September 29, 2015

Charitable Remainder Trusts and the Probability of Exhaustion Test

Once popular among those with charitable aims who also require steady income, charitable remainder annuity trusts (CRATs) have become more difficult to implement due to low interest rates. In an article written for Tax Analysts, Chip Parks, Faegre Baker Daniels partner, and co-authors William Finestone and Susan Leahy propose revisions that would restore the CRAT as a feasible estate-planning tool in the current economic climate.

“The authors propose including a qualified contingency provision in the CRAT that would terminate the trust immediately before any payment to the income beneficiary that would cause the value of the CRAT to fall below 5 percent of its initial value,” the article said. “In light of today’s historically low interest rates, this is the simplest and best way to modify the CRAT requirements without any new legislation, making CRATs viable again as an estate planning tool for advisers, donors and charities.”

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