Charitable Remainder Annuity Trusts (CRAT) Part 2
Benefits of Appreciated Securities
Another way to reduce tax obligations is by funding the annuity trust with appreciated securities. Neither gains on sales of appreciated securities nor ordinary income from them when they are part of an annuity trust are taxed to the trust although the beneficiary will be taxed on any payments received. The full fair market value of long-term securities is the basis for the charitable deduction when funded by long-term securities rather than using the securities’ lower cost basis.
Annuities for Loved Ones
An annuity may be paid to a family member after your death. You may also use your annuity trust to fund an annuity for a parent, spouse, child or another relation or loved one. Keep in mind that payments last longer when the annuity goes on to pay others after your death, and this does lower the charitable deduction.
Protection from Inflation
Inflation does not affect the annuity trust because the amount received annually is calculated on the trust’s initial value. If the income of the trust falls below the stated percentage you are to receive, you will still receive the percentage. Principal, capital gains and years in which trust income is greater than the stated percentage balance this, and in the latter situation, the excess is reinvested.
Effects on Estate Tax and Probate
If the only beneficiary for the annuity trust is the donor, the donor’s estate will not be taxable for the trust. It is also unlikely to have personal representative or probate fees levied. Savings on federal estate tax are also available.
If both spouses are U.S. citizens and two-life annuity trust beneficiaries, their estates will not be taxed. If the creator of the trust is the first beneficiary, the second beneficiary is not a spouse, and the second beneficiary dies before the creator, the donor’s estate is not taxed for the trust. If the donor’s estate would normally be taxed and there is a beneficiary who is alive, the only portion that the donor’s estate will be taxed for is the beneficiary’s right to life payments as valued at the time the donor died. Charitable gifts, defined as the trust principal that the charity receives when surviving beneficiaries are deceased, are not subject to estate tax.
The Role of Wills
A will can create an annuity trust for one or multiple beneficiaries. If the estate is large, this may result in considerable tax savings.