Imagine being able to give to your favorite charity while
still receiving income for the rest of your life—plus enjoying tax savings
along the way. That is precisely what a Charitable Remainder Trust (CRT) can
help you accomplish.
For many individuals and families, the decision between maintaining financial security or supporting charitable causes can feel like a trade-off. A CRT eliminates the need to choose by allowing you to achieve both. It is a planning tool that can provide predictable income, meaningful tax benefits, and a legacy of generosity.
What Is a Charitable Remainder Trust?
A Charitable Remainder Trust is an irrevocable trust that
allows you to donate assets to charity while retaining the right to receive
income for life or for a defined period of years. Once the trust term
ends—often upon the donor's death—the remaining assets are distributed to the
charity or charities named in the agreement.
The concept is straightforward. You transfer assets such as
cash, appreciated securities, or real estate into the trust. The trust then
provides you (or another designated individual) with annual income. At the
conclusion of the trust term, the charity receives the remainder.
This structure provides donors with the satisfaction of contributing to causes they value while also ensuring that their personal financial needs are addressed during their lifetime.
Types of Charitable Remainder Trusts
CRTs are structured in two primary ways, depending on how
the income distribution is calculated.
- A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount annually. This payout is determined at the time the trust is established and does not change regardless of the trust's investment performance. CRATs appeal to individuals who prefer predictability and stability in their income stream.
- A Charitable Remainder Unitrust (CRUT) pays a fixed percentage of the trust's value each year. Because the trust is revalued annually, the income payment may rise or fall depending on market performance. CRUTs are often favored by those who are comfortable with variability and who want the potential for income growth over time.
Both structures achieve the same objectives of providing income to the donor and ultimately benefiting a charity, but the choice between the two depends on the donor's income needs and tolerance for fluctuation
Funding a CRT
One of the most significant advantages of a CRT is its
flexibility in funding. Donors can contribute a variety of assets, including
cash, stocks, bonds, real estate, or even interests in private businesses.
CRTs are particularly beneficial for individuals who own
highly appreciated assets. For example, if you hold stock purchased many years
ago that has substantially increased in value, selling it outright would
trigger a considerable capital gains tax. By transferring the stock into a CRT,
the trust can sell the asset without incurring immediate capital gains taxes,
allowing the full proceeds to be reinvested to generate income.
To ensure the trust fulfills its charitable purpose, the IRS
imposes specific requirements:
- The
annual payout must be at least 5 percent of the trust's value but no more
than 50 percent.
- At
least 10 percent of the initial value must be projected to pass to the
charity at the end of the trust.
These guidelines are designed to balance the interests of the donor with the intended benefit to the charitable organization.
Tax Advantages of a CRT
The tax benefits of a Charitable Remainder Trust are among
its most attractive features.
1. Income
Tax Deduction: Donors are entitled to an immediate charitable income tax
deduction when the trust is funded. The deduction amount is based on the
present value of the remainder that will eventually go to charity.
2. Capital
Gains Deferral: When appreciated assets are sold within the trust, the sale
does not generate immediate capital gains taxes. This allows the full value of
the asset to be reinvested, which can increase the income available to the
donor.
3. Estate
Tax Reduction: Because assets transferred to the CRT are removed from the
donor's estate, they are not subject to estate taxes. This can significantly
reduce the tax burden for heirs.
While the trust itself is tax-exempt, the income payments received by the donor or other non-charitable beneficiaries are taxable. These distributions are generally taxed first as ordinary income, then as capital gains, followed by other categories of income, and finally as a return of principal.
A Practical Example
Consider an investor who purchased stock years ago for
$200,000 that has grown in value to $1 million. Selling the stock outright
would result in a substantial capital gains tax liability.
Instead, the investor transfers the stock to a CRT. The
trust sells the stock without immediate tax consequences and reinvests the full
$1 million. The investor begins receiving annual income from the trust and also
receives a charitable income tax deduction in the year of the gift. When the
trust terminates, the remainder is distributed to the investor's chosen
charity.
This strategy avoids a large capital gains tax, provides a steady income stream, and leaves a lasting charitable gift.
Key Considerations
While CRTs provide powerful benefits, they are not without
limitations.
The trust is irrevocable, meaning once assets are
transferred, they cannot be retrieved. Donors must be confident they will not
need access to those funds in the future.
There are also costs associated with establishing and
administering a CRT, including legal, accounting, and trustee fees. As a
result, CRTs may not be practical for smaller estates.
Additionally, because the remainder of the trust ultimately passes to charity, heirs will not inherit those assets. Some families address this by creating a life insurance trust to provide for heirs while directing appreciated assets into a CRT.
Why Donors Choose CRTs
A Charitable Remainder Trust (CRT) is more than just a
financial strategy—it allows donors to align their wealth with purpose by
supporting causes that reflect their values while maintaining financial
security. By providing steady income in retirement, reducing taxes, and leaving
a lasting charitable legacy, CRTs offer a unique way to balance personal needs
with philanthropic goals. Because every situation is different, it is important
to consult financial, tax, and legal advisors to determine whether a CRT is the
right fit for your broader plan. If you would like to explore this opportunity
further, we invite you to contact
us to discuss how a CRT can support both your financial future and
charitable vision.
