Takeaways:
- A charitable remainder trust (CRT) is an irrevocable trust that pays income to you or someone you choose for life or up to 20 years, then transfers whatever remains to a qualified charity, all under Internal Revenue Code § 664.
- CRTs come in two forms: a charitable remainder annuity trust (CRAT) pays a fixed dollar amount each year, while a charitable remainder unitrust (CRUT) pays a fixed percentage of the trust’s assets, revalued annually. Both must pay out at least 5 percent per year and leave at least 10 percent of the initial value for charity.
- The tax benefits stack in three ways: a partial income tax deduction when you fund the trust, capital gains deferral when the trustee sells appreciated assets inside the trust, and a reduction in the size of your taxable estate.
- A CRT works best when you hold a highly appreciated asset, want reliable income, and also want to support a charity. It is irrevocable, though, so the assets ultimately leave your family, which is why it belongs inside a broader estate plan, not on its own.
The short answer: A charitable remainder trust (CRT) is an irrevocable trust that pays you, or another person you choose, an income stream for life or for up to 20 years, then gives whatever remains to a charity you name. In return, you can claim a partial income tax deduction, defer capital gains on appreciated assets, and reduce the size of your taxable estate. For high-net-worth Californians in and around Los Angeles, a CRT can turn a highly appreciated asset into steady income while supporting a cause you care about.
Los Angeles residents who have built substantial wealth often hold assets that have grown far beyond their original cost. Selling could mean a large capital gains bill, and passing everything to heirs could expose your estate to significant taxes. A charitable remainder trust is one tool that can help you plan around both concerns. Our experienced Los Angeles estate planning lawyers explain how it works, in plain English.
This guide walks through the following:
– What a charitable remainder trust is
– How a charitable remainder trust works
– The tax benefits of a charitable remainder trust
– When a CRT makes sense in your estate plan
– Frequently asked questions
What Is A Charitable Remainder Trust?
A charitable remainder trust is an irrevocable trust that pays a stream of income to one or more individual beneficiaries for a set period, then transfers the remaining assets to a qualified charity. Following the termination of the set period, the remaining assets in the trust are transferred to, or for the use of, a qualified charitable organization.
Defined under federal law, these trusts come in two main forms: a charitable remainder annuity trust or a charitable remainder unitrust. A charitable remainder annuity trust distributes a fixed annuity amount each year, and additional contributions are not allowed. A charitable remainder unitrust distributes a fixed percentage based on the balance of the trust assets (reappraised annually), and additional contributions can be made.
How Does A Charitable Remainder Trust Work?
A CRT works by dividing your gift into two parts: an income interest for your chosen beneficiaries and a remainder interest for charity. You transfer assets into the trust, the trust pays an income stream for a set period, and when that period ends, the charity receives what remains.
There are two common structures:
– Charitable remainder annuity trust (CRAT): pays a fixed sum (or annuity), at least annually, to the income beneficiaries.
– Charitable remainder unitrust (CRUT): pays a fixed percentage of the net fair market value of the trust assets, determined annually, at least once a year.
Whichever option you choose, the trust distributes an amount equal to at least 5%, but no more than 50%, of the net fair market value of its assets each year, and the income may continue for the life or lives of the beneficiaries or for a term of years, not to exceed 20 years. To qualify, the value of the remainder interest passing to charity must be at least 10% of the initial net fair market value of the property placed in the trust.
What Are The Tax Benefits Of A Charitable Remainder Trust?
The benefits of a charitable remainder trust generally fall into three categories: an income tax deduction, capital gains tax deferral, and reduced estate tax exposure.
Income tax deduction
When you fund the trust, you may claim a partial charitable income tax deduction. The deduction is based on the value of the remainder interest, calculated on the assumption that at least 5% of the trust’s value is distributed each year. In plain terms, the larger the share projected to pass to charity, the larger your potential deduction.
Capital gains deferral
A properly structured CRT is generally exempt from income tax. A charitable remainder annuity trust and a charitable remainder unitrust are not subject to income tax for a taxable year unless the trust has unrelated business taxable income for that year. That means the trustee can sell appreciated assets, such as stock or real estate, without an immediate capital gains hit. The full value stays invested and working, and gains are spread out and taxed to you gradually as income is paid.
Reduced estate tax exposure
Because the charity’s remainder interest qualifies for a charitable deduction, assets you move into the trust are generally removed from your taxable estate. For families whose estates are large enough to be subject to federal estate tax, this can reduce exposure while directing wealth to a cause that matters to you.
If you’re weighing whether a CRT fits your goals, our attorneys at Weiner Law can walk you through the tradeoffs. Call 866-273-8652 to talk with our team.
When Does A Charitable Remainder Trust Make Sense In Your Estate Plan?
A CRT often makes sense when you hold a highly appreciated asset, want reliable income, and also want to support charity. If you own stock, a business interest, or real estate that’s grown substantially, selling outright could mean a heavy capital gains bill. A CRT lets you convert that asset into an income stream while benefiting a charity and capturing tax advantages.
A CRT isn’t right for everyone. It’s irrevocable; the assets ultimately leave your family, and the rules are detailed. That’s why it’s most useful as one piece of a broader estate plan, alongside your will, other trusts, and your overall goals for heirs. Our attorneys can help you weigh whether it fits your situation before you commit.
Frequently Asked Questions About Charitable Remainder Trusts
Can I be the income beneficiary of my own CRT?
Yes. Many individuals name themselves, their spouse, or both as income beneficiaries and receive payments for a term no longer than 20 years. You can also name other individuals. The charity you choose receives whatever remains at the end of the term.
Is a charitable remainder trust revocable?
No. A CRT is irrevocable, meaning you generally cannot undo it or reclaim the assets once it’s funded. In fact, a trust subject to a power to revoke does not meet the definition of a charitable remainder trust, so this permanence is part of what makes the tax treatment possible.
What kinds of assets can fund a CRT?
Individuals commonly fund CRTs with appreciated assets, such as publicly traded stock, real estate, or business interests. These assets often carry large built-in gains, which is exactly where a CRT’s tax advantages can be most valuable.
Do I need an attorney to set up a charitable remainder trust?
CRTs involve complex federal tax rules, precise drafting, and coordination amongst your financial, tax, and estate planners. Working with experienced attorneys helps ensure the trust is structured correctly and actually delivers the benefits you’re counting on.
Talk With Weiner Law About Tax-smart Estate Planning
A charitable remainder trust can be a powerful way to create a steady stream of income, support a charity, and reduce taxes, but it’s only worth doing when it fits your larger plan. Our attorneys at Weiner Law bring focused, prepared, and relentless advocacy to high-net-worth estate planning, guiding you through each decision with steady, knowledgeable counsel. From our Los Angeles office at 445 S Figueroa St, Suite 3100, we help clients throughout Southern California build plans aligned with their goals.
Whether you need to update your estate plan or explore tax-smart strategies, we’re ready to help. Call 866-273-8652 today.
