What Is A Charitable Remainder Annuity Trust?

A charitable remainder annuity trust is popular amongst people in the middle to upper income brackets. It's popularity is due to the fact that the scheme allows for a trust that it can be tailored and individually managed to the donor's personal requirements. It can be custom designed to allow the donor a fixed lifetime income, which is fully tax deductible, and when the donor passes on, the assets remaining in the trust are transferred to the charity that they have chosen to be the beneficiary.

The Internal Revenue Service (IRS) calculates the levels of tax to be deducted from a charitable remainder annuity trust around a fixed formula. This formula takes into account the donor's age and that of the income beneficiaries. Another factor is the level of income that the trust generates. The IRS index rate that calculates the tax level is known as the Applicable Federal Rate (AFR). This rate is calculated basically by taking into consideration the age of the donor. Depending on how old the donors are, then the income tax deduction rates are higher. When the trust has not been set up for an indefinite period, but rather over a few years then the AFR is usually higher.

In order to qualify as being a charitable remainder annuity trust, the current value of the remainder interest must equal 10% of the value of the assets in the current fiscal year, within a federally imposed 5% probability test. An average donor who is interested in establishing a charitable remainder annuity trust is someone who needs a fixed additional income for their pre-pension years up to the end of their lives.

Donors generally fall into the following criteria.
  • They are interested in guaranteeing a fixed income. The income would be calculated on the value of the assets transferred originally into the fund.
  • They are aware that they will not be making similar donations in the future.
  • They are aged between 55 to 80.

Once the donors have made their decision to open a charitable remainder annuity trust then a trust document that has been custom produced to meet their individual commitments and needs will be drawn up. This deed will be drawn up by a trustee, who will be appointed by the donor. In many cases physical assets such as property or stock portfolios that have been transferred to the trust will be sold of by the trustee. This is to ensure a fixed and guaranteed income during the period that the trust fund will be active.

The next stage in establishing a charitable remainder annuity trust is to evaluate how this action will affect the balance of the balance of the donor's estate. There are other key factors to be decided. They are as follows.
  • Naming the beneficiaries of the allowable income from the fund.
  • Naming the charities that will benefit from the fund,
  • Setting an annual payout rate for the fund.
  • Deciding how often the payouts will be made ( Monthly or quarterly)

Unlike other forms of charitable trusts, once the trust has been established, the donor is disallowed from having too much to do with the dealings of the trust. Decisions on the day to day running of the trust are solely placed in the hands of the trustee only.