Why a CRT Matters
Picture a single asset that makes up most of your wealth: perhaps shares of a tech company you bought for pennies, a downtown rental building you have owned for decades, or a family farm that has dramatically increased in value.
If you sell, the capital gains tax could eat up 20% or more of the sale price.
If you keep it, all your eggs remain in one basket.
A Charitable Remainder Trust (CRT) can help solve both problems. You can sell the asset inside a tax-free trust, diversify the proceeds into a safer mix of investments, and still receive income for the rest of your life—or for up to 20 years.
How the Process Works
1. Transfer the Asset Into the CRT
Once the asset is transferred, the trust—not you—owns it.
2. The Trust Sells the Asset
Because the CRT is generally tax-exempt, the trust can sell the appreciated asset without immediately paying capital gains tax on the sale.
3. The Trust Reinvests the Proceeds
The trust can reinvest the full sale proceeds into a diversified portfolio, such as:
- Large-cap stocks
- Bond funds
- Real estate investment trusts (REITs)
- Other appropriate investments
4. The Trust Pays You an Income Stream
The CRT pays you income each year, either for life or for a set term you choose.
Two CRT Types
| Type | How Payments Work | Good Fit For |
|---|---|---|
| CRATCharitable Remainder Annuity Trust | Sends the same dollar amount each year, regardless of market performance. | People who prefer a fixed “paycheck” for predictable budgeting. |
| CRUTCharitable Remainder Unitrust | Pays a fixed percentage of the trust’s value, recalculated annually. Payments can rise when markets rise and fall when markets fall. | People comfortable with variable income who want the potential for continued growth. |
A CRUT must satisfy the IRS requirement that the charity’s projected remainder interest generally be at least 10% of the initial value. A CRAT must also satisfy applicable IRS requirements, and certain economic conditions can make qualification more difficult.
Tax Benefits You May Receive
Immediate Charitable Deduction
When you fund the CRT, you may receive an immediate charitable income-tax deduction based on the present value of the charitable remainder interest.
The deduction is not simply a fixed percentage of the asset’s value; it depends on factors such as the asset’s value, payout rate, your age, the trust term, and applicable IRS assumptions.
Four-Tier Taxation
Each CRT payment you receive is generally taxed in the following order:
- Ordinary income
- Capital gains
- Tax-free income
- Principal
This structure can spread the recognition of taxable income over many years rather than potentially realizing the entire gain in the year of sale.
Keeping Heirs Whole With Life Insurance
Some donors worry that charity will ultimately receive assets that their children could otherwise inherit.
A common strategy is to use part of the CRT income to purchase life insurance through an Irrevocable Life Insurance Trust (ILIT).
Because the ILIT, rather than you personally, owns the policy, the death benefit can potentially provide significant estate-planning benefits and replace some or all of the wealth ultimately passing to charity.
This strategy must be structured carefully to achieve the intended tax and estate-planning results.
A Few Safety Rules
UBTI Warning
If a CRT operates a business or owns certain debt-financed property, it can generate Unrelated Business Taxable Income (UBTI) and potentially create significant tax consequences for the trust.
Swap Power
Many CRTs can include provisions allowing the donor to exchange a trust asset for another asset of equal value. This can provide flexibility if an asset creates an undesirable tax issue or if the investment strategy needs to change.
Professional Oversight
CRT administration involves significant tax and reporting requirements. The trustee may need to:
- File IRS Form 5227
- Provide Schedule K-1 information to beneficiaries
- Handle applicable state charitable-trust filings
- Maintain detailed records of trust assets, distributions, and tax character
Using a qualified bank, trust company, CPA, attorney, or other experienced trustee can help keep the administration on track.
The Big Picture
A Charitable Remainder Trust can transform a single, highly appreciated asset into a diversified investment portfolio while providing:
- Potential capital-gains tax deferral
- An income stream for the donor
- A potential charitable income-tax deduction
- Diversification of concentrated wealth
- A future charitable gift
For donors holding a highly appreciated, low-basis asset and facing a potentially large tax bill, a CRT can be a powerful estate-planning and charitable-giving strategy.
The key is proper planning. CRTs involve complex tax, legal, investment, and administrative rules, so the strategy should be designed with qualified tax and legal professionals before transferring an asset. Contact The Stejkowski Law Firm today to learn more!