Charitable Remainder Trust (CRT)

Charitable Remainder Trust: Give to Charity, Reduce Your Taxes, and Create an Income Stream

A Charitable Remainder Trust allows you to convert a highly appreciated asset into a reliable income stream, eliminate or defer capital gains tax, receive an immediate income tax deduction, reduce your taxable estate, and make a meaningful gift to the charitable causes you care about most. For the right donor, a CRT accomplishes all of these goals simultaneously.

A Charitable Remainder Trust (CRT) is a tax-exempt irrevocable trust that pays income to the grantor or other designated beneficiaries for a specified period, with the remaining trust assets passing to one or more charitable organizations at the end of that period. The “remainder” is the charitable gift; everything else the income stream, the tax deductions, the capital gains savings is what the donor receives in return for making that ultimate gift.

The grantor transfers assets into the trust, receives an income stream for life or for a defined term of years, and takes an immediate income tax deduction for the present value of the charitable remainder interest at the time of contribution. When the trust terminates, either at the end of the defined term or at the death of the last income beneficiary, the remaining assets pass outright to the designated charitable beneficiaries.

A CRT is a tax-exempt entity. When the trust sells an appreciated asset that was contributed to it, no capital gains tax is owed at the time of sale. The full proceeds can be reinvested to generate income for the beneficiaries, producing a significantly larger income stream than a taxable sale of the same asset would have allowed.

The most powerful use of a Charitable Remainder Trust is contributing a highly appreciated, low-yield asset — real estate, closely held business stock, a concentrated stock position — that the donor would like to sell but cannot sell without triggering a large capital gains tax bill. The CRT sells it tax-free, reinvests the full proceeds, and turns a non-income-producing asset into a reliable income stream for the donor's lifetime.

A Charitable Remainder Trust can be structured as either a Charitable Remainder Annuity Trust (CRAT) or a Charitable Remainder Unitrust (CRUT). The choice between them determines how the income payments are calculated and how the trust responds to changes in asset value over time.

Charitable Remainder Annuity Trust (CRAT)

A CRAT pays a fixed dollar amount each year to the income beneficiaries, calculated as a percentage of the initial fair market value of the trust assets at the time the trust is funded. The payment amount never changes regardless of how the trust's investments perform. If the trust grows, the charitable remainder grows; the income payments do not. If the trust declines in value, the payments remain the same until the trust is depleted.

A CRAT provides certainty and predictability for the income beneficiary. It is best suited for donors who want a fixed, known income stream and are not concerned about inflation eroding the real value of that payment over time. No additional contributions can be made to a CRAT after it is initially funded.

Charitable Remainder Unitrust (CRUT)

A CRUT pays a fixed percentage of the trust's assets, revalued annually, to the income beneficiaries. Because the payment is tied to the trust's current value, it fluctuates with investment performance. If the trust grows, the payments increase. If it declines, the payments decrease. Over time, a CRUT provides a natural inflation hedge because growing asset values produce growing distributions.

A CRUT also allows additional contributions after the trust is initially funded, making it more flexible for donors who want to add assets to the trust over time. A CRUT is generally the more versatile structure and is the more commonly used form for most CRT planning.

Immediate Income Tax Deduction

When assets are transferred to a CRT, the grantor receives an immediate income tax deduction equal to the present value of the charitable remainder interest. This is calculated using IRS actuarial tables based on the trust's payout rate, the applicable federal interest rate (the Section 7520 rate), and the expected duration of the income interest. The deduction is taken in the year of the contribution and can be carried forward for up to five additional years if it exceeds the grantor's deduction limit in the contribution year.

Capital Gains Tax Savings

A CRT is a tax-exempt entity. When appreciated assets contributed to the trust are sold, no capital gains tax is owed at the time of sale. The full proceeds, including what would have been paid in capital gains tax on a direct sale, are available for reinvestment. This produces a larger income-generating portfolio and a larger income stream for the beneficiaries than a taxable sale of the same assets would have allowed. The capital gains are not permanently eliminated; they are incorporated into the income stream paid to beneficiaries and taxed as the payments are received, typically over many years rather than in a single year.

Estate Tax Reduction

Assets transferred to a CRT are removed from the grantor's taxable estate. Because they are no longer part of the estate at death, they are not subject to Vermont or federal estate tax. For Vermont families with estates above the $5,000,000 Vermont exemption threshold, this reduction in the taxable estate can produce meaningful estate tax savings. The larger the contribution to the CRT, the larger the reduction in the taxable estate.

Charitable Contribution Deduction at Distribution

When the CRT terminates and the remaining assets pass to the designated charitable organizations, that distribution also qualifies as a charitable contribution for estate tax purposes, further reducing the taxable estate. This deduction compounds the estate tax benefit of the original contribution.

•      Reliable income for life or a defined term: A CRT provides a structured, predictable income stream that the grantor or other designated beneficiaries receive for the duration of the trust. This income can serve as a meaningful source of retirement income or supplement other sources of support.

•      Diversification without immediate capital gains: A CRT allows a donor who holds a concentrated or illiquid appreciated position to diversify into a broadly invested portfolio without triggering capital gains tax on the sale. The trust's tax-exempt status makes this diversification economically far more efficient than a direct sale.

•      Philanthropic legacy and personal meaning: A CRT allows you to make a significant, lasting gift to the organizations and causes that matter most to you, backed by the full value of the trust's assets at termination rather than whatever might remain after taxes and other transfers. Many donors find that the CRT's charitable purpose gives the entire planning structure a personal significance that a purely financial strategy does not.

•      Financial security alongside charitable giving: A CRT does not require you to choose between supporting charity and providing for yourself or your family. The income stream serves the donor's financial needs during the trust's term; the remainder serves the donor's charitable goals at the trust's end. Both purposes are served by the same structure.

