Tax Deferral Vehicle: Charitable Remainder Trusts

Selling a highly appreciated asset can create a significant tax bill, especially when the asset has grown substantially over many years. A Charitable Remainder Trust (CRT) may offer a way to support a charitable cause while creating an income stream and potentially reducing the immediate tax impact of a sale. Because CRTs are complex and irrevocable, they should be evaluated with qualified tax, legal, and financial professionals.

What Is a Charitable Remainder Trust?

A Charitable Remainder Trust is an irrevocable trust that makes payments to one or more non-charitable beneficiaries for a specified period, usually the donor's lifetime or a term of up to 20 years. When that period ends, the remaining trust assets pass to a qualified charitable organization. The donor generally receives an income or remainder interest, while the charity receives the eventual remainder interest.

How a CRT Can Defer Tax on a Sale

A common strategy is to contribute appreciated property, such as closely held business interests, real estate, or securities, to the CRT before a sale. The trust may then sell the asset. Because the CRT is generally tax-exempt, it can often sell the contributed asset without paying tax at the trust level immediately. The proceeds remain invested inside the trust, and distributions to beneficiaries are taxed under ordering rules over time.

Income, Flexibility, and Charitable Giving

The trust can provide an income stream based on its governing structure. A Charitable Remainder Annuity Trust pays a fixed amount, while a Charitable Remainder Unitrust generally pays a percentage of the trust's annually determined value. This can create different levels of payment stability and growth potential. At the same time, the donor makes a meaningful charitable commitment and may qualify for a partial charitable income tax deduction, subject to applicable rules and limitations.

Important Considerations Before Choosing a CRT

A CRT cannot generally be revoked or amended simply because circumstances change. The charitable remainder interest must meet statutory requirements, and the trust must be administered carefully. Valuation, payout rates, investment management, beneficiary designations, unrelated business income, and the tax character of distributions all require attention. A CRT may also involve setup, legal, accounting, trustee, and investment expenses.

Is a Charitable Remainder Trust Right for You?

CRTs may suit individuals with highly appreciated assets, charitable goals, and a need for lifetime or term income. They aren't a universal solution; the best structure depends on the asset, the intended beneficiaries, the desired payout, and the donor's broader estate and tax plan. Before transferring property, consult an estate-planning attorney and tax professional who can model the strategy and explain its long-term effects. This blog is for general educational purposes only and is not tax, legal, or investment advice. Rules and results vary based on individual circumstances and may change over time. For more information, contact The Center for Financial, Legal, and Tax Planning, P.C. at 997-343