You spend decades accumulating assets and growing your net worth. At this point, you may be asking yourself, “Now what?” You might be at a point where it’s highly unlikely you’ll outlive your wealth and feel ready to start making decisions about what will happen to your remaining financial assets when you’re gone.
Whether your top priority is building generational wealth, giving a boost to your favorite charities, or both, a charitable remainder trust (CRT) may be a worthwhile path. CRTs also come with tax benefits and can ensure a steady income stream for yourself and loved ones.Â
Let’s dive into how charitable remainder trusts work, the two primary types of CRT, the pros and cons of these trusts, and the tax implications for beneficiaries.Â
The information and analysis contained within this article appears for your consideration, but it does not constitute individualized financial advice. Always act at your own discretion.
How Do Charitable Remainder Trusts Work?
If you are the donor of a charitable remainder trust, you transfer cash, property, or other assets into an irrevocable trust—thus, you generally can’t take out any of the assets you put in.
A CRT provides income to one or more living noncharitable beneficiaries. You can name yourself as a beneficiary if you want. These payments last for a predetermined term of up to 20 years or the life of one or more noncharitable beneficiaries.Â
The remainder of the trust is given to one or more qualified U.S. charitable organizations—generally, they must be 501(c)(3) organizations—upon either the end of the predetermined term or the death of the last listed noncharitable income beneficiary. The amount you ultimately donate has to be a minimum of 10% of the initial net fair market value of everything placed in the trust.
Contributing to these trusts provides you with an immediate, though partial, tax deduction. A few things to note about the deduction:
- The deduction is based on the expected charitable remainder.
- The deduction is subject to AGI limits based on how the CRT is funded—60% for cash, 30% for long-term appreciated property.
- Starting in 2026, you can only claim charitable deductions on donations that exceed 0.5% of your annual AGI. (So, if your AGI is $100,000, you can only deduct amounts over $500.)
- Unused charitable deductions can carry forward for up to five consecutive years before expiring.
- The maximum tax benefit of your deduction is limited to 35% if you’re in the top 37% tax bracket.
There are two types of charitable remainder trusts, both of which can be made while the donor is still living or upon death: charitable remainder unitrusts (CRUTs) and charitable remainder annuity trusts (CRATs).
Charitable Remainder Unitrust (CRUT)
A charitable remainder unitrust (CRUT) …
- Pays a fixed percentage of the value of the trust every year to noncharitable beneficiaries.Â
- Must pay at least 5%, but no more than 50%, of the fair market value of the assets, valued annually.
- Does allow you to make additional contributions.Â
Because CRUT payouts are based on a percentage of the trust’s value, the amount of income provided can vary depending on investment performance.
Check out our primer on charitable remainder unitrusts (CRUTs) for an example of how they work and what the tax deduction might look like.
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Charitable Remainder Annuity Trust (CRAT)
A charitable remainder annuity trust (CRAT) …
- Pays a specific dollar amount every year to noncharitable beneficiaries.
- Must pay at least 5%, but no more than 50%, of the fair market value of the trust’s property when the trust is established.Â
- Does not allow for additional contributions.
Thus, unlike CRUTs, the amount of income paid out by a CRAT isn’t affected by the trust’s investment performance (because it’s a fixed dollar amount, not percentage) nor future contributions (because you can’t make them).
Check out our primer on charitable remainder annuity trusts (CRATs) for an example of how they work and what the tax deduction might look like.
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Advantages of Charitable Remainder Trusts
- Income stream that lasts years: Creating a charitable remainder trust can provide you or other beneficiaries with income for a set time period or even for life.
- Tax benefits: It can also be a tax-savvy move for donors, as you can defer capital gains on the sale of the assets transferred to the trust. Again: Contributions to these trusts are eligible for a partial charitable deduction, with certain AGI limits and other restrictions.
- Diversification: Let’s say Mark is an Apple (AAPL) employee who has acquired company stock over a couple decades at the firm, and that stock is now worth $20 million. Mark wants to diversify his portfolio so his wealth no longer lives or dies by Apple’s performance alone. If he simply sells the stock, he’ll take a significant tax hit, then he’ll reinvest the reduced assets that remain. But if Mark is charitably inclined, he can contribute the stock to a charitable remainder trust. Inside the trust, Mark can sell all $20 million of the stock without tax consequences, then reinvest that money into whatever assets he wants. Yes, he would pay taxes each year when he took distributions, but he wouldn’t be kneecapping the earnings potential of his assets with the upfront tax responsibility.
- Charitable vehicle: CRTs are an advantageous way to support charities you believe in.
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Disadvantages of Charitable Remainder Trusts
- UBTI: Charitable remainder trusts are not a good place to hold investments that will generate unrelated business taxable income (UBTI). Although CRTs aren’t subject to federal income tax, they are still subject to UBTI. The CRT must pay a 100% excise tax equal to the full amount of the UBTI.
- State taxes: Additionally, where you live can affect the attractiveness of a CRT. While the trusts themselves generally aren’t subject to federal income tax, some states do levy taxes on CRTs.
- Gift taxes: If you establish a lifetime CRT, and you name a noncharitable beneficiary other than you or your spouse, your contribution may be considered a gift for federal gift tax purposes.
- Effectively set in stone: As previously mentioned, these are irrevocable trusts. You generally can’t alter the terms of the trust later.
- Costly: CRTs not only can be costly to set up initially, but they’re also an ongoing obligation. While the fund may be able to pay legal fees, taxes, management, etc., this isn’t a set-it-and-forget-it vehicle.
- Complicated: CRT setup and management can be complex, so you should carefully discuss the option with a financial advisor before deciding whether this type of trust makes sense for you.Â
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Beneficiary Taxes for Charitable Remainder Trusts
The income that noncharitable beneficiaries receive from charitable remainder trusts is taxable and should be reported to the IRS. The payments are taxed as distributions of the trust’s income and gains, in this order:
- Ordinary income. Taxable at marginal tax rates, just as one’s salary is. In a situation where the trust has sufficient ordinary income to cover all payments, those payments are taxed as ordinary income. The payments must be reported as ordinary income as outlined in Schedule K-1.
- Capital gains. If the trust’s ordinary income runs out, then payments are taxed as capital gains, up to the amount of any capital gains from the current year plus undistributed capital gains from previous years.
- Other income. If ordinary income and capital gains both are fully distributed, payments are considered “other income,” up to the amount of the trust’s current year and accumulated other income (including tax-exempt income).
- Corpus. Once all current-year and accumulated income and gains are completely distributed, remaining payments are considered corpus or “principal” and not subject to tax.
It’s essential for beneficiaries to understand their tax obligations and be prepared to pay what they owe.
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