Charitable Remainder Trust: All You Need to Know

A charitable remainder trust can be a useful part of your estate plan that allows you to receive an income tax deduction while benefiting your favorite charity. Learn about charitable remainder trusts, how they work, their benefits, the risks associated with them, and information to help you decide whether a charitable remainder trust is right for you.

What Is a Charitable Remainder Trust

A charitable remainder trust, or CRT, is a special type of trust that is intended to benefit both a charitable organization and a non-charitable beneficiary. It is considered a “split-interest” trust because it can benefit two types of beneficiaries simultaneously: charitable beneficiaries (e.g. non profits) and non-charitable benficiaries (e.g. you, a family member, a non-charitable entity). 

This type of trust may help reduce income tax now, as well as capital gains tax and estate tax later. 

In a charitable remainder trust, non-charitable beneficiaries receive income from the charitable remainder trust for a specified term of years. Then, the remainder interest goes to the designated charitable organization. 

How Does a Charitable Remainder Trust Work?

When discussing charitable remainder trusts, it is important to understand the potential tax savings objective behind them. A grantor sets up a charitable remainder trust and receives a partial income tax deduction. The trust can be funded with a variety of property, including:

• Cash 
• Real estate
• Private business interests
• Stocks
• Life insurance proceeds

The partial tax deduction the grantor receives is based on a number of factors, including:

• Type of trust
• Trust term
• Interest rates set by the Internal Revenue Service (IRS)
• Projected payment to charity

Any gains and growth on the assets within the trust are tax exempt for the duration of the CRT. For example, highly appreciated stock that’s sold within the the CRT is sold tax free.

From its assets and income, the charitable remainder trust pays one or more non-charitable beneficiaries for a specific number of years out of the trust’s income that is generated from the trust property. These payments are taxed to the non-charitable beneficiary. The non-charitable beneficiary is usually  the grantor of the trust. The maximum number of years for a charitable remainder trust is 20, or for the life of a non-charitable beneficiary. After this term expires, the remaining assets go to one or more charitable beneficiaries. 

CRTs are irrevocable trusts, so they cannot be easily modified or revoked – at least not without the beneficiaries’ permission. The grantor removes all of their ownership rights to the assets. 

A CRT can be an effective way to achieve philanthropic goals while establishing a vehicle that provides reliable retirement income and minimizing income tax. Your assets can continue to grow inside the trust, offsetting and delaying capital gains tax that you would have otherwise realized immediately. 

Types of Charitable Remainder Trusts

There are different types of charitable remainder trusts, including:

Charitable Remainder Annuity Trust (CRAT) 

A charitable remainder annuity trust provides distributions in the form of an annuity to non-charitable beneficiaries, which is a fixed dollar amount on an annual basis. The payout rate must be between 5% and 50% of the assets in the trust and must be consistent each year. No other contributions can be made to this type of CRT. For example, if you funded a CRAT with $2,000,000 and chose a 5% payout rate, then you would receive an annual annuity of $100,000 per year.

Charitable Remainder Unitrust (CRUT)

A charitable remainder unitrust provides a percentage of the CRUT assets to non-charitable beneficiaries, based on the value of the assets in the trust as valued the year the distribution is made. The payout rate must still represent between 5% to 50% of the trust assets. The dollar amount of the payout fluctuates with the market so the dollar amount of your income stream can vary each year. Additional contributions are permitted with a CRUT.

Here is a summary of the similarities and differences between a CRAT and CRUT.

Characteristic	Charitable Remainder Annuity Trust (CRAT)	Charitable Remainder Unitrust (CRUT)
Irrevocable?	Yes	Yes
Who receives the remaining assets?	Charitable organization	Charitable organization
Additional contributions permitted?	No	Yes
Annual distributions	A fixed dollar amount  on the original value of the trust	A percentage based on fair market value of trust assets each year distributions are made

Why Would You Want a Charitable Remainder Trust

A CRT is most valuable when you are charitably inclined, while being a position to benefit from an immediate tax deduction, as well as a tax deferment on appreciated assets. For example, a CRT provides you with a steady income stream, which you can strategically plan to receive when you might be in a lower tax bracket, such as during retirement. A CRT can also be helpful when you want to take advantage of its tax-exempt status, such as when you have appreciated assets and do not want to sell it under your name and incur a steep capital gains tax. 

