Background and purpose

A Charitable Remainder Trust (CRT) lets a donor convert assets—often highly appreciated stocks, real estate, or business interests—into an income stream while ultimately directing the remaining value to charity. Congress created the modern CRT rules in the Tax Reform era to encourage philanthropy while allowing donors to retain income benefits. In practice, CRTs are most useful when a taxpayer wants liquidity or income from an illiquid or appreciated asset and prefers to postpone or avoid immediate capital gains taxes.

Key legal anchors include Internal Revenue Code §664 (which governs charitable remainder trusts) and IRS guidance on split‑interest trusts. For a reliable primer, see the IRS Charitable Remainder Trusts page: https://www.irs.gov/charities-non-profits/charitable-remainder-trusts.

How a CRT is structured (step‑by‑step)

  1. Establish the trust. The donor (grantor) creates an irrevocable trust and names a trustee, beneficiaries (income beneficiaries and remainder charitable beneficiaries), and the term.
  2. Fund the trust. The donor transfers assets into the CRT. Typical assets: appreciated publicly traded stock, privately held business interests, real estate, or cash.
  3. Income distributions. The CRT pays either:
  • A fixed annuity (Charitable Remainder Annuity Trust, CRAT): a specified dollar amount each year (stays constant, except by trust terms);
  • A percentage of trust value recalculated annually (Charitable Remainder Unitrust, CRUT): e.g., 5% of the trust’s fair market value each year.
    Payments are made to the income beneficiaries for life or a fixed term not to exceed 20 years (per IRC §664 rules).
  1. Remainder to charity. When the trust term ends, the trustee transfers the remaining trust assets to the named public charity(ies) or other qualifying charitable organizations.

Note: CRTs are irrevocable. Once funded, you generally cannot modify the trust’s beneficiaries or payout structure except in limited court‑approved circumstances.

Why clients use CRTs (practical benefits)

  • Tax efficiency when gifting appreciated assets. Funding a CRT with appreciated securities avoids immediate capital gains tax at the time of transfer; the trust can sell the assets tax‑free and reinvest the entire proceeds to fund income payments (IRS guidance; see split‑interest rules).
  • Immediate charitable income tax deduction. Donors receive a charitable deduction in the year of the transfer for the present value of the remainder interest, subject to income‑tax deduction limits and substantiation rules.
  • Lifetime income or legacy planning. CRTs can provide predictable income in retirement while ensuring a charitable legacy.
  • Asset diversification and professional management. Donors often use CRTs to convert concentrated positions (like a single stock or business interest) into a diversified portfolio overseen by a trustee.

In my practice as a CPA and CFP®, I’ve seen CRTs help clients monetize concentrated positions without an immediate tax hit and create named scholarships or endowments at local universities.

Common CRT types and considerations

  • CRAT (Charitable Remainder Annuity Trust): Pays a fixed dollar annuity each year. Better when you want predictable cash flow, but a CRAT cannot reinvest to increase payments if the trust declines in value.
  • CRUT (Charitable Remainder Unitrust): Pays a fixed percentage of the trust’s annually determined fair market value, so income can rise with good investment performance; however, payments can fall if the portfolio declines.
  • Net income CRUTs and flip CRUTs: Specialized CRUTs allow flexibility for timing sales of illiquid property or to limit distributions until liquidity is created.

Key rule to remember: CRTs must meet certain actuarial tests under IRC §664 — the actuarial present value of the charitable remainder must meet minimum thresholds (primarily to demonstrate a meaningful charitable interest). Practitioners commonly ensure the remainder interest is at least 10% of the initial trust value to satisfy IRS requirements.

Example scenarios (real‑world, anonymized)

  • Appreciated stock conversion: A client with highly appreciated public stock funds a CRUT. The CRUT sells the stock tax‑free, reinvests the proceeds, and pays the client 5% of the trust’s annually revalued balance. The client receives steady income, spreads tax advantages, and leaves the remainder to a university.
  • Business sale planning: An owner selling a business shifts part of sale proceeds into a CRT before closing. The CRT can receive the proceeds or an installment, deliver retirement income, and donate the remainder to charity while reducing taxable estate.

Eligibility and who benefits most

CRTs are available to any donor who can legally transfer property into an irrevocable trust and name qualifying charities as remaindermen. They are most attractive to:

  • People holding large appreciated assets with low cost basis.
  • Donors seeking both income and a philanthropic legacy.
  • Those who need to reduce estate tax exposure while supporting charities.

