What is a charitable remainder trust and how does it work?

A charitable remainder trust, or CRT, is an irrevocable trust that pays income to one or more noncharitable beneficiaries for life or for a term of up to 20 years. After that period, the remaining trust assets pass to one or more qualified charitable beneficiaries. A CRT can hold appreciated assets and may allow the trust to sell them without immediate capital-gains tax at the trust level, subject to the trust meeting federal requirements.

Does a charitable remainder trust eliminate capital gains tax?

A CRT generally defers capital-gains recognition rather than eliminating the tax permanently. A qualifying CRT is generally tax-exempt, so a sale of appreciated property by the trust does not usually create an immediate capital-gains tax bill for the trust. However, distributions to beneficiaries are taxed under the CRT’s four-tier system: ordinary income, capital gains, tax-exempt income, and then principal.

What is the difference between a CRAT and a CRUT?

A charitable remainder annuity trust, or CRAT, pays a fixed dollar amount based on the trust’s initial value. A charitable remainder unitrust, or CRUT, pays a fixed percentage of the trust’s value, recalculated each year, so payments can rise or fall with the portfolio. Both structures generally require an annual payout of at least 5% and no more than 50%. A CRAT generally cannot accept additional contributions after it is established, while a CRUT may accept them.

What are the main risks and limitations of a charitable remainder trust?

A CRT is irrevocable, so the donor generally cannot reclaim contributed assets or freely change the arrangement after it is established. The trust can involve legal, administrative, investment, valuation, and tax-preparation costs. CRUT payments can fluctuate with trust asset values, while CRAT payments remain fixed and may lose purchasing power over time. The payout and charitable remainder interest must also meet federal requirements, including an actuarial test that generally requires at least 10% of the initial value to be expected to pass to charity.

Charitable Remainder Trusts: Tax & Estate Planning Guide for Financial Advisors

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Charitable Remainder Trusts: Tax & Estate Planning Guide for Financial Advisors | Dunham