What is a CRAT?

A charitable remainder annuity trust (CRAT) is a legal arrangement in which an individual transfers assets, typically appreciated securities or real estate, into an irrevocable trust. The donor receives a fixed annuity payment each year, predetermined when the trust is established. This fixed annuity provides the donor with a stable income stream throughout their lifetime or for a specified number of years. Since a CRAT is an irrevocable trust, it can’t be changed once it’s created, and no additional contributions can be made.

Benefits of CRATs

One of the key benefits of a CRAT is the immediate charitable income tax deduction the donor receives at the time of the transfer. This deduction is based on the present value of the remainder interest that will ultimately pass to one or more chosen charitable organizations. By establishing a CRAT, individuals can reduce their current tax liability while supporting the causes they care about.

What is a CRUT?

A charitable remainder unitrust (CRUT) operates similarly to a CRAT but with a crucial distinction. Instead of receiving a fixed annuity payment, the donor receives a variable payment based on a fixed percentage of the trust’s assets. The value of the CRUT is reassessed annually, allowing the income stream to fluctuate with the performance of the trust’s investments.

Benefits of CRUTs

The flexibility of a CRUT can be particularly appealing to donors who anticipate the need for adjustments in their income stream over time. If the trust’s investments experience growth, the income payments will increase proportionally, ensuring the donor benefits from their philanthropic investment. Moreover, donors can make additional contributions to the CRUT during their lifetime, allowing them to further benefit from tax deductions and increase the ultimate charitable contribution.

Making a CRAT or CRUT Part of Your Estate Plan

Both CRATs and CRUTs allow you to support charitable causes while enjoying tax benefits and a stable income stream. Whether you choose a fixed annuity payment through a CRAT or a variable income stream through a CRUT, the ability to leave a meaningful legacy while achieving personal financial goals makes these charitable trusts attractive options.

Setting up and administering CRATs and CRUTs requires careful planning and the assistance of legal and financial professionals. Donors must comply with specific rules and regulations established by the Internal Revenue Service (IRS) to ensure the eligibility of the trust for tax benefits. Consulting with your estate planning attorney and financial advisor is essential to navigating the complexities associated with these agreements.

Contact our office at (740) 947-7277 today to learn more about your estate planning and wealth management options. We will help you achieve your estate planning goals and establish a meaningful legacy.

This article offers a summary of aspects of estate planning. It is not legal advice. It does not create an attorney-client relationship. For legal advice, you should contact an attorney.

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The post-WWII economic environment allowed the growth of assets during decades of economic prosperity. Rising real estate values, stock markets, and favorable tax policies contributed to the baby boomers’ ability to aggregate significant wealth. These 45 million households will see their generational wealth pass to Generation X and millennial inheritors, dramatically shifting the landscape of American wealth management.

Baby boomers collectively hold thirty to forty trillion in assets, controlling roughly seventy percent of all disposable income. While families of already established generational wealth may have plans in place, much of the upcoming wealth transfer hails from self-made men and women who have avoided discussing estate plans and family fortunes with their heirs. Predictions are that Gen X will inherit about 57 percent of these assets, with millennials inheriting the rest. Yet the mechanisms for inheritance through sound estate planning are missing in many of these family systems.

Wealth management groups and estate planning attorneys posit that inheritors will needlessly lose much of their wealth due to parents who failed to develop comprehensive end-of-life plans. On the other side of the equation, younger generation inheritors must ramp up their knowledge about asset management to grow their inheritance for future generations.

Generation X and millennials have vastly different financial experiences and attitudes towards money than their parents. On average, while millennials are the highest-earning generation, they have significantly less money, controlling just 4.6 percent of US wealth in 2021. They have lower levels of financial literacy, are less likely to own a home, and have less interest in investing in the stock market. They also tend to have higher debt after experiencing two recessions before the age of 40, cost of living increases that outpaced wages, and increasing college tuition and vehicle loans.

These younger generations will also change the landscape of financial planning and management. Financial firms will have to bridge the gap of immediate expectation with a generation raised in an era of enormous technological transformation. Smart technology can provide an incrementally higher return on investment through transaction speed alone. Digital financial tools and apps will be the norm, including robot advisors as a convenience for investing.

Are these younger generations ready to be stewards of generational wealth? Will they see the need to protect this wealth through comprehensive estate planning? To better protect their inheritors’ interests, baby boomer parents can include their children in estate planning goals. The older generation can implement or update an existing plan and guide their inheritors to protect from squandering assets.

Some family systems may find the surest and safest way to protect generational wealth is via trusts. Both revocable and irrevocable trusts can create structure and limit new inheritors’ access to assets. A trust can grow wealth and also save on taxes. The objectives and conditions of a family trust are wide-ranging and easily tailored to a family’s specific needs.

Charitable trusts and charitable remainder trusts can generate income for heirs while protecting assets and favorable tax consequences. There are also asset-protection trusts, testamentary trusts, and special needs trusts. A qualified estate planning attorney will assess the best trust type(s) for you and your family based on your unique set of parameters. With trillions of inheritable dollars in motion over the next twenty-five years in America, proactive estate planning is key to securing generational wealth for your family. We hope you found this article helpful. Contact our office at (740) 947-7277 and schedule a free consultation to discuss your legal matters.

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