Charitable Remainder Trust – What It Is and How It Works

Ever wonder how you can support a cause you love while still keeping an income for yourself? A charitable remainder trust (CRT) lets you do just that. You transfer assets—like cash, stocks, or property—into a trust, keep a steady payment for a set period or for life, and then the remaining assets go to the charity you pick. It’s a win‑win: you get tax breaks and income, the charity gets a future gift.

The idea sounds legal‑ese, but the mechanics are pretty straightforward. First, you set up the trust with a trustee—often a bank or a lawyer—who manages the assets. The trust then sells any highly appreciated assets, which avoids the capital gains tax you’d normally pay. The trustee invests the proceeds, and you receive a regular, taxable distribution. When the trust term ends, whatever is left slides over to your chosen nonprofit.

How a CRT Benefits You

Tax savings are the headline benefit. Because the assets move out of your name, you can claim an immediate charitable deduction based on the present value of the future gift. That deduction can lower your income tax bill for the year you create the trust.

Besides the tax perk, you get an income stream that can be tailored to your needs. Some CRTs pay a fixed percentage of the trust's value each year; others pay a fixed amount. This flexibility lets you plan for retirement, cover living expenses, or simply enjoy extra cash for hobbies.

Another plus is that you avoid capital gains tax when you contribute highly appreciated assets. If you own stock that has doubled in value, moving it into a CRT lets the trust sell it without that heavy tax hit. The trust then reinvests the full amount, potentially growing the payout you receive.

Setting Up a CRT: Practical Steps

1. Pick the right type. There are two main CRTs: a charitable remainder annuity trust (CRAT) that pays a fixed dollar amount, and a charitable remainder unitrust (CRUT) that pays a percentage of the trust’s assets. Choose the one that matches your cash‑flow goals.

2. Choose a trustee. You’ll need a reliable trustee to handle paperwork, investments, and distributions. Banks, trust companies, or experienced attorneys make good choices.

3. Select the charity. Any qualified 501(c)(3) organization works—schools, hospitals, arts groups, or local community charities. Make sure the charity is still alive when the trust ends.

4. Value the assets. A professional appraisal determines the fair market value of what you’re putting in. This step is crucial for calculating your tax deduction.

5. Draft the trust document. Your attorney will write the legal language, specifying payout rates, term length, and the remainder beneficiary.

6. Transfer the assets. Once the trust is funded, the trustee takes over. If you contributed real estate, the trustee may need to handle title changes and insurance.

7. File the paperwork. The trust must file Form 5227 with the IRS each year, and you’ll report your distribution on your personal tax return.

While a CRT sounds like a smart financial move, it isn’t right for everyone. You need enough assets to make the trust worthwhile, and the payout must meet IRS minimums. If the trust’s income is too low, the charity might end up with a small remainder.

Comparing a CRT to a Charitable Incorporated Organisation (CIO) can help you decide which structure fits your goals. A CIO is a legal form for the charity itself, offering limited liability and easier governance. A CRT, on the other hand, is a tool for donors to give while retaining income. Some people set up both: a CRT to fund a CIO’s projects, creating a steady flow of support.

Bottom line: a charitable remainder trust lets you turn appreciated assets into a tax‑benefit, an income stream, and a lasting gift. If you’re thinking about retirement planning, philanthropy, or both, talk to a financial advisor or attorney who knows CRTs. They can run the numbers, explain the paperwork, and see if this strategy aligns with your financial picture.