Qualifying as a Charitable Remainder Annuity Trust (CRAT) Becomes Easier

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Qualifying as a Charitable Remainder Annuity Trust (CRAT) Becomes Easier

Posted by Kim Chen on August 20th, 2016

To qualify as a CRAT under IRC Sec. 664, a trust must (1) provide a charitable remainder interest to charity of at least 10% of the total value of assets initially transferred to the trust, (2) pay at least 5% to the trust beneficiary each year, and (3) pass a 5% probability of exhaustion test. The IRS has provided new guidance that does away with the upfront requirement that the trust pass the 5% probability of exhaustion test. Instead, if sample language included in the guidance is used, once the value of the CRAT reaches the point where 10% of the trust assets remain, the trust will automatically terminate early and pay the remainder to the charity. This early termination provision will be treated as a qualified contingency under IRC Sec. 664(f) and will apply to trusts created on or after 8/8/16. Rev. Proc. 2016-42, IRB 2016-34 .