Charitable Remainder Trusts: Income for You, a Gift to Charity

For people with highly appreciated assets and charitable goals, a charitable remainder trust can combine several benefits: an income stream for yourself or others, potential tax advantages and a meaningful gift to the causes you care about. These trusts are a common tool in sophisticated estate and charitable planning, but they involve complex rules and irrevocable decisions.

How a charitable remainder trust works

With a charitable remainder trust, often called a CRT, you transfer assets, often appreciated stock, real estate or other property, into an irrevocable trust. The trust then pays income to you or other named beneficiaries, such as a spouse or children, either for life or for a term of up to 20 years.

When the trust term ends, whether at the death of the income beneficiaries or after the set number of years, the remaining assets in the trust, called the remainder, go to one or more charities you’ve chosen. The charities may be public charities, a private foundation or a donor-advised fund, depending on how the trust is structured.

Types of charitable remainder trusts

There are two main types of charitable remainder trusts, which differ in how payments are calculated.

A charitable remainder annuity trust, or CRAT, pays a fixed dollar amount each year, based on a percentage of the trust’s initial value. Payments stay the same regardless of how the trust’s investments perform. CRATs provide predictable income, but you can’t add more assets after the trust is created.

A charitable remainder unitrust, or CRUT, pays a fixed percentage of the trust’s value, recalculated each year. If the trust’s investments grow, payments increase; if they decline, payments decrease. CRUTs offer potential for growing income and allow additional contributions after the trust is created. Variations of CRUTs can accommodate assets that don’t produce immediate income.

IRS rules require that payouts fall within a set percentage range and that the projected value of the charitable remainder meet a minimum threshold when the trust is created.

Potential benefits

You may receive a partial charitable income tax deduction when you fund the trust. The deduction is based on the present value of the remainder interest expected to go to charity, calculated using IRS tables that consider factors like the payout rate, the term of the trust, beneficiaries’ ages and interest rates. Deduction limits based on your income apply.

The trust can sell appreciated assets without paying capital gains tax immediately. If you sold highly appreciated stock or real estate yourself, you’d typically owe capital gains tax on the gain. Because a CRT is generally tax-exempt, it can sell the assets and reinvest the full proceeds, allowing more money to be invested and generate income. Taxes generally apply as income is paid out to beneficiaries, following specific ordering rules that determine how distributions are taxed.

A CRT can provide a steady income stream, which can be valuable in retirement, especially if you convert a low-yielding appreciated asset into a diversified portfolio that generates income.

Assets in the trust are generally removed from your taxable estate, which may reduce estate taxes for larger estates.

And a CRT allows you to support causes you care about, creating a lasting charitable legacy.

Things to consider

The trust is irrevocable. Once you transfer assets into a charitable remainder trust, you generally can’t take them back or change the basic terms. Make sure you’re comfortable giving up control of the assets.

Setup and administration costs can be significant, including legal fees to create the trust, ongoing trustee fees, investment management, annual tax filings and valuations. CRTs generally make the most sense for larger amounts.

Strict IRS rules apply to payout rates, the minimum charitable remainder and trust administration. Failing to follow these rules can jeopardize the trust’s tax benefits.

Your heirs won’t receive the assets in the trust, since the remainder goes to charity. Some people use life insurance, sometimes funded with income from the CRT, to replace the value of assets for heirs, an approach sometimes called a wealth replacement trust.

Income beneficiaries receive payments subject to the trust’s terms, which may not keep pace with inflation in a CRAT.

Charitable remainder trusts versus other giving options

Other charitable giving tools include donor-advised funds, which offer an immediate tax deduction and flexibility in recommending grants over time but don’t provide income to you; charitable gift annuities, which provide income in exchange for a gift to a charity, typically with simpler setup; and charitable lead trusts, which reverse the CRT structure, paying income to charity first, with the remainder going to heirs.

Get expert help

Charitable remainder trusts involve complex tax and legal rules. An estate planning attorney and tax adviser can help determine whether a CRT fits your goals, structure it properly and help you understand the trade-offs compared with other charitable giving strategies. The charities you plan to support may also offer planned giving resources.