What you say? Darn accountants use silly acronyms almost as bad as NASA. A CRAT stands for “Charitable Remainder Annuity Trust.”
Basically, a CRAT is a type of charitable remainder trust which is often used by taxpayers with substantial appreciated capital gain property, a charitable intent, and a need for a stream of income during their lifetimes. As a general rule, the grantor recognizes no gain when transferring appreciated property to a CRAT. IRS code section 664c provides that, because CRATs are exempt from income tax, a charity using a CRAT can sell appreciated property without itself paying tax on the sale. However, the person making the gift (called a grantor or other noncharitable CRAT beneficiary) must pay tax on the CRAT distributions, in the form of annuities.
Large charities, like Salvation Army, Red Cross, American Cancer, etc. love CRATs. They benefit by getting a person who might be sitting on some highly appreciated capital asset (usually stock) to gift that item to them. They then sell it and use some of the proceeds to purchase an annuity from a 3rd party annuity provider on behalf of the person who made the gift, keeping the rest for their charity needs.
So why is this such a great idea? If you hold some stock, let’s say in Microsoft that you bot for $200 way back in 1985, with a built-in gain of $500,000. You now want to retire and start getting an income stream off that investment. You could sell it, pay the 20% capital gains tax, and have $400,000 left to purchase an annuity with. Let’s say, you are a charitable person and want to give some of that gain ($100,000) to your favorite charity, The Salvation Army. That leaves you with about $300,000 to purchase an annuity with.
If you decided to go the CRAT route, The Salvation army would have $200,000 to work with instead of only $100,000 and the IRS would be out of collecting $100,000 in tax. ALSO, you get the benefit of a fairly large charitable deduction (usually more than 50% of the original potential capital gain) to use to reduce other taxable income.
We have some clients who love CRATs and have used them more than once. It requires the charity to have quite an investment in knowing how to use a CRAT. It’s not for small charities who just don’t have the resources to put a CRAT together properly. You should do some research on which charities offer CRATs.
Also, a CRAT only works when you are sitting on some highly appreciated property. The larger the built in gain, the better the benefit of a CRAT that occurs.
Have you heard? Proverbs 22:9 says, “He who has a generous eye will be blessed, for he shares his food with the poor.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.