Many successful individuals want to support charitable causes without sacrificing financial security. A Charitable Remainder Trust (CRT) can help bridge this gap as it provides lifetime income to a non-charitable beneficiary, an immediate tax deduction to the donor, and reduces estate taxes by gifting the remainder benefit to charity. Below, we answer common questions about how CRTs work and illustrate the impact with an example.
What exactly is a Charitable Remainder Trust?
A CRT is an irrevocable trust designed to benefit both a non-charitable beneficiary and a charity: The trust is set up so that the donor (or another beneficiary) receives an income stream from the trust each year and the remainder goes to one or more charities of the donor’s choice after the trust term ends, usually at the income beneficiary’s death.
This structure allows the donor to:
– Receive an income tax deduction today for the charitable portion of the gift.
– Avoid immediate capital gains tax if you fund the trust with appreciated assets, like stock.
– Reduce the donor’s taxable estate, potentially lowering future estate taxes.
What types of CRTs are available?
There are two main types:
– CRAT (Charitable Remainder Annuity Trust): Pays a fixed dollar amount each year. Ideal if you want predictable income.
– CRUT (Charitable Remainder Unitrust): Pays a fixed percentage (e.g., 5%) of the trust’s value, recalculated annually. This allows income to grow if investments appreciate.
How does a CRT affect estate taxes?
Assets transferred into a CRT are removed from the donor’s taxable estate, which can meaningfully reduce estate taxes.
Let’s look at a Case Study
Scenario: An individual has a total estate value of $25 million and is 50 years old. In 2026, the estate exemption amount is $15 million, meaning that $15 million will pass tax-free to heirs but this individual would have a taxable estate of $10 million. The estate tax rate is 40%.
How much estate tax will I owe if I do nothing?
|
Total Gross Estate: |
$25,000,000 |
|
Less: Deductions |
$0 |
|
Taxable Estate: |
$25,000,000 |
|
Less: Estate Tax Exemption |
$15,000,000 |
|
Net Taxable Amount: |
$10,000,000 |
|
Estate Tax Rate: |
40% |
|
Estimated Estate Tax: |
$4,000,000 |
|
Net to Heirs: |
$21,000,000 |
That’s $4 million that would go to the IRS instead of family or charity.
How would using a CRT change this picture?
Assume:
– You contribute $2 million of appreciated stock to a Charitable Remainder Annuity Trust (CRAT).
– You are the income beneficiary of the trust.
– The CRAT pays 5% annually for life and this amount is recalculated annually based on the value of the trust assets.
1. Annual Income Stream:
– First-year payout: 5% × $2,000,000 = $100,000 per year
– This income can supplement retirement needs or be reinvested.
– The payout may fluctuate based on the trust’s investment performance.
2. Immediate Charitable Deduction:
– Charitable deduction ≈ $450,000 (actual charitable deduction is determined with actuarial calculation)
– Deductible up to 30% of AGI this year; any unused portion can be carried forward for up to five years.
3. Estate Tax Reduction:
– The $2 million gift is removed from your taxable estate.
– New taxable estate = $25M – $2M – $15M = $8 million
– Estate tax = 40% × $8M = $3.2 million
Result:
– Estate tax savings = $800,000
– Plus, avoided capital gains tax on appreciated stock.
Why is appreciated stock an ideal asset for a CRT?
Funding a CRT with appreciated stock offers multiple advantages:
– The trust can sell the stock without paying capital gains tax.
– 100% of the proceeds are reinvested for income and growth.
– You diversify your portfolio without triggering a taxable event.
– You create a lasting charitable legacy at the end of the trust term.
What’s the takeaway?
Charitable Remainder Trusts can be a valuable estate and tax planning tool for clients with a taxable estate who are charitably inclined. These trusts allow the donor or another beneficiary to receive a lifetime income, the trust presents an opportunity to diversify a concentrated stock position without triggering capital gains, the donor receives a tax deduction in the year the trust is funded, and the client can create a meaningful charitable legacy.
Charitable, estate, and income tax planning can be complicated and we believe there is no one-size-fits-all approach. Contact us today to discuss how various strategies may apply to you.