved one and also donates assets to charity.

What is a charitable remainder annuity trust?

A charitable remainder annuity trust is a type of charitable remainder trust. It's designed so that you can have a stream of income from the trust while you're living, while allowing a charity to receive the remainder of the trust's funds after your death (or a term of years that you specify).

The biggest reason for choosing a charitable remainder annuity trust is to support a charity or cause near and dear to you. That's a reward in and of itself; you're supporting a cause you love and passing down this value to your loved ones. Beyond the fulfilment you may experience from donating, a CRAT can provide additional financial security through the fixed income stream that comes with potential tax advantages.

Additionally, a CRAT may have a long-term impact on the cause you support and your loved ones. After you pass or at the end of the trust, the charity receives the remainder of the funds, and the gift could lower your estate taxes, potentially leaving your family with a reduced tax burden.

How does a CRAT work?

A charitable remainder annuity trust is fairly simple in how it works. You can think of it in three steps:

1. You fund a CRAT using a one-time gift of cash, publicly traded securities or mutual funds. A CRAT is only funded at setup, and you will not be able to make additional contributions.

2. Once funded, the trust pays out a fixed amount each year from the assets to you or loved ones.

3. At the end of the term or after your death, the remaining assets transfer to a tax-qualified charity of your choice.

Charitable remainder annuity trust example

If you fund a CRAT with $100,000 for a 10-year payout at 8% ($8,000/year), you’ll be eligible for an income tax deduction of $39,279 in the year of the gift, and after the 10-year term, the charity is projected to have $67,471 to support their mission.

How the SECURE Act 2.0 affects charitable remainder annuity trusts

If you're 70½ or older, the IRS allows you to transfer up to $105,000 annually from a traditional IRA to charity tax-free. These transfers, known as qualified charitable distributions (QCDs), can also count toward an IRA owner's yearly required minimum distributions (RMDs).

If you meet the age criteria, under the SECURE Act 2.0, you are allowed an additional one-time rollover of up to $53,000 to a CRAT (or other split-interest gift) once in your lifetime. This will count toward the annual $105,000 limit. Beginning in 2024, the qualified charitable distribution limits are indexed to inflation, so the amounts may increase.

Pros & cons of charitable remainder annuity trusts

Each charitable trust has different structures with pros and cons. As you're thinking about charitable giving, it's important to get a complete picture of the benefits and drawbacks of each to help you make the best decision.

Pros of a CRAT

  • Fixed income stream while you're living. You (or others you name) will receive a fixed income from the trust during the specified term that's designed to last your lifetime or a set number of years.
  • Potential tax advantages. After donating to a charity, you may qualify for an immediate income tax deduction. In addition, assets passed to charity are typically not subject to estate tax. That could help reduce your tax liability. Additionally, the CRAT sells appreciated assets tax-free and the proceeds are reinvested to produce income.
  • Flexibility. With a CRAT, you can select the charities you want, the length of the trust term and the assets that set up the trust. You'll have control over the entire process.
  • Leaving a charitable legacy. Setting up a CRAT can also help create a legacy for both your family and the causes you care about. It enables you to live and pass on your values while your generosity benefits a charity close to you.

Potential cons of a CRAT

  • Irrevocability. Once established, the CRAT is generally irrevocable. You can't change the terms or regain control of the assets placed in the trust. However, you can open multiple CRATs with different directives and charities.
  • Limits on charitable deductions. You may receive an immediate income tax deduction for the present value of the charitable remainder interest. However, there are limits on the deduction amount you can claim in any given year moving forward.
  • Administrative costs. Setting up and managing a CRAT can involve administrative expenses, such as legal and accounting fees. You'll want to factor those fees into the overall cost of the CRAT as you plan.
  • Market volatility. Since the payment from the CRAT is fixed, if the investment returns don’t keep up with the distributions, your income and the charitable remainder may be at risk.
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Maximize your donations with a charitable giving plan

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How does a charitable remainder annuity trust compare with other charitable trusts?

Charitable trusts help you give to causes you care about while still providing benefits for you and your loved ones. Here are some key differences between the various types of charitable trusts.

Charitable remainder annuity trust vs. charitable remainder unitrust

Like a CRAT, a charitable remainder unitrust (CRUT) pays income to you or named beneficiaries during a set period before the remaining funds pass to charity. However, charitable remainder unitrust distributions vary and are recalculated each year as a fixed percentage of the value of the trust assets at that time. Additionally, you have more options to fund CRUTs. You may fund it with cash, publicly traded stocks or mutual funds, certain private stock, real estate and other illiquid assets.

Charitable remainder annuity trust vs. charitable lead trust

You can think of charitable lead trusts as the inverse of charitable remainder trusts. A charitable lead trust makes recurring payments to a charity while you're alive. The remaining funds return to your family or a noncharity beneficiary upon your death or at the end of the trust term.

How does a charitable remainder annuity trust compare to a charitable gift annuity?

Like a CRAT, a charitable gift annuity involves giving assets to charity in exchange for a stream of income payments. However, unlike a CRAT or a CRUT, a gift annuity is not a separate legal entity. It’s just a simple contract between the charity and the donor that says, in return for making the gift (whether that be cash, stocks or mutual funds), you will receive income for life. (A term of years is not an option for a gift annuity.)

The income may start immediately or may be deferred. At your death, the charity receives any remaining assets, which can be used to fund the charity's mission.

Work with a financial advisor on your charitable giving plan

While CRATs can be a valuable tool for charitable giving, they are complex and require careful planning and professional guidance. If you're considering a CRAT, it's a good idea to consult with a financial advisor, attorney or tax professional before making any decisions.

To learn more about incorporating charitable giving into your long-term financial goals, connect with a local Thrivent financial advisor.

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Hypothetical example is for illustrative purposes. May not be representative of actual results. Past performance is not necessarily indicative of future results.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Guarantees based on the financial strength and claims paying ability of the product’s issuer. 
4.17.23