How charitable remainder annuity trusts work

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.

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, and the charity will receive the remainder of the trust's funds after your death or a term of years.

Here's how a charitable remainder trust works:

• 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.
• Once funded, the trust pays out a fixed amount each year from the assets to you or a loved one.
• At the end of the term or after your death, the remaining assets transfer to a tax-qualified charity of your choice.

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.

• Fixed income stream while you're living. You'll 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.

• 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.

• 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.

The IRS allows people ages 70½ and older to transfer up to $100,000 from a traditional individual retirement account (IRA) to charity tax-free annually. These transfers, known as qualified charitable distributions, can also count toward an IRA owner's yearly required minimum distributions.

The SECURE Act 2.0, signed into law in late 2022, made some key changes, including:

• You are allowed an annual one-time rollover of up to $50,000 to a CRAT, a charitable remainder unitrust or an immediate charitable gift annuity. This will count toward the annual $100,000 limit.
• Beginning in 2024, the qualified charitable distribution limits will index to inflation, so the amounts may increase.

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 or charitable trusts.

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, certain private stock, real estate and other liquid assets.

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 non-charity beneficiary upon your death or at the end of the trust term.

The biggest reason for choosing any charitable remainder 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. That can have a generational impact.

Beyond the fulfilment you may experience from donating, a CRAT can provide additional financial security through the fixed income stream and potential tax advantages during your term or life.

Finally, 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 state taxes, potentially leaving your family with a reduced tax burden.

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.