Charitable Remainder Trusts Explained: Tax Benefits, Annuity Options, and Legacy Planning

Charitable Remainder Trusts (CRTs) are powerful estate planning vehicles that allow high-net-worth individuals to transfer appreciated assets in a tax-efficient manner while supporting charitable causes. When structured properly, a CRT can reduce capital gains tax, provide a steady income stream, and generate valuable income tax deductions—making it a strategic option for philanthropic-minded clients seeking to minimize estate taxes.

This guide explores how CRTs work, their tax advantages, key differences between trust types, and practical considerations to help you determine if this strategy fits within your broader estate plan.

What Is a Charitable Remainder Trust (CRT)?

A Charitable Remainder Trust (CRT) is a specialized estate planning tool that allows an individual to generate income for themselves or others over a defined period, after which the remaining trust assets are distributed to designated charitable organizations. This approach combines charitable giving with income generation and long-term tax planning benefits. It is commonly used in estate planning to generate lifetime income for the donor or family members while supporting charitable giving goals.

There are two primary types of CRTs:

1. Charitable Remainder Annuity Trust (CRAT): Pays a fixed annuity amount annually, regardless of trust asset performance.
2. Charitable Remainder Unitrust (CRUT): Pays a fixed percentage of the trust’s annually revalued assets.

Each structure offers different benefits depending on the donor’s goals, risk tolerance, and asset types.

How Charitable Remainder Trusts Work

CRTs are designed to balance philanthropic intent with income generation. Here’s how the process typically works:

1. Assets Contributed: The donor transfers appreciated assets (e.g., real estate, stocks, or private business interests) to the CRT.
2. Income Stream: The trust provides a stream of income—either a fixed annuity (CRAT) or a percentage of asset value (CRUT)—to the income beneficiary for life or a specified period (up to 20 years).
3. Charitable Remainder: At the end of the term, the remaining trust assets pass to the designated charitable beneficiaries.

Because the trust is irrevocable, the donor relinquishes control over the contributed assets. However, this setup provides significant tax advantages while ensuring charitable support in the future.

Types of Charitable Remainder Trusts: CRAT vs CRUT

Understanding the difference between a CRAT and a CRUT is crucial when determining which strategy is right for your estate plan:

Charitable Remainder Annuity Trust (CRAT):

• Pays a fixed annuity each year.
• No additional contributions allowed once established.
• Ideal for donors seeking predictable income payments.

Charitable Remainder Unitrust (CRUT):

• Pays a fixed percentage (minimum 5%) of the trust’s fair market value, recalculated annually.
• Permits additional contributions.
• Beneficial in times of market growth—projected income payments can increase with asset appreciation.

Both types must comply with the Internal Revenue Service (IRS) guidelines, including passing the 10% remainder interest test to qualify for tax benefits.

Tax Benefits of a Charitable Remainder Trust

CRTs offer several substantial tax advantages that make them attractive to high-net-worth individuals:

• Avoid Capital Gains Tax: When appreciated assets are transferred to a CRT and subsequently sold by the trust, no capital gains tax is triggered. This preserves the full fair market value for reinvestment within the trust.
• Charitable Deduction: Donors receive an immediate charitable income tax deduction for the present value of the charitable remainder interest. This deduction is subject to IRS limits based on the donor’s adjusted gross income (AGI).
• Tax-Deferred Growth: CRTs allow trust assets to grow without immediate tax erosion, increasing the overall benefit to both the income and charitable beneficiaries.
• Reduction in Estate Taxes: Assets transferred to a CRT are removed from the donor’s taxable estate, lowering potential estate tax liability.
• Partial Tax Deduction: Because the donor retains an income interest, the tax deduction reflects only the charitable portion of the gift.

Additional benefits may include improved retirement income planning and legacy-building strategies through charitable giving.

