Charitable Remainder Trust

Understanding Charitable Remainder Trusts

A Charitable Remainder Trust (CRT) is an irrevocable trust that provides income to you or other beneficiaries for a specified period, with the remaining assets going to one or more charities of your choice. CRTs offer a unique combination of benefits: income generation, significant tax advantages, and the satisfaction of supporting causes you care about. They're particularly valuable for individuals with highly appreciated assets who want to diversify without incurring large capital gains taxes.

How CRTs Generate Income

When you establish a CRT, you transfer assets into the trust and receive income payments for a term you specify—either for your lifetime, a term of years (up to 20 years), or a combination. The trust pays you a percentage of its value annually, and there are two main types:

• Charitable Remainder Annuity Trust (CRAT): Pays a fixed dollar amount each year, regardless of trust performance. This provides predictable income but offers no inflation protection or growth potential. Once established, you cannot add more assets to a CRAT.
• Charitable Remainder Unitrust (CRUT): Pays a fixed percentage of the trust's value, recalculated annually. If investments perform well, your payments increase. You can add assets to a CRUT over time. This type offers more flexibility and growth potential but income can fluctuate.

The annual payout rate typically ranges from 5% to 8%, though IRS rules require that at least 10% of the initial trust value must ultimately go to charity. Our attorneys help you select the optimal structure and payout rate based on your income needs, age, and charitable goals.

Tax Benefits Explained

CRTs offer multiple layers of tax advantages:

• Immediate Income Tax Deduction: You receive a charitable deduction in the year you create the CRT, based on the present value of what will eventually go to charity. This deduction can be substantial—often 30-50% of the assets contributed—and can be carried forward for up to five additional years if you can't use it all immediately.
• Capital Gains Tax Avoidance: When you transfer appreciated assets (stocks, real estate, business interests) to a CRT, you pay no immediate capital gains tax. The trust can then sell these assets tax-free and reinvest the full proceeds, maximizing your income stream.
• Estate Tax Reduction: Assets in a CRT are removed from your taxable estate, potentially saving significant estate taxes for larger estates.
• Income Tax Deferral: While you pay income tax on the payments you receive, the trust itself is tax-exempt, allowing assets to grow without annual tax drag.

The tax benefits can be significant. For example, if you contribute $500,000 in stock with a $50,000 cost basis, you'd avoid $90,000+ in capital gains taxes, receive a charitable deduction potentially worth $50,000+ in tax savings, and could generate income from the full $500,000 rather than just the after-tax proceeds.

CRT vs. Direct Charitable Giving

While direct charitable gifts are simpler, CRTs offer advantages when you want income, have appreciated assets, or want to make a larger eventual gift:

• Income Generation: CRTs provide income for years while direct gifts provide none
• Larger Ultimate Gift: Because of tax-free growth, the charity often receives more than if you sold assets, paid taxes, and donated cash
• Tax Efficiency: CRTs avoid capital gains on appreciated assets; direct gifts of appreciated assets also avoid capital gains but don't provide income
• Flexibility: You can change charitable beneficiaries in most CRTs; direct gifts are irrevocable
• Estate Planning: CRTs remove assets from your estate; direct gifts may or may not depending on timing

CRTs are more complex and costly to establish than direct gifts, so they typically make sense for contributions of $250,000 or more. For smaller amounts, direct gifts or donor-advised funds may be more appropriate.

Is a CRT Right for You?

Charitable Remainder Trusts work best for people who:

• Have significant appreciated assets (stocks, real estate, business interests) with low cost basis
• Are in high income tax brackets and want substantial deductions
• Need income but want to avoid large capital gains taxes from selling assets
• Are charitably inclined and want to support causes they care about
• Have adequate other assets for heirs and don't need to leave these particular assets to family
• Are at least 50-60 years old (younger ages result in smaller charitable deductions)
• Can commit assets irrevocably (CRTs cannot be undone)

CRTs are particularly popular with business owners planning to sell their companies, real estate investors with highly appreciated properties, and individuals holding concentrated stock positions. However, they're not suitable if you might need the principal back, have significant debts, or aren't genuinely charitably inclined.

Our attorneys provide detailed financial projections showing exactly how a CRT would work for your specific situation, including income projections, tax benefits, and the ultimate charitable gift. This analysis helps you make an informed decision about whether a CRT aligns with your financial and philanthropic goals.