The charitable remainder annuity trust is an individually managed trust that combines regular, predictable income with some flexibility in management and investment.

The annuity trust pays its beneficiaries – the donor, their spouse, family members, or other individuals – fixed-dollar income or a fixed percentage of the initial value of the assets that funded the trust.

Here are some of the benefits of an annuity trust:

Income from an annuity trust can be paid to the donor and other beneficiaries for lifetime or for a term of up to 20 years.

There is no capital gains tax payable if the donor funds the annuity trust with appreciated property. So, the donor can contribute appreciated but low-yielding assets and put the entire value of the gift to generate higher income for the donor.

Besides avoiding capital gains tax, the donor also receives a charitable income tax deduction when he or she creates an annuity trust. The deduction will be based on the full fair market value of the assets the donor contributed, reduced by the present value of the income interest the donor retained, as calculated under IRS tables.

The charitable income tax deduction for an annuity trust is usually higher than that for a unitrust, because the unitrust is likely to pay out more income to the beneficiaries over time.

An annuity trust terminates at the death of the last beneficiary or at the end of the trust term – the remaining balance will be available for the charity designated when the donor created the trust.

Annuity trusts are not flexible in their payout as are  unitrusts.  So, it is not practical to fund an annuity trust with donations of illiquid assets, invest solely for growth, or pay out net income only.

Is the donor concerned about declining yields in their portfolio of tax-free bonds?  The donor can capture high interest rates and still make a gift by placing one or more of the donor's older bonds into an annuity trust. The trust will hold the bonds, and pass their tax-free income through to the donor and other beneficiaries. In addition, the donor will receive a charitable income tax deduction based on the market value of the bonds the donor donated, minus the present value of the income interest the donor retained.

Setting up a charitable remainder annuity trust is not particularly difficult, but the donor should be advised by an attorney with expertise in the area of charitable trusts and estate planning. Once the trust agreement is signed, the donor can fund the annuity trust by transferring assets to the trustee.