Charitable Remainder Trust

A Charitable Remainder Trust (CRT) is a specialized, irrevocable tax-exempt trust designed to reduce your taxable income by first dispersing income to you (or other beneficiaries) for a set period and then donating the remaining assets to a specific charity.

It is often described as a “split-interest” vehicle because it serves two functions: providing a potential income stream for the donor and a future gift for a charity.

How It Works

  1. Transfer Assets: You move appreciated assets (like stock, real estate, or cash) into the irrevocable trust.
  2. Generate Income: The trust pays you (or a named beneficiary) an annual income for life or a fixed term (up to 20 years).
  3. Charitable Remainder: When the trust term ends or the beneficiary passes away, the remaining assets go to one or more qualified charitable organizations.

The Two Main Types

There are two primary structures for these trusts, distinguished by how they pay out income:

  • Charitable Remainder Annuity Trust (CRAT): Pays a fixed dollar amount annually. It is valued once at the start, and you cannot add more assets to it later.
  • Charitable Remainder Unitrust (CRUT): Pays a fixed percentage of the trust’s value, which is revalued every year. This means your income can grow if the investments do, and you can add more assets over time.

Key Benefits

  • Tax Deduction: You may receive an immediate partial income tax deduction based on the estimated value of the eventual gift to the charity.
  • Capital Gains Savings: If you fund the trust with highly appreciated assets, the trust can sell them without paying capital gains tax, allowing the full value to be reinvested to generate more income for you.
  • Estate Tax Reduction: Because the assets are in an irrevocable trust, they are generally removed from your taxable estate.

Important Considerations

  • Irrevocable: Once you set up a CRT and fund it, you cannot take the assets back or cancel the trust.
  • Complexity: These require professional legal and tax advice to set up and manage. Most experts suggest they only make financial sense for funding amounts of $250,000 or more due to administrative costs.
  • 10% Rule: By law, the value of the “remainder” that eventually goes to the charity must be at least 10% of the initial value of the assets placed in the trust.

Who can be beneficiary?

Under IRS rules and general trust law, the beneficiaries of a Charitable Remainder Trust (CRT) do not necessarily have to be a single person, but they must be “ascertainable” at the time the trust is created.

The “Ascertainable” Rule

You can name a “class” of people (like “my children”), but there are strict conditions depending on how long the trust is set to last:

  • If the trust is for a Fixed Term (e.g., 20 years): The class can be open. You can name “my grandchildren” as beneficiaries, and if more are born after the trust is funded, they can be added to the distribution list.
  • If the trust is for Life: The beneficiaries must be living and identifiable at the time the trust is created. In this specific case, the class cannot “grow” because the life expectancy used to calculate the charitable deduction must be based on specific, living individuals.

Key Requirements for Beneficiaries

According to IRS guidelines, a CRT must meet these criteria regarding its human beneficiaries:

  • At least one: There must be at least one non-charitable beneficiary.
  • The 20-Year Limit: If the trust isn’t based on a person’s lifetime, it cannot exceed a term of 20 years.
  • Taxation: Income paid to these beneficiaries is taxable and reported via a Schedule K-1.