Estate Planning Advantages of CRTs

Beyond tax savings, Charitable Remainder Trusts offer a range of estate planning benefits that make them an attractive strategy for high-net-worth individuals:

• Minimizing Your Taxable Estate: Assets transferred to a CRT are excluded from your taxable estate, reducing the potential estate tax liability and preserving more wealth for your heirs or other beneficiaries.
• Flexibility in Philanthropy: CRTs allow donors to support charitable organizations over time while still meeting personal income goals. You can designate multiple charitable beneficiaries and even include donor-advised funds or private foundations.
• Integration with Other Planning Tools: CRTs can work in tandem with other advanced estate planning structures such as Irrevocable Life Insurance Trusts (ILITs), Dynasty Trusts, or Grantor Retained Annuity Trusts (GRATs) to create a comprehensive, tax-efficient wealth transfer plan.
• Supporting Long-Term Legacy Goals: A CRT aligns your estate plan with your values, allowing you to leave a philanthropic legacy while still benefiting from income generation and tax efficiency during your lifetime.

What Can You Contribute to a CRT?

CRTs are most effective when funded with appreciated assets that would otherwise trigger significant capital gains tax if sold outright. Common asset types include:

• Highly Appreciated Publicly Traded Securities: Ideal for clients holding low-basis stocks or ETFs.
• Real Estate: Residential, commercial, or investment properties can be transferred into a CRT and sold without immediate capital gains tax.
• Private Business Interests: S-corp or C-corp shares, LLC membership interests, or other closely held business assets can often be structured into a CRT, though additional compliance and valuation requirements may apply.
• Private Company Stock: CRTs can accommodate non-public equity interests, subject to specific IRS and transfer restrictions.

In all cases, the fair market value of the contributed assets plays a role in calculating your charitable deduction and the projected income stream. Consulting with a qualified estate planning attorney and tax advisor is critical to ensure contributions are structured properly and aligned with your broader goals.

What Happens to Remaining Trust Assets?

At the end of the CRT’s term—whether that’s a fixed number of years or upon the death of the income beneficiary—the remaining trust assets are distributed to one or more designated charitable organizations. These charitable beneficiaries are typically named in the original trust document and can include public charities, donor-advised funds, private foundations, or other qualified charitable entities.

Importantly, the value of the charitable remainder must equal at least 10% of the initial fair market value of the assets contributed to the trust at the time it is created (the IRS’s 10% test requirement). This ensures the CRT provides a meaningful charitable benefit to qualify for tax-exempt status and associated deductions.

Proper planning is essential to ensure that the transfer of remaining assets aligns with the donor’s philanthropic goals while complying with IRS regulations.

Drawbacks and Limitations of CRTs

While Charitable Remainder Trusts offer numerous benefits, they are not without limitations. Understanding the potential downsides is key to making an informed decision:

• Irrevocable Structure: Once a CRT is created and funded, it cannot be revoked or altered. This loss of control can be a significant concern for donors whose financial needs may change over time.
• Income Variability (CRUTs): In a CRUT, income payments depend on the annual valuation of trust assets. In down markets, income payments may decrease, creating unpredictability for the income beneficiary.
• Administrative Complexity: CRTs require legal drafting, ongoing trust administration, annual valuations (for CRUTs), and compliance with IRS requirements. This can increase the cost and burden of managing the trust over time.
• Risk of Trust Underperformance: If trust assets underperform or income payments are poorly structured, there may be insufficient remaining assets for charitable beneficiaries—or worse, a risk of the trust “running out of money” before term completion.
• Unfavorable Tax Treatment for Some Assets: Certain assets (e.g., S corporation stock or debt-financed property) may generate unrelated business taxable income (UBTI), which can reduce or eliminate a CRT’s tax-exempt status.
• Disqualified Persons and Restrictions: CRTs must comply with IRS rules concerning disqualified persons and self-dealing, especially when private business interests are involved.

Because of these potential pitfalls, it’s essential to work with a qualified tax advisor and estate planning attorney to determine whether a CRT is right for your circumstances.

