This is an educational illustration and does not represent legal or tax advice. Please consult your legaland tax advisors about your specific situation.

Let's say Mary and John Jones had property with a cost basis for tax purposes of $40,000. Let's also say that the property has increased in value such that it is worth $200,000 today. If Mary and John sell the property, they will incurr a capital gains of $160,000 with a tax burden of $32,000.

If they donate the property to a charity which establishes a Charitable Remainder Annuity Trust for their benefit, Mary and John create an income tax deduction of $98,885 based on federal tax tables that consider their ages and the amount of the gift. For Mary and John, this means tax savings in the year they make the gift of $30,654.

Mary and John choose a 6% rate of return, which means a $12,000 annual income for the rest of their lives. The Trust will be revalued annually and they will receive this fixed rate of income as long as there are sufficient assets in the trust. At their deaths, the remainder of the trust assets go to the charity they chose. Their estimated income will be $188,400 over 15.7 years for an effective rate of return of 7.09%.

If the trust earns 8% on the assets and pays the 6% fixed rate to Mary and John, the assets will increase. After both Mary and John have died, the trust passes without probate to the charity and the estimated total gift amount based on our assumptions will be $296,860. Knowing what that will mean for their charity, John and Mary are very happy.