6 minute read
**Updated: February 2025.
What Is a Charitable Remainder Trust (CRT)?
A Charitable Remainder Trust (CRT) is a tax-exempt trust that allows you to convert appreciated assets into lifetime income while reducing capital gains taxes. This type of trust provides an immediate charitable remainder trust deduction, enables estate planning benefits, and supports your favorite charity or donor-advised fund.
Key Benefits of a CRT Trust:
✔ Avoid Capital Gains Taxes: Sell appreciated assets like real estate or stock without paying immediate capital gains taxes.
✔ Receive Lifetime Income: Choose a fixed amount (CRAT) or percentage (CRUT) of trust assets as an income stream.
✔ Immediate Charitable Deduction: Get an upfront tax deduction based on the present value of the remainder interest left to charity.
✔ Estate Tax Benefits: Reduce your taxable estate by transferring assets into a charitable remainder trust.
✔ Support a Charitable Cause: Leave at least 10% of the trust’s value to a 501(c)(3) nonprofit or donor-advised fund.
Now, let’s explore how a charitable remainder trust works and whether it’s the right financial tool for you.
How Does a Charitable Remainder Trust Work?
A charitable remainder trust (CRT) works by converting appreciated assets into a lifetime income stream while deferring capital gains taxes. Here’s a step-by-step breakdown of how a CRT trust functions:
Step 1: Transfer Assets into the CRT Trust
You transfer appreciated assets (such as stock, real estate, or cash) into a charitable remainder trust. This removes the assets from your taxable estate and provides an immediate charitable remainder trust deduction.
Step 2: The CRT Trust Sells the Assets
The CRT trustee sells the assets at market value. Since the CRT is tax-exempt, the sale incurs no immediate capital gains tax.
Step 3: Assets Are Reinvested & Managed
The CRT reinvests the proceeds into a diversified portfolio, managed by your financial advisor.
Step 4: Receive Annual Income Payments
The IRS requires the CRT to distribute at least 5% annually in one of two ways:
✔ Charitable Remainder Unitrust (CRUT): Payments are based on a fixed percentage of the trust’s fluctuating value.
✔ Charitable Remainder Annuity Trust (CRAT): Payments are a fixed dollar amount, regardless of trust value changes.
Step 5: Charitable Remainder Passes to a Nonprofit
When the trust term ends (or upon your passing), a minimum of 10% of the initial CRT trust value must be distributed to your chosen charity or donor-advised fund.
Example: If you fund a CRT with $1 million, at least $100,000 (10%) must go to charity when the trust terminates.
What Types of Assets can be Placed Within a Charitable Remainder Trust?
Charitable remainder trusts are typically funded with greatly appreciated assets like publicly traded securities and real estate and can also be funded with cash, C-Corp stock, and more. It is important to note that certain types of closely-held stock, such as S-Corp stock, do not qualify.
How do you Generate Income from a Charitable Remainder Trust?
Two primary trust options fall under the umbrella of CRTs. You can establish a Charitable Remainder Unitrust (CRUT) or a Charitable Remainder Annuity Trust (CRAT).
A CRUT allows you to receive a fixed percentage of the trust assets annually, while a CRAT distributes a fixed dollar amount annually. The income distributed to you will remain stable with a CRAT and fluctuate when using a CRUT because the value of the trust assets change. Therefore, no additional contributions are allowed in a CRAT, while additional contributions besides the initial investment can be added to the CRUT.
Since the CRAT distributes a fixed dollar amount of income each year, when establishing the CRAT you must ensure that you can meet the 5% minimum distribution rate annually while still leaving the 10% to charity. If the value of the assets cannot meet these standards with a fixed dollar amount, a CRUT may be a more appealing option than the CRAT.
Because the CRUT distributes a fixed percentage of the trust assets, the payout rate can be maximized to still provide the charity on an actuarial basis at least 10% of the initial value of the assets within the charitable remainder trust, and also provide you with the maximum amount of income. You can also decide to set the minimum rate of distributions for yourself in order to provide the maximum amount of income to the charity.
Charitable Remainder Trust Example: A Hypothetical Case Study
Let’s look at a real-world example of how a charitable remainder trust (CRT) works:
Case Study: Mary’s CRT Trust
🔹 Mary’s Assets: $3 million in appreciated stock (cost basis: $500,000).
🔹 Tax if Sold Normally:
✔ Capital Gains Tax (20%): $500,000
✔ Net Investment Income Tax (3.8%): $95,000
✔ California State Tax (13.3%): $332,500
✔ Total Tax Liability: $927,500 (37.1%)
If Mary Uses a CRT Trust Instead
🔹 Annual Payout Rate: 11.4372% (maximizing Mary’s lifetime income).
🔹 Average After-Tax Annual Payment: $154,820
🔹 Charitable Remainder Trust Deduction: $300,000
🔹 Total After-Tax Benefit to Mary: $3,518,497
🔹 Final Gift to Charity: $423,967
Key Takeaway: A CRT eliminates capital gains tax, provides lifetime income, and supports charitable giving.
Learn More about Charitable Remainder Trusts with Dunham Trust Company
The primary benefits of using a charitable remainder trust include potential lifetime income for you or your beneficiary, no capital gains tax when your asset is sold, a current income tax deduction, and a gift for a donor-advised fund or a charity you are passionate about.
To learn more about the potential benefits of using a charitable remainder trust, contact Dunham at (858) 964-0500, or complete our online contact form. You can also click the button below to receive a free PDF that outlines Frequently Asked Questions about using a Charitable Remainder Trust!
More InformationDisclosures – Charitable Remainder Trust
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Federal and state laws and regulations are complex and subject to change, which can materially impact your results. Charitable deductions at the federal level are available only if you itemize deductions. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy or completeness of the information provided. Dunham Associates & Investment Counsel, Inc. (“Dunham”) cannot guarantee that such information is accurate, complete or timely; and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.
The trust is subject to the published fee schedule at the time the trust is established.
Because the annuity payments from CRATS are fixed and must immediately begin after the creation of the trust, the underlying assets within the structure must be kept highly liquid.
Income tax consequences for the donor can be complex, depending on the individual situation. All or some of the income from the trust may be taxed at ordinary income rates, but part may be taxed at lower capital gains tax rates, or may even be tax-free, for some years.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA / SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc. Trust services offered through Dunham Trust Company, an affiliated Nevada Trust Company.