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Simple English definitions for legal terms
charitable remainder annuity trust
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A quick definition of charitable remainder annuity trust:
A charitable remainder annuity trust (CRAT) is a type of trust that allows someone to give money to a charity while still receiving income from it during their lifetime. The person who creates the trust (called the grantor) chooses a fixed percentage of the trust's assets to receive as income each year. After the grantor dies, the remaining assets in the trust go to the chosen charity. The grantor can't change the trust once it's created, but they do get tax benefits and can avoid paying capital gains taxes. CRATs are different from charitable remainder unitrusts (CRUTs), which allow for more flexibility in how income is generated and how much can be contributed after the trust is created.
A more thorough explanation:
A Charitable Remainder Annuity Trust (CRAT) is a type of trust that allows a person to generate income from their assets while also benefiting a charity. The trust pays a fixed percentage of its assets to the grantor or a chosen beneficiary for a set period of time, and then transfers the remaining assets to a charity after the beneficiary's death.
For example, let's say John creates a CRAT and funds it with $1 million. He chooses to receive 5% of the trust's assets every year for the next 20 years. After 20 years, the remaining assets in the trust will be transferred to a charity of John's choice.
CRATs are popular because they offer tax benefits to the grantor. They can receive deductions and delay capital gains taxes while still generating income from their assets. However, once the trust is created, the grantor cannot make any changes to it, including adding more assets to the trust.
It's important to note that CRATs are different from Charitable Remainder Unitrusts (CRUTs). CRUTs generate income based on the trust's performance and allow contributions by the grantor after its creation.