When it comes to advanced charitable giving and estate tax planning, few tools provide more flexibility and tax efficiency than a Charitable Remainder Trust (CRT). Whether structured as a Charitable Remainder Annuity Trust (CRAT) or a Charitable Remainder Unitrust (CRUT), these trusts allow individuals to convert highly appreciated assets into income for life, reduce taxes, and still leave a lasting charitable legacy.
What Is a Charitable Remainder Trust?
A Charitable Remainder Trust is an irrevocable split-interest trust recognized under the Internal Revenue Code, which pays income to one or more non-charitable beneficiaries for life or for a fixed term (not exceeding 20 years), with the remainder passing to one or more qualified charitable organizations. See I.R.C. § 664; Treas. Reg. § 1.664-1(a)(1)(i).
The basic steps of a CRT are:
- Contribution: You transfer appreciated assets—such as stock, real estate, or closely held business interests—into the trust.
- Immediate Tax Deduction: You receive a charitable income tax deduction for the present value of the remainder interest that will ultimately go to charity.
- Tax-Exempt Sale: The trust, being a charitable entity, can sell appreciated assets without triggering immediate capital gains tax.
- Income Stream: You (and possibly your spouse or another beneficiary) receive annual income from the trust.
- Charitable Remainder: When the trust term ends, the remainder passes to your chosen charity.
The Taxable Benefits of a CRAT or CRUT
CRTs offer a unique combination of income, estate, and capital gains tax advantages.
1. Avoiding Immediate Capital Gains Tax
When a CRT sells appreciated assets, no capital gains tax is due at the time of sale, because the trust qualifies as a tax-exempt entity under I.R.C. § 664(c). This allows the trust to reinvest the full proceeds—rather than a reduced after-tax amount—compounding returns for future income payments.
2. Charitable Income Tax Deduction
You receive an income tax deduction in the year you fund the trust, based on the actuarial value of the remainder that will pass to charity, determined under I.R.C. § 170(f)(2) and Treas. Reg. § 1.664-4. This deduction can be carried forward for up to five years if it exceeds your adjusted gross income limits.
3. Estate Tax Reduction
Because a CRT is irrevocable and the remainder interest passes to charity, that portion of the trust is excluded from your taxable estate, potentially reducing estate tax liability under I.R.C. § 2055(e)(2).
4. Deferred and Tiered Income Taxation
Income distributions to you are taxed under the IRS’s four-tier system:
- Ordinary income
- Capital gains
- Tax-exempt income
- Return of principal
This allows strategic management of taxable income year-to-year, especially for retirees or high-net-worth individuals balancing multiple income sources.
CRAT vs. CRUT: Key Differences
While both CRATs and CRUTs fall under the umbrella of charitable remainder trusts, they differ primarily in how payouts are calculated and how flexible contributions can be.
| Feature | CRAT (Charitable Remainder Annuity Trust) | CRUT (Charitable Remainder Unitrust) |
|---|---|---|
| Payout Structure | Fixed annual payment based on the initial trust value | Variable annual payment based on a fixed percentage (at least 5%) of the trust’s current annual value |
| Additional Contributions | Not permitted once funded | Permitted throughout the life of the trust |
| Flexibility | Provides stable, predictable income | Adjusts with investment performance and inflation |
| Remainder Requirement | At least 10% of initial value must pass to charity | At least 10% of projected remainder must pass to charity |
| Statutory Authority | I.R.C. § 664(d)(1) | I.R.C. § 664(d)(2) |
A CRAT suits those who want certainty—a guaranteed payment unaffected by market conditions. A CRUT, by contrast, offers growth potential, since payouts increase if the trust’s value rises.
Example: How a CRUT Can Defer Taxes and Increase Income
Assume you own $1 million of highly appreciated stock with a $100,000 cost basis. If sold outright, the capital gain would trigger roughly $180,000 in federal and state taxes (depending on your bracket).
By transferring the stock into a CRUT, the trust can sell it tax-free, reinvest the full $1 million, and pay you 5% of the trust’s value annually. You receive:
- A charitable deduction in the year of transfer,
- Annual income for life based on the trust’s annual value, and
- A charitable remainder gift when you pass away.
When to Consider a CRAT or CRUT
You might consider establishing a Charitable Remainder Trust if you:
- Own highly appreciated assets you wish to sell without immediate capital gains tax;
- Want to generate lifetime income from those assets;
- Desire to reduce your taxable estate; and
- Intend to leave a legacy gift to charity.
For business owners, real estate investors, and retirees with low-yield but highly appreciated portfolios, CRTs can convert stagnant assets into lifetime income while advancing philanthropic goals.
Final Thoughts
Whether you choose a CRAT for stable income or a CRUT for growth potential, both provide a powerful blend of charitable giving and tax strategy.
At Crowder & Scoggins, our estate planning attorneys can help you:
- Model the tax deduction and income projections under each option,
- Ensure the trust complies with IRS and Treasury regulations, and
- Coordinate with your financial advisors to integrate the CRT into your overall estate and retirement plan.
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