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What Is a Charitable Remainder Trust? Learn the Basics

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A Charitable Remainder Trust (CRT) is a special type of trust that provides income to individuals for a period of time, with the remaining assets ultimately going to charity. At its core, it’s a way to support both personal financial needs and charitable intentions in a single structure. 

While many people use CRTs to generate income during retirement or provide for family members, they also offer significant flexibility for more advanced tax and estate planning strategies—such as deferring capital gains taxes, reducing estate tax exposure, or managing the sale of highly appreciated assets.

This article will focus on the core features of how the CRT works and not advanced strategies done for estate or tax planning.

How a Charitable Remainder Trust Works

1. Contribute Assets to the Trust

You – the grantor – begin by transferring assets into an irrevocable trust. These assets might include:

  • Cash
  • Publicly traded securities
  • Real estate
  • Other appreciated property

Once contributed, the assets are removed from your estate and placed under the management of the trust. The trustee can be the grantor, a trusted individual, or a professional trustee like a bank or trust company.

Tax Deduction: Upon contributing the to the trust, the grantor will receive an immediate tax deduction based on the present value of the estimated remainder in the annuity (see below for an explanation of this process)

2. Annually Pay Out Income to Income Beneficiary

Income from a Charitable Remainder Trust can be paid for a fixed period of time (for example, 20 years) or for the lifetime of income beneficiary. 

Income payments can be structured as a fixed dollar amount every year – dubbed a Charitable Remainder Annuity Trust or CRAT. Or.. the payments can be based on a percentage of the trust assets each year – dubbed a Charitable Remainder Uni-Trust or CRUT.

For example, a CRAT could pay $10,000 per year for the duration of the trust whereas a CRUT might pay $10,000 the first year, $12,000 the second year, and $8,000 the third year.

The trustee is responsible for managing these calculations and ensuring the trust assets are structured to generate this income.

3. The Remaining Assets in the Trust Go to Charity

At the end of the trust term (remember that’s a fixed term or a life beneficiary), the remaining assets in the trust are distributed to the charity or charities identified in the trust.

How the Charitable Tax Deduction Works

The exact calculation of the Charitable Tax Deduction is fairly complex and should be calculated by a professional.

One key provision in setting up a CRT is that the charity must be projected to receive at least 10% of the initial trust. Whether they actually do or not does not matter. 

Here is a brief primer though on the four factors the most heavily influence the amount of tax deduction:

  1. Length of Trust
    1. Shorter = Higher Deduction as the charity is expected to receive more
    2. Longer = Lower Deduction as the charity might receive less. Trusts with lifetime income beneficiaries stretch the length of the trust greatly. 
  2. Payout Rate
    1. Lower = Higher Deduction as more assets are projected to remain in the trust for the charity
    2. Higher = Lower Deduction as more is distributed to income beneficiary
  3. IRS Section 7520 Rate
    1. Higher = Higher Deduction as assets are expected to grow more
    2. Lower = Lower Deduction as assets are not expected to grow. 
  4. Annuity Trust versus Uni-Trust
    1. If the trust pays a regular amount, the remainder is more certain and will yield a larger up front deduction
    2. If the trust pays a variable amount, the remainder is less certain and yield lower the up front deduction slightly.

Annual Income Taxation

While there are tax benefits to the CRT, one feature that seems to be brushed over in sales literature is that annual distributions are taxed to the income beneficiary.

While it’s true that if you sell assets in a CRT, it’s not immediately taxed. When income is distributed, the grantor will pay tax on that distribution. 

That is because CRT’s distribute income based on a worst in, first out (WIFO) process which means it will distribute the highest taxed income first. 

For example, if you contributed $1,000,000 of highly appreciated stock with $800,000 in gains to a CRT, subsequently sold it and invested in taxable bonds generating $50,000 per year in interest, an annual distribution of say $80,000 per year would be taxed as $50,000 ordinary income (from the bonds) and $30,000 in capital gains. 

Of course, you would be able to  potentially offset some or all of this with the charitable deduction received but it is an important thing to understand.

In general, CRT’s will distribution income in the following order:

  1. Ordinary Income
  2. Capital Gains
  3. Tax Exempt Income
  4. Principal

Advanced Strategies

As noted in the introduction, Charitable Remainder Trusts can be used for multiple advanced strategies. Here are some of the most common:

  • Offsetting tax from highly appreciated positions
  • Providing an immediate income tax deduction.
  • Lowering estate tax
  • Mimicking a “Stretch IRA”
Steven Gilbert

Steven Gilbert CFP® is the owner and founder of Gilbert Wealth LLC, a financial planning firm located in Fort Wayne, Indiana serving clients locally and nationally. A fixed fee financial planning firm, Gilbert Wealth helps clients optimize their financial strategies to achieve their most important goals through comprehensive advice and unbiased structure.