Consider a Vermont property owner who purchased real estate decades ago for $200,000. The property is now worth $1,500,000, producing little rental income relative to its value. A direct sale would trigger approximately $260,000 in federal capital gains tax at the 20% rate, leaving $1,240,000 available for reinvestment. At a 5% investment return, the net portfolio generates $62,000 per year in income.

By contributing the property to a CRUT structured at a 5% payout rate instead, the trust sells the property tax-free, reinvests the full $1,500,000, and generates a first-year distribution of $75,000. The donor also receives an income tax deduction for the present value of the charitable remainder interest, further reducing income taxes in the year of the contribution. The full $1,500,000 is also removed from the donor's taxable estate, producing Vermont and federal estate tax savings at death.

This illustration is for conceptual purposes only. The actual tax benefits of a CRT depend on the specific assets contributed, the trust's payout rate, the Section 7520 rate at the time of funding, the donor's individual tax circumstances, and the applicable Vermont and federal tax laws. We will model the specific numbers for your situation as part of the planning process.

A CRT is most valuable in the following circumstances.

•      You hold a highly appreciated asset, such as real estate, closely held business stock, or a concentrated stock position, that you want to sell or diversify but cannot do so without triggering a significant capital gains tax liability.

•      You want a reliable income stream from that asset for your lifetime or for a defined term of years.

•      You have meaningful charitable intent and want to make a significant gift to one or more qualifying organizations at the end of the trust's term.

•      You have a taxable estate and want to reduce its size while also generating income during your lifetime.

•      You want to diversify a concentrated portfolio without the immediate capital gains tax cost of a direct sale.

•      You want an immediate income tax deduction to offset income in the year of the contribution or in subsequent years.

What is the difference between a CRAT and a CRUT?

A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount each year, calculated as a percentage of the initial trust value at funding. The payment never changes regardless of investment performance, and no additional contributions can be made after initial funding. A Charitable Remainder Unitrust (CRUT) pays a fixed percentage of the trust's assets revalued annually. Payments fluctuate with investment performance, providing an inflation hedge over time. Additional contributions to a CRUT are permitted. For most donors, a CRUT provides greater flexibility and is the more commonly used structure.

How large does the charitable gift need to be?

IRS rules require that the present value of the charitable remainder interest be at least 10% of the initial net fair market value of the assets contributed to the trust. This minimum is calculated at the time of funding using the applicable Section 7520 rate. A payout rate that is too high relative to the beneficiary's age and the trust term may fail this test. We structure every CRT to ensure it meets this requirement while maximizing the benefits to the donor.

Can I name my family as income beneficiaries?

Yes. You can designate yourself, your spouse, your children, or any other individuals as income beneficiaries of a CRT. The income interest can be structured for the lifetime of one or more individuals or for a fixed term of years up to twenty. Naming additional beneficiaries extends the income period, which reduces the present value of the charitable remainder and therefore the income tax deduction.

Can I change the charitable beneficiary after the trust is funded?

It depends on how the trust is drafted. Some CRTs allow the grantor to change the designated charitable beneficiaries during their lifetime, provided the replacement beneficiary is a qualifying organization. Others designate specific charitable beneficiaries irrevocably at funding. We will discuss your preferences and draft the trust accordingly. If you want flexibility in directing the charitable gift, a donor-advised fund named as the CRT's charitable beneficiary can provide that flexibility while still qualifying the trust.

Are CRT distributions taxable to the income beneficiaries?

Yes. CRT distributions are taxable to the income beneficiaries under a four-tier income characterization system: ordinary income first, then capital gains, then tax-exempt income, then return of principal. The capital gains that would have been owed on the contributed asset are not permanently eliminated; they are distributed to the income beneficiary over time and taxed as they are received. The benefit is that capital gains tax is spread over many years rather than owed in a single year.

What happens if the CRT runs out of assets before the trust term ends?

If a CRAT's assets are depleted before the trust term ends, the income payments stop. For this reason, CRAT payout rates must be carefully set to ensure the trust is sustainable for the expected term. A CRUT naturally adjusts to a declining asset base because payments are always a percentage of current assets; if the assets decline, the payments decline proportionally. We model the sustainability of any CRT structure we recommend before it is funded.

Does a Charitable Remainder Trust reduce Vermont estate taxes?

Yes. Assets transferred to a CRT are removed from the grantor's taxable estate for both Vermont and federal estate tax purposes. For Vermont families with estates above the $5,000,000 Vermont exemption threshold, contributing appreciated assets to a CRT can meaningfully reduce Vermont estate tax exposure while also generating income during the grantor's lifetime. The income tax deduction, the capital gains savings, and the estate tax reduction together make the CRT one of the most tax-efficient charitable planning strategies available.

Establishing a CRT requires careful drafting to ensure that the trust meets IRS requirements, is structured to achieve the donor's specific tax and income goals, and designates appropriate charitable beneficiaries. At Will and Trust Planning, we begin every CRT engagement with a thorough analysis of the assets involved, the donor's income needs, the applicable tax rates, and the desired charitable impact.

We model the specific numbers for your situation before the trust is funded, showing you exactly what income stream the trust will generate, what income tax deduction you will receive, what capital gains tax will be saved, and what charitable gift will ultimately be made. We then draft the trust document, coordinate with your financial advisors on trustee selection and investment strategy, and ensure that the trust is properly funded and administered in compliance with Vermont and federal law.

Contact Will and Trust Planning Today

For personalized advice on estate planning, including strategies to minimize or avoid probate, contact Will and Trust Planning today. Our experienced estate planning attorneys can help you understand your options, draft essential documents, and create a plan that protects your assets and achieves your goals.