What Is a Charitable Remainder Trust? The Tax Strategy for Charitable Retirees

How Does a Charitable Remainder Trust Work?

You transfer assets (typically appreciated stock or real estate) into an irrevocable trust. The trust sells the assets without triggering capital gains tax (the trust is tax-exempt). You receive a fixed annuity payment for life (CRAT) or a percentage of the trust value annually (CRUT). When the trust terminates (at your death or end of term), the remaining assets go to your designated charity.

The three simultaneous benefits: 1. Immediate partial income tax deduction based on the present value of the charitable remainder 2. No capital gains tax on the sale of appreciated assets inside the trust 3. Regular income payments for life

The trade-off: the assets are irrevocable — you cannot get the principal back. You're exchanging a lump sum for an income stream plus a charitable deduction.

What Is the Difference Between a CRAT and a CRUT?

CRAT (Charitable Remainder Annuity Trust): Pays a fixed dollar amount each year, regardless of trust performance. Once set, the payment never changes. No additional contributions allowed. Better when interest rates are high (larger deduction) and you want predictable income.

CRUT (Charitable Remainder Unitrust): Pays a fixed percentage of the trust's value each year, recalculated annually. Payments fluctuate with trust performance. Additional contributions allowed. Better for growth-oriented investors who want payments that keep pace with the portfolio.

Payout rates: IRS requires a minimum of 5% and maximum of 50%. The remainder interest to charity must be at least 10% of the initial contribution. Higher payout rates reduce the charitable deduction.

When Does a CRT Make Financial Sense?

Best candidates: - Large concentrated position in appreciated stock (avoids capital gains) - Charitably inclined (would donate anyway) - Need for additional retirement income - In a high tax bracket (maximizes deduction value)

Example: $500,000 of stock with $50,000 cost basis. Selling outright triggers $90,000 in federal capital gains tax (20% + 3.8% NIIT). Contributing to a CRAT: zero capital gains, 6% annuity = $30,000/year for life, plus an immediate tax deduction of approximately $150,000-200,000 (varies by age and IRS rate).

Not a good fit if: you might need the principal, your assets aren't highly appreciated, you're not charitably inclined, or the amounts are under $100,000 (administration costs become proportionally high).

Want to Model a CRT in Your Estate Plan?

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