How does a Charitable Remainder Trust (CRT) work and when is it appropriate?

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AcadiFi · Accepted Answer

A Charitable Remainder Trust (CRT) is a split-interest irrevocable trust where the grantor (or other named beneficiary) receives an income stream for life or a term of years, after which the remainder passes to one or more qualified charities. The CRT provides immediate partial tax benefits while deferring or spreading capital gains and generating retirement-like income. Common scenario: Genevieve Holbrook, age 65, owns $3M of Vega Industries stock with a $500,000 cost basis. She wants income, wants to reduce concentrated exposure, but selling would trigger $595,000 in capital gains tax (20% LTCG + 3.8% NIIT on $2.5M gain). She establishes a Charitable Remainder Unitrust (CRUT) and contributes the $3M of Vega stock: ```mermaid flowchart LR A[Grantor
Genevieve] --> B[CRUT
$3M stock] B -->|Sells tax-free| C[Diversified
Portfolio] C -->|5% annual
for life| A C -->|At death| D[Named
Charity] ``` Benefits: (1) The CRT sells the stock tax-free (CRTs are exempt entities), reinvesting full $3M in a diversified portfolio. (2) Genevieve receives an immediate charitable deduction equal to the present value of the remainder interest — calculated using the IRS §7520 rate and actuarial tables, typically 30-40% of contribution ($900K-$1.2M deduction). (3) Annual payments: a 5% CRUT pays 5% of trust value each year (e.g., $150,000 in year 1). Income is taxed per the 'four-tier' rules — ordinary, capital gain, tax-exempt, return of principal — in that order. (4) Charitable remainder goes to her chosen charity. CRT variations: CRUT (percentage of annual value, growing with portfolio), CRAT (fixed annuity). IRS requires the remainder interest to be ≥10% of contribution — limits payout rates at older ages. Appropriate for concentrated appreciated assets, charitable intent, and income need.

How does a Charitable Remainder Trust (CRT) work and when is it appropriate?

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