Charitable Remainder Trusts (CRTs):
An Advanced Estate Planning Tool for Tax Savings and Charitable Giving
-
Many individuals own highly appreciated assets that they would like to sell but hesitate because of the capital gains taxes that may result.
-
Others wish to support charities that are important to them while also providing income for themselves or their families.
A Charitable Remainder Trust (CRT) can often accomplish both objectives.
A CRT is an advanced estate planning strategy that allows you to transfer appreciated assets into an irrevocable trust, receive an income stream for life or for a specified number of years, and ultimately leave the remaining trust assets to one or more charities of your choosing.
For the right individual, a CRT can provide significant tax advantages while creating a lasting charitable legacy.
What Is a Charitable Remainder Trust?
A Charitable Remainder Trust (CRT) is an irrevocable trust that divides the benefits of trust ownership between you and a charitable organization.
When you transfer assets into the trust:
-
you (or another designated beneficiary) receive income from the trust for life or for a specified term of years; and
-
after the income interest ends, the remaining trust assets are distributed to one or more qualified charitable organizations.
Because the trust—not you individually—becomes the owner of the assets, a CRT can provide unique tax planning opportunities that are unavailable through outright ownership.
How Does a CRT Work?
The process generally follows these steps:
-
You transfer appreciated assets into a Charitable Remainder Trust.
-
The trust sells those assets without immediately triggering capital gains tax to you personally.
-
The proceeds are reinvested inside the trust.
-
You receive income from the trust for life or for a term of years.
-
At the end of the trust term, the remaining assets pass to one or more charities that you selected.
This strategy allows appreciated assets to continue working for you while also benefiting charitable causes that are important to your family.
What Assets Work Best?
A CRT is often most effective when funded with highly appreciated assets, including:
-
publicly traded securities;
-
investment real estate;
-
closely held business interests;
-
commercial property;
-
appreciated investment portfolios; and
-
other assets that would generate significant capital gains if sold outright.
The greater the appreciation, the greater the potential tax planning benefits.
Types of Charitable Remainder Trusts
There are two primary types of CRTs.
-
Charitable Remainder Annuity Trust (CRAT)
A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount each year regardless of the investment performance of the trust.
Because the annual payment never changes, a CRAT provides predictable income.
-
Charitable Remainder Unitrust (CRUT)
A Charitable Remainder Unitrust (CRUT) pays a fixed percentage of the trust's value each year.
Because the trust is revalued annually, your income may increase if the trust assets appreciate or decrease if their value declines.
Potential Tax Benefits
When properly structured, a CRT may provide several significant tax advantages.
-
Immediate Charitable Income Tax Deduction
The grantor may receive an income tax deduction based upon the actuarial value of the charitable remainder interest passing to charity.
-
Capital Gains Tax Planning
One of the most attractive features of a CRT is that appreciated assets can generally be sold by the trust without the immediate recognition of capital gains tax by the trust itself.
This allows the entire sales proceeds to remain invested rather than having a significant portion lost to taxes immediately after the sale.
-
Estate Tax Reduction
Assets transferred to a CRT are generally removed from the grantor's taxable estate, which may reduce future federal estate taxes for individuals with taxable estates.
Advantages of a Charitable Remainder Trust
A properly structured CRT may:
-
convert appreciated assets into a lifetime income stream;
-
reduce or defer capital gains taxes on appreciated assets;
-
provide an immediate charitable income tax deduction;
-
remove appreciating assets from your taxable estate;
-
diversify concentrated investment holdings;
-
benefit one or more charitable organizations; and
-
create a lasting charitable legacy.
Potential Disadvantages
Like every advanced planning strategy, CRTs also have limitations.
-
Irrevocable
Once assets are transferred into a CRT, they generally cannot be returned to you.
-
Charitable Commitment
The remaining trust assets must ultimately pass to one or more qualified charitable organizations.
If your primary objective is preserving all of your wealth for your family, another planning strategy may be more appropriate.
-
Administrative Complexity
CRTs require ongoing administration, annual tax reporting, and careful compliance with federal tax rules.
Professional legal, tax, and financial advice is essential.
Is a Charitable Remainder Trust Right for You?
A Charitable Remainder Trust is not appropriate for every family.
However, it may be an excellent planning tool if you:
-
own highly appreciated assets;
-
wish to reduce capital gains taxes;
-
desire a reliable stream of retirement income;
-
have charitable objectives;
-
are concerned about federal estate taxes; or
-
wish to leave a lasting philanthropic legacy.
Like other advanced planning techniques—including Grantor Retained Annuity Trusts (GRATs), Family Limited Partnerships, and Buy-Sell Agreements—a Charitable Remainder Trust should be carefully integrated into your overall estate plan.
An experienced Florida estate planning attorney can help determine whether a CRT is appropriate for your financial objectives and long-term family goals.