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A charitable remainder trust lets you donate appreciated assets, receive income from those assets for a period of time, and pass the remainder to a qualified charity. Itâs an irrevocable trust, but it can offer income, a potential tax deduction, and a way to support a cause you care about.
Who typically uses a CRT?
Charitable remainder trusts tend to appeal to people with highly appreciated assetsâcompany stock, real estate, or a concentrated portfolioâwho want to turn those assets into income without triggering immediate capital gains. Theyâre also common in estate planning because of the trustâs tax advantages and charitable component.
What types of CRTs are available?
There are two main forms: a charitable remainder annuity trust (CRAT), which pays a fixed dollar amount each year, and a charitable remainder unitrust (CRUT), which pays a set percentage of the trustâs value annually. CRUTs are more flexible because the payout adjusts as the trustâs value changes.
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You retain the benefits now; the charity gets the asset.
A charitable remainder trust (CRT) can be a good solution for people who want to turn appreciated assets into retirement income while ultimately supporting a nonprofit organization.
Charitable remainder trusts are a good way to give a sizable gift to a charity and ensure that you still have enough income to support yourself.
A CRT can be set up as an annuity trust that pays you a set amount per year, or as a unitrust that pays a fixed percentage of the fundâs assets each year.
Trusts are complex legal entities, so consider working with trusted advisors when setting one up.
How does a charitable remainder trust work?
CRTs allow people to donate assets to a trust and receive income payments over a set period. When the donor passes away or the time period ends (depending on how the trust is set up), any remaining assets go to the charity. These trusts fall under the Internal Revenue Code 664 and are known as split-interest trusts.
If you plan to bequeath a portion of your estate to a specific charity (or group of charities), a CRT can be a tax-efficient part of your estate plan. They are often created for people nearing retirement who want to move highly appreciated assets (i.e., those with a low property basis) into an irrevocable trust to avoid triggering immediate capital gains on the sale of that asset and spread the tax impact over future income payments, says Jonathan Raymon, a charitable solutions strategist at Baird Trust.
There are two types of CRT trusts, says Scott Rutherford, a certified public accountant and certified financial planner at Gratus Capital:
Charitable remainder annuity trust (CRAT). This type pays out a set amount of moneyâjust as an annuity wouldâto a non-charitable beneficiary each year (thatâs you, if youâve set up the CRAT for yourself). A life annuity means youâll receive payments for the rest of your life.
Charitable remainder unitrust (CRUT). This type pays out a percentage of the assetâs value annually. The payments are recalculated each year based on the value of the fund. The calculation resembles the logic behind the 4% rule for retirement income.
âThe whole purpose is to turn a highly appreciated asset into an income stream, and then at the end of whatever the term is, the charity gets the assets,â Rutherford says.
Who should create a CRT?
CRTs are complex to set up, and there are fees to establish the trust and maintain it, including filing annual tax reports. Raymon says that because of the fees and legal requirements, a person should normally have at least $1 million in assets to fund a CRT.
Calculate how much income the beneficiary will receive
Decide how much to give to the charity
Choose between a CRAT vs. a CRUT
Although CRTs are primarily used by people with substantial or highly appreciated assets, there are other times when it can make sense to establish one. For example, a CRT can help if a significant amount of a personâs wealth is tied up in a concentrated positionâcompany stock, a small business, or a family farmâand the person is looking to sell the asset to fund their retirement, Raymon says.
When highly appreciated, concentrated assets are placed in a CRT, the trust can sell the assets without triggering immediate capital gains. The beneficiary pays taxes later as income is distributed. Typically, the trust will sell the assets up frontâparticularly if itâs a large, illiquid asset such as a propertyâand invest the proceeds in an income-producing portfolio. If the donation is made up of stocks or other liquid assets, the trust may choose to sell the assets slowly over time.
Charitable remainder trust example
According to the IRS, a CRT must be set up such that at least 10% of the initial funding value goes to the charityâhence the âremainderâ of the trust. For example, if you were to set up a trust with a funding value of $1 million, itâs expected that the charity will get at least $100,000, which is 10% of the present value. You might leave even more to the charity, depending on how the assets in the trust perform between setup and when you pass away.
As the donor (aka âfund grantorâ), youâd get a tax deduction in the tax year in which you place the assets in the CRT.
Interested in getting a ballpark estimate of how the numbers would work? Start with a charitable remainder trust calculator or similar charitable gift calculator to estimate income streams and charitable remainders. Many of the largest charitable organizations, including university endowments and medical research organizations, have calculators available on their websites.
To use a calculator, youâll need to know the current IRS discount rate, which the IRS uses to set the initial value of the trust. Set at 120% of the so-called âfederal applicable interest rate,â itâs basically an assumption of what the trustâs assets are expected to earn over the life of the trust. The IRS discount rate changes monthly. Check the current rate, because deductions vary significantly with interest rates.
Suppose youâve owned a property for many decades, and youâd like to use it for retirement income as of age 65, but donate the remainderâat least $100,000âonce youâve passed on. Suppose itâs valued at $1 million, has an adjusted cost basis of $250,000, and you expect to be in the 24% tax bracket during retirement.
The calculatorâs estimate includes:
Your payout rate and annual payout (5.4% and $54,000 per year in this example).
The total charitable deduction ($406,365âall claimed in the first year).
How much of each distribution will consist of ordinary income ($24,169), capital gains income ($22,373), and tax-free donations ($7,457).
What to consider before establishing a CRT
Aside from the costs (setup and ongoing), there are other factors grantors should consider before opening this type of trust:
Donations are irrevocable. Once assets are put into the trust, they cannot come out. Distributions are mandatory, and the trust must file an annual tax return using Form 5227.
Legal documents can be tricky. The language must be specific and carefully considered to make sure the trust doesnât run afoul of the IRS, Rutherford says. You can include certain stipulations, such as retaining the right to change the charity that will receive the remainder of the trustâs assets; however, that information must be spelled out when the trust is established.
Trusts must be managed by a trustee. Although that person can be you, Raymon doesnât recommend that approach, as the trustee has a fiduciary duty. The trustee must ensure timely distributions to the income beneficiary and that the charitable remainder money is invested to preserve what the nonprofit organization will receive.
âIf youâre not aware of what you need to do as your role of trustee, you can get into a perilous situation,â Raymon says. âIf someone is trying to be their own trustee, they canât see it as entirely their money. It is the trustâs money. And while they have an income interest in it, they are not the only beneficiary.â
The bottom line
Charitable remainder trusts can be a good way for near-retirees to ensure a steady income stream from a highly appreciated asset while supporting their favorite charities in their estate. These are complex vehicles that are costly to set up and maintain, so theyâre best suited for high-net-worth individuals or those who own highly appreciated assets they want to sell to fund a retirement while spreading out their capital gains over time.
If youâre looking to include charitable donations as part of your estate plan, but youâd like to target a retirement income stream, a CRT might be for you. But donât plan on setting it up alone. Work with an attorney and perhaps an accountant or financial advisor to make sure you do it right.
This article is intended for educational purposes only and not as an endorsement of a particular financial strategy. EncyclopĂŠdia Britannica, Inc., does not provide legal, tax, or investment advice. Please consult your legal or tax advisor before proceeding.
