A charitable remainder trust (CRT) offers many potential financial and philanthropic benefits. However, weighing the pros and cons with an experienced estate planning attorney is important.

Some key advantages include an immediate income tax deduction, avoidance of capital gains taxes, and potential for growth in the underlying assets.

Tax-Free Income

For donors with highly appreciated assets (like stock or artwork), a charitable remainder trust can help maximize the value of their gift. Using a CRT, the donor can avoid capital gains tax that would be due if they sold their asset outright and, at the same time, receive an annual income stream for a defined period of years or until death.

Any remaining assets are given to charity at the end of the term or upon the donor’s death. A CRT can be structured to pay a fixed amount or a percentage of the underlying assets. The trust’s income will remain constant regardless of market fluctuations if a set rate is used. A CRUT (Charitable Remainder Unitrust) will be re-appraised each year to determine the current value of its underlying assets and, as such, may produce greater income over time, potentially keeping pace with inflation.

Before implementing one, understanding the details of a CRT and its impact on your financial situation is important. Working with a qualified advisor familiar with this strategy is recommended to ensure it makes sense for you and your family. If you decide to implement a CRT, consider your overall estate plan and the effect on your taxable income.

Tax-Free Investments

A CRT allows donors to donate illiquid assets like cash, securities, real estate, and private company stock into an irrevocable trust that pays the donor (or noncharitable beneficiary) a fixed or variable income for a specified period. At the end of the defined period, the remaining trust assets are donated to a charity of the donor’s choice, creating a lasting philanthropic legacy. Donors receive partial income tax deductions for their contributions to the trust.

The trustee of a CRT does not pay capital gains taxes when it sells the original assets, which allows it to invest the proceeds in a diversified portfolio. This investment diversification allows for more stable returns, preserving the value of the original asset while still generating an income stream for the income beneficiaries.

There are several CRT types, including a standard unitrust, net income unitrust, and flip unitrust. Choosing which kind of CRT to create depends on the donor’s goals. For example, some donors prefer a fixed income payment to avoid fluctuations in the trust’s investments, while others want to ensure their income grows over time.

While a CRT may only be suitable for some, it can offer a powerful solution for individuals who have appreciated assets that are not generating income. A CRT can help them avoid paying large capital gains taxes if they sell those assets while providing a steady income stream for themselves and their family.

Estate Planning

Many high-net-worth individuals (HNWIs) have highly appreciated assets like property or securities that have climbed in value but are reluctant to sell them due to capital gains tax. These assets can be transferred to a charitable trust, which will avoid tax liability and allow you to enjoy an income stream for life and give back to your community at the same time.

You’ll start by contributing the asset you wish to donate to a CRT, which will then reinvest that amount in income-producing investments. You can choose whether you want to receive a fixed income payment based on the initial value of the assets or a variable percentage that fluctuates based on the performance of the assets.

The remaining amount is distributed to one or more charities once the trust term has ended (which can be as long as 20 years). Depending on the type of CRT you choose, either a CRAT or a CRUT, the proceeds will be free from gift and estate taxes, reducing the overall inheritance your beneficiaries will receive.

Life Insurance

A CRT allows your clients to repurpose their illiquid assets into a regular stream of income that benefits them and one or more beneficiaries. This income can supplement retirement income, add to investment portfolios, or help pay for current expenses. A CRT can also provide an opportunity to pass appreciated assets to family members without incurring gift or estate taxes.

There are two CRT types – the charitable remainder annuity trust and the charitable lead trust. Both can be established while your client is alive (inter vivos) or as part of their estate plan upon death.

The charitable remainder annuity trust (CRAT) makes fixed payments to one or more income beneficiaries for life or a term of up to 20 years. At the end of the period or after the death of the income beneficiary(s), whatever remains in the trust is passed to one or more qualified charities.

A CRAT can also be set up as a variable income annuity trust (CRUT). In this case, the income distributions fluctuate based on the performance of the underlying assets in the faith. This type of trust can provide more flexibility, especially for those who want their investments to grow and keep pace with inflation or their financial needs.