What Is a Charitable Remainder Trust?

    A Charitable Remainder Trust (CRT) is an irrevocable trust that provides an income stream for a donor or designated beneficiaries for a specified period, with the remainder of the trust's assets going to select charities after the trust term ends. 

    This arrangement offers significant tax advantages and the opportunity to make a meaningful impact through charitable giving.

    CRTs are especially appealing to individuals with $500,000 or more in liquid savings who want to balance their financial goals with philanthropic efforts. With a CRT, it may be possible to achieve a steady income stream, reduce tax liabilities, and contribute to the causes you care about.

    Types of Charitable Remainder Trusts

    There are two primary types of Charitable Remainder Trusts, each with its unique features:

    Charitable Remainder Annuity Trust (CRAT)

    A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount to the beneficiaries annually. This predictable income stream makes CRATs ideal for individuals who prefer financial certainty. The payout amount is established at the time of the trust's creation and does not change, regardless of the trust's investment performance.  No further contributions are allowed to this type of trust following the initial creation and funding of the vehicle.

    Charitable Remainder Unitrust (CRUT)

    A Charitable Remainder Unitrust (CRUT) pays a fixed percentage of the trust's value annually, recalculated each year based on the trust's current value. This approach allows for potential growth of income if the trust's investments perform well, but it also means that the income can vary from year to year. 

    CRUTs offer greater flexibility in asset management and the potential for higher payouts over time.

    Establishing a Charitable Remainder Trust

    Setting up a CRT involves several key steps and considerations:

    Funding and Payouts

    CRTs can be funded with cash, securities, real estate, or other appreciated assets. Minimum funding amounts may apply, and the trust must meet specific payout requirements, with annual distributions of at least 5% but no more than 50% of the trust's initial fair market value.  The larger the distribution percentage that is selected, the smaller the first year charitable deduction, and ultimately less that will be left to charity following the lifetime of the trust.

    Tax Considerations

    CRTs offer immediate partial income tax deductions, deferred capital gains tax on appreciated assets, and potential estate tax benefits.  In addition, sales of assets within a charitable trust will not trigger immediate income tax implications for an individual so it can be an excellent vehicle for diversifying an investment such as a concentrated and appreciated stock position which otherwise could not be sold as an individual without paying a large amount of tax up front. 

    These tax advantages make CRTs an attractive option for individuals seeking to potentially minimize tax liabilities while maximizing charitable donations.

    Term and Flexibility

    A CRT can last for the lifetime of the donor(s) or for a specified term of up to 20 years. Additionally, CRTs can accommodate multiple income beneficiaries and benefit multiple charities, providing flexibility in meeting your financial and philanthropic goals.  It is even possible to name a Donor Advised Fund as the beneficiary of your CRT if you have not yet selected an organization you would like to benefit from the remainder of the trust and would like to do so at a later date.

    Potential Drawbacks

    While CRTs offer numerous benefits, there are potential drawbacks to consider: 

    • Rigid Structure: The irrevocable nature of CRTs limits flexibility, as changes generally cannot be made once the trust is established. 
    • Complexity: Setting up and administering a CRT requires professional assistance to comply with legal and tax regulations.
    • Cost: CRTs may not be suitable for smaller estates, as the costs of setting up and maintaining this type of trust may outweigh the benefits.
    • Tax Planning: Since this vehicle can create a large deduction, it is essential to ensure that you will be able to utilize the full amount of the deduction within 5 years following the year you gift to the trust.  Gifts of appreciated assets may be limited to 30% of your Adjusted Gross Income.  In addition, it is important to note that income from this type of trust is not tax free.
    • Deferral: Since your assets may not reach an end charity for a number of years, if you would prefer to see your assets at work for a worthy cause in the near term there may be other more suitable charitable vehicles to pursue.

    Estate Planning With EP Wealth

    To learn more about how CRTs can fit into your estate planning strategy, contact an EP Wealth advisor today.

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