Comparing CRTs to Other Estate Planning Tools

Charitable Remainder Trusts are just one of several advanced tools available for high-net-worth individuals looking to balance income needs, tax efficiency, and charitable giving. Here’s how CRTs compare to other common estate planning strategies:

• CRT vs. GRAT (Grantor Retained Annuity Trust): A GRAT is used primarily to transfer appreciating assets to heirs at reduced gift tax cost. While both involve annuity structures, a GRAT benefits family members, whereas a CRT benefits charitable causes. GRATs are often used when philanthropy is not a primary goal.
• CRT vs. Donor Advised Fund (DAF): A DAF provides an immediate charitable deduction and a flexible way to recommend grants to charities over time, but it does not offer income to the donor. CRTs, by contrast, provide a lifetime income stream and defer the full charitable distribution until the trust term ends.
• CRT vs. Dynasty Trust or ILIT: Dynasty trusts and Irrevocable Life Insurance Trusts (ILITs) focus more on multigenerational wealth transfer and estate tax minimization for family members. CRTs are more philanthropic in nature and are best used when charitable giving is a central part of the estate planning strategy.

Each tool has distinct tax consequences, control considerations, and planning implications. A qualified estate planning attorney can help you determine the most appropriate combination of strategies to meet your goals.

Incorporating a CRT Into a Broader Estate Plan

A Charitable Remainder Trust should not be viewed in isolation but rather as one piece of a well-coordinated estate and tax plan. When integrated thoughtfully, CRTs can complement a range of wealth transfer and philanthropic strategies that reflect your broader legacy goals.

Many high-net-worth individuals use CRTs alongside:

• Irrevocable Life Insurance Trusts (ILITs) to replace wealth transferred to charity.
• Donor Advised Funds (DAFs) for flexible grantmaking and ongoing charitable giving.
• Private Foundations to build multigenerational charitable legacy and family involvement.
• Retirement Income Planning, where CRT income payments serve as a tax-efficient supplemental income source.
• Additional Contributions to CRUTs (where permitted) to continue building charitable capital while generating income.

At Evolution Tax & Legal, we specialize in helping clients evaluate and structure CRTs in alignment with their broader estate and financial planning needs. Whether you’re navigating the sale of highly appreciated assets, planning for retirement income, or exploring ways to create a lasting charitable impact, our experienced tax and estate planning team can help you design a custom strategy that minimizes taxes while maximizing your legacy.

If you’re ready to explore whether a CRT fits into your estate plan, contact us today to schedule a consultation.

Frequently Asked Questions: Charitable Remainder Trusts (CRTs)

Q. What is the difference between a CRAT and a CRUT?

A: A CRAT pays a fixed dollar amount each year, while a CRUT pays a fixed percentage of the trust’s annually revalued assets.

Q: What is the 10% test for charitable remainder trusts?

A: The IRS requires that the present value of the charitable remainder interest must be at least 10% of the initial value of the contributed assets.

Q: What happens if a CRT runs out of money?

A: If trust assets are depleted before the term ends, income payments may cease and charitable beneficiaries may receive less or nothing. Proper funding and management help mitigate this risk.

Q: Can you fund a CRT with real estate or a house?

A: Yes, real estate is commonly used to fund CRTs. However, appraisals, liquidity, and tax implications should be carefully considered.

Q: How does a CRT avoid capital gains tax?

A: Assets transferred to the CRT can be sold by the trust without triggering immediate capital gains tax due to its tax-exempt status.

Q: How is CRT income taxed?

A: Distributions to income beneficiaries are taxed under a four-tier system, typically beginning with ordinary income, followed by capital gains, tax-exempt income, and return of principal.

Q: Is a CRT tax-exempt?

A: Yes, a CRT is generally a tax-exempt entity under IRS rules, which allows it to sell appreciated assets without incurring immediate capital gains tax.

Q: What’s the difference between a CRT and a GRAT?

A: A CRT provides income to the donor and benefits charity, while a GRAT provides income to the donor and transfers the remainder to heirs. GRATs are more family-centric; CRTs are philanthropic.

Q: What’s the difference between a CRT and a donor advised fund (DAF)?

A: A CRT provides income and a delayed charitable gift, while a DAF provides an immediate gift and donor advisory privileges over distributions but no income stream.

Q: Why would someone set up a charitable trust?

A: To reduce taxes, support charities, generate lifetime income, and remove assets from their estate in a strategic and philanthropic manner.