They may be less suitable for taxpayers who need short‑term liquidity or who cannot tolerate irrevocability or trust administration costs.

Administrative, tax, and cost considerations

  • Trustee responsibilities: The trustee must follow fiduciary duties, manage investments, calculate payments, value trust assets annually, and file information returns (split‑interest trusts commonly file Form 5227 in applicable cases). Administrative work adds costs.
  • Tax reporting: The CRT is a tax‑exempt entity for income tax purposes but must follow rules for unrelated business taxable income (UBTI) and report distributions correctly. Donors report the charitable deduction and any taxable income received from the trust.
  • Valuation and actuarial work: Calculating the donor’s deduction and meeting IRS testing requires actuarial valuation at funding. Professional valuation is essential for unusual or illiquid gifts (real estate, business interests).
  • Costs: Setup (legal drafting), trustee fees, valuation, and ongoing administration can be substantial—factor these into whether a CRT makes sense for smaller gifts.

Planning strategies and professional tips

  1. Match the CRT type to cash‑flow needs: Choose a CRUT for potential growth in payments, a CRAT for predictable income.
  2. Consider a unitrust with flip or net income features for illiquid property to avoid forced low payouts before sale/proceeds are realized.
  3. Integrate CRTs with other giving techniques: Combine CRTs with charitable gift annuities or donor‑advised funds depending on desired timing of gifts and tax treatment. See related resources on charitable gift annuities and trust‑based legacy options for context: Charitable Gift Annuities: How They Work and Charitable Bequests vs Trust Gifts: Choosing the Right Legacy Vehicle.
  4. Run multiple scenarios: Model different payout rates, term lengths, and investment returns to compare income vs. eventual charity remainder.
  5. Coordinate estate and income tax planning: CRTs affect both income tax and estate tax pictures; coordinate with an estate attorney and tax advisor.

Common mistakes and misconceptions

  • “CRTs are only for the very wealthy.” Many mid‑to‑high net worth taxpayers can benefit, but administrative costs can limit practicality for smaller gifts.
  • Underestimating liquidity needs. Funding with illiquid property without a plan for monetization may cause low initial payments.
  • Forgetting ongoing costs. Trustee fees, legal fees, and valuation work reduce net income and eventual charitable remainder.
  • Treating the CRT like a regular investment account. CRTs have unique tax and distribution rules—donors and trustees must follow them carefully.

FAQ (short answers)

Q: Can I change or revoke a CRT after it’s funded?
A: Generally no. CRTs are irrevocable. Changes typically require court approval and are rare.

Q: Do CRT payments have tax character (ordinary income vs. capital gain)?
A: Distributions from a CRT carry tiered tax character—payments are treated in a defined ordering rule (income first, then capital gains, return of principal, etc.). Work with a tax advisor to determine your tax treatment each year.

Q: How large must the charitable remainder be?
A: Under IRC §664 actuarial rules, the remainder must represent a meaningful charitable interest; practitioners commonly target a remainder value of at least 10% of the initial trust property when valued actuarially.

How CRTs fit with other charitable vehicles

CRTs are one of several split‑interest mechanisms. Depending on your goals, a charitable gift annuity, donor‑advised fund, or a bequest might be more appropriate. For a comparison of trust gifts and bequests, see: Charitable Bequests vs Trust Gifts. For donors who prefer a simpler guaranteed payout to charity with less administration, a charitable gift annuity may be an alternative: Charitable Gift Annuities: How They Work.

Final considerations and next steps

If you’re considering a CRT, start by:

  • Listing assets you might contribute and identifying which are appreciated or illiquid.
  • Running preliminary cash‑flow models for different payout rates and trust types.
  • Consulting a tax attorney, estate planning attorney, or a qualified CPA/CFP who has experience with charitable planning.

Professional Disclaimer: This article is educational and does not provide individualized tax, legal, or investment advice. Rules for charitable remainder trusts are complex and fact‑specific. Consult a licensed tax professional or estate attorney before creating or funding a CRT.

Sources and further reading

Internal resources on FinHelp

If you’d like, I can create a checklist or cash‑flow model template you can take to an advisor to evaluate whether a CRT fits your situation.