Charitable Remainder Trust Explained: Tax Benefits and How It Works

A **Charitable Remainder Trust (CRT)** is an irrevocable trust that provides you (and/or your spouse) with income for life or a set term, after which the remaining assets go to your chosen charity.

• You transfer assets (stock, real estate, etc.) into the CRT
• The CRT pays you income annually for life or a fixed term (up to 20 years)
• When you die (or term ends), the remainder goes to charity
• You receive immediate income tax deduction based on present value of remainder
• Trust pays no capital gains tax when selling appreciated assets

The CRT process follows a specific structure designed to benefit both you and your chosen charity.

1. 1**Create the trust:** Attorney drafts CRT document naming you as income beneficiary and charity as remainder beneficiary
2. 2**Fund the trust:** Transfer appreciated assets (stock, real estate, business interests) into CRT
3. 3**Trust sells assets tax-free:** CRT sells appreciated assets without paying capital gains tax
4. 4**Reinvest proceeds:** Trustee invests proceeds to generate income
5. 5**Receive annual income:** You receive fixed percentage or dollar amount annually
6. 6**Get tax deduction:** Immediate income tax deduction for present value of charity's remainder interest
7. 7**Charity receives remainder:** Upon your death (or end of term), charity receives remaining assets

CRTs offer three major tax advantages that make them attractive for wealthy retirees.

• **1. Immediate Income Tax Deduction**
• Receive deduction in year you fund the CRT
• Deduction based on IRS calculation of present value of charity's remainder
• Typically 30-50% of asset value transferred
• Can carry forward unused deduction for 5 years
• Subject to AGI limits (30% or 50% depending on charity type)
• **2. Avoidance of Capital Gains Tax**
• CRT is tax-exempt - pays zero capital gains tax
• Can sell highly appreciated assets without tax hit
• Especially valuable for low-basis stock or real estate
• Can save 15-20% federal + state capital gains tax
• **3. Estate Tax Reduction**
• Assets transferred to CRT removed from taxable estate
• Reduces estate tax for high-net-worth individuals
• Charity receives remainder free of estate tax

There are two types of Charitable Remainder Trusts, each with different payment structures.

• **CRAT (Charitable Remainder Annuity Trust)**
• Pays fixed dollar amount each year
• Does not change with trust performance
• Cannot add more funds after initial contribution
• Good for: People who want predictable income
• Risk: If investments underperform, trust can be depleted
• **CRUT (Charitable Remainder Unitrust)**
• Pays fixed percentage of trust value (revalued annually)
• Payment amount fluctuates with investment performance
• Can accept additional contributions
• Good for: People who want inflation hedge and flexibility
• Benefit: Trust principal can grow if investments perform well

CRTs can be funded with various asset types, each with different advantages.

• **Best assets to fund a CRT:**
• Highly appreciated stock (low basis, high value)
• Real estate with large gains
• Business interests (closely-held stock)
• Mutual fund shares with gains
• Art or collectibles (requires appraisal)
• **Assets to avoid:**
• IRAs or 401ks (taxed as income when distributed to CRT)
• Tax-free municipal bonds (no tax benefit)
• S-corporation stock (creates tax issues)
• Assets with debt (UBTI complications)
• **Funding process:**
• 1. Choose asset with low basis and high appreciation
• 2. Have asset appraised (real estate, art, business)
• 3. Transfer title/ownership to CRT
• 4. Trustee sells asset (no capital gains tax)
• 5. Proceeds invested per trust terms

CRTs are powerful tools but not right for everyone.

• **Pros:**
• Immediate income tax deduction (30-50% of value)
• Avoid capital gains tax on appreciated assets
• Lifetime income stream for you and/or spouse
• Support charity you care about
• Remove assets from taxable estate
• Can provide more income than if you sold asset and reinvested after-tax
• **Cons:**
• Irrevocable - cannot change or undo
• No inheritance for children (remainder goes to charity)
• Complex and expensive to set up ($3,000-7,000 in legal fees)
• Annual tax filings required (Form 5227)
• Trustee fees if using professional trustee
• Income payments taxed as ordinary income (worst tax treatment)
• Not suitable for modest estates (best for $1M+ contributions)