Estate Planning and Charitable Remainder Annuity Trusts

Conservative investors who want a predictable income year after year may prefer a Charitable Remainder Annuity Trust (CRAT) to a Charitable Remainder Trust (CRT).

A CRT pays a fixed annuity which equals a percentage of the fair market value of the assets transferred to the CRT or a percentage of the fair market value of the CRT’s assets as they are revalued annually. However, a CRAT provides a fixed annual income regardless of the investment performance of its assets. Because the tax deductions and income are based on the value of the asset as of the day it is transferred to the Trust, a CRAT is better if you expect the CRAT’s assets to lose value in the future.

Regardless of what happens to the economy, the income is fixed. If the CRAT’s assets do not earn enough to pay your annual income, more principal will be used to make up the difference. But if the market improves and the CRAT’s assets outperform expectations, the surplus will be added to the principal and benefit the charity in the end.

The CRAT protects against swings in the financial markets. In a stagnant or declining market, you come out head. In a strong market experiencing investment growth, the charity will benefit.

Consult your estate planning attorney for further information.

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