A CRT can be part of your estate planning strategy when making a charitable gift is important to your legacy. 

SECURE Act and CRTs

The SECURE 2.0 Act provides for special provisions to make a one-time qualified charitable distribution from an Individual Retirement Account (IRA). According to this law, you can make a charitable gift of up to $50,000 to a charitable remainder annuity trust or charitable remainder unitrust if you are a donor over the age of 70 ½. 

Benefits of a Charitable Remainder Trust

Some of the benefits of a charitable remainder trust include:

• Tax savings – CRTs offer many tax benefits. The grantor gets a charitable income tax deduction, which reduces income taxes. The grantor can use an appreciable asset in the trust, which can help eliminate capital gains tax because the trust assets grow tax-free. Capital gains can also be avoided when the assets are eventually sold by using a CRT. Because the grantor removes any ownership rights over the trust property, the trust becomes the new owner of the property until the charitable organization receives it, so the grantor can also eliminate or reduce estate and gift taxes.
• Income stream – Unlike with a charitable lead trust, a charitable remainder trust provides a reliable income stream for a certain number of years. The grantor can designate these distributions be made to them or to another non-charitable beneficiary of their choice. 
• Finality – Because a CRT is an irrevocable trust, changes cannot easily be made. This could be a good thing if there is a contentious family relationship where other potential beneficiaries might otherwise try to challenge the grantor’s decision. An irrevocable trust protects trust assets from creditors or family members who are not intended to benefit from the trust. 
• Philanthropy – A grantor can know that their contributions will ultimately benefit a charity of their choosing. 
• Probate avoidance – A CRT can help you avoid probate by removing personal ownership of the assets. 

Risks of a Charitable Remainder Trust

While there may be significant benefits of a charitable remainder trust, there can also be some downsides, including:

• Difficult to change or revoke – Because a CRT is an irrevocable trust, it can be difficult or impossible to change or revoke the trust.  If your situation changes and you need access to the trust assets, you may not be able to access them. 
• Valuable contribution necessary – To provide the desired annual income, you may need to have a substantial contribution.  
• Complicates control – When assets are transferred to an irrevocable trust, you control over them gets more complicated. You also lose the potential opportunities those assets may have otherwise provided to you outside of the trust.
• Potential to minimize income tax deduction – Since one of the most important benefits of a CRT is the potential tax benefits, it is important to understand when this benefit may not be as significant. For example, if you set up the CRT so that you can take higher distributions, your income tax deduction will be lower.

It is important to run a cost-benefit analysis before setting up a charitable remainder trust. You can also seek the advice of an estate planning lawyer if you’d like.

How to Set Up a Charitable Remainder Trust 

If you have decided you would like to make a charitable remainder trust part of your estate planning strategy, here are the steps you can take to set up your own:

1. Create a charitable remainder trust. Ask a lawyer to draft one for you. Determine the terms of the trust, including:
   1. The income beneficiary or beneficiaries
   2. The duration of the trust 
   3. The size of the income stream
   4. How often you want beneficiaries to receive trust income
   5. Which charitable organization will receive the remainder interest at the end of the trust
2. Select a charity. Check with the IRS that the charity you want to benefit is approved to receive the remainder interest. 
3. Transfer assets to the trust. Sign whatever documentation or conduct a transfer to establish the trust assets. 

Takeaway

A charitable remainder trust can be an effective way to create an income stream for you or a loved one, receive a charitable deduction to reduce income taxes, and benefit a charity. However, think through the potential risks and costs before making this type of commitment.

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