With a Charitable Remainder Annuity Trust (CRAT), a contributor irrevocably transfers money or appreciated property to Sierra Donor Services (SDS), in return for an annual income from the reinvested assets for the donor and/or other beneficiaries. At the beneficiary’s death, payments cease and the remaining Trust assets (the “Charitable Remainder” gift) go to SDS and — following our guidelines — to other charities as you have designated.
An individual contributor may have multiple Annuity Trusts.
What are some of its key benefits?
- Helps SDS save more lives through more effective public outreach and education.
- Can provide income for another as well as for yourself – a spouse, parent, child, etc. Income can be paid to you for life and then to another family member, or for a specified period of years.
- Generates income from under-producing appreciated assets. Payout rate may well exceed dividends, rental fees or other potential revenues from the assets.
- Eliminates Capital Gains Taxes, which can be as high as 25% if the assets are sold outright by the donor.
- Reduces or eliminates Estate Taxes by removing the value of the donated asset or money from your taxable estate.
- Can be used to delay distributions to beneficiaries until they reach a certain age or meet other criteria.
- Provides income that is taxed at lower overall rates than ordinary income-tax rates.
- Reduces income taxes. A portion of the appreciated asset donation is income tax deductible, even though a portion of the annual payouts themselves may be taxable.
How does a Charitable Remainder Annuity Trust work?
A Charitable Remainder Annuity Trust pays a contributor a set income per year, based upon an agreed-to percentage of the fair market value of the donated assets at the time the Trust is established. Its payout is fixed throughout the term of the Trust, no matter how investment values fluctuate (trust could conceivably be depleted if payments are too high or interest earned is too low to support payments). Payments can be made quarterly or annually.
Who should consider a Charitable Remainder Annuity Trust?
A Charitable Remainder Annuity Trust is especially appropriate for anyone who is asset rich but cash poor, i.e. an individual who owns appreciated assets that are yielding little or no income at a time when he/she needs increased income for retirement or other needs.
Additionally, a CRAT can be a valuable estate-planning tool for any contributor who needs an immediate income tax deduction, but also needs to retain a level income stream for retirement.
Daniel and Cynthia Payne have amassed a strong stock portfolio. Their original $40,000 investment in EFC Corporation is now worth $200,000, but is paying only a 2% dividend per year. Nearing retirement, the Paynes need additional income to supplement their anticipated pension and Social Security payments. They have chosen to fund a Charitable Remainder Annuity Trust with these stocks in return for quarterly income payments from SDS as long as they both live, with the remainder upon their death going to SDS and other named charities equally. Given that they are currently in a 31% tax bracket, they will receive…
- $12,000 per year income at the agreed upon 6% payout rate
- Income tax savings in Year One of $22,337 (based upon a $72,056 present value of the remainder interest)
- Over $340,000 total projected income possible (using government actuarial tables of life expectancies)
- Immediate savings of up to $40,000 by eliminating Capital Gains Tax on their portfolio’s $160,000 appreciation
- Projected benefit of $549,403 to ministries (using these same actuarial tables)
Example only. Actual data, income and tax deductions vary case by case. Your SDS consultant can answer any further questions you might have and develop specific illustrations for your personal estate planning needs and goals.
For a no-cost, no-obligation consultation in the privacy of your home, please complete the More Information form or call 1.916.678.6009