Charitable Remainder Trusts (CRT)

Preface: “Whether you come from a council estate or country estate, your success will be determined by your own confidence and fortitude” – Michelle Obama.

Charitable Remainder Trusts (CRT)

A charitable remainder trust (CRT) can be a powerful tax and estate planning vehicle. The technique works like this—a donor places appreciated assets, such as stock with growth potential or undeveloped real estate into a CRT. The donor receives an income-tax deduction in the year of the gift based on the present value of the remainder interest, as computed under certain IRS-provided tables. The charitable gift also removes the gifted assets from the donor’s estate and, thus, from exposure to estate taxes. The CRT, without direction from the donor, then sells the assets, incurring no capital-gains taxes for the donor. The CRT invests the proceeds in a new diversified portfolio, typically made up of income-producing assets such as high-dividend stocks, bonds, and real estate. The donor, or other person(s) designated by the donor, receives the annual income from the investments for either a set period of time, such as term of years, or for the life of an individual or individuals.

 The payout to the donor may be a fixed dollar amount or a fixed percentage of the fair-market value of the assets, so long as the dollar amount or the percentage is at least five percent of the value. When the donor dies, the remainder goes to the qualified charity designated in the CRT.

 CRTs are divided into two main types. The first is a charitable remainder annuity trust (CRAT) and the second is a charitable remainder unitrust (CRUT). They can be set up during life (inter vivos) or at death (testamentary).


 A CRAT is an irrevocable trust that pays a non-charitable beneficiary an annuity interest with the remainder interest going to a charity. The Internal Revenue Code requires that the annuity payout percentage be at least five percent, but not more than 50 percent of the initial value of the trust assets (as finally determined for federal tax purposes). In addition, the value of the remainder interest must be equal to at least 10 percent of the net fair market value of the property transferred to the trust (on the date of contribution to the trust). The latter requirement effectively eliminates the use of CRTs by younger donors. That’s because the longer life expectancy of the donor or other income beneficiary reduces the amount of the remainder (charitable) interest. If a CRT fails this 10-percent test, the trust is either voided or it must make appropriate changes to meet the 10-percent requirement.

 In the case of a lifetime transfer, the donor receives both an income tax and a gift tax deduction for the present value of the charitable interest. In addition, the gift tax annual exclusion  may be used to reduce the value of the lead interest. The amount of the gift, income, or estate tax deduction (in the case of a testamentary CRAT) is the fair market value of the property transferred to the trust, minus the value of the annuity interest. If the annuity payments are received by someone other than the donor, gift or estate tax will be payable on the present value of the lead interest.

The term of a CRAT will either be (1) for some number of whole years (term certain), not to exceed 20 years, (2) the life of one or more persons (life), or (3) the shorter of term or life. When first establishing a CRAT, the present value of the remainder interest may be calculated using the Code Sec. 7520 rate for the month of the transfer date or the rate for either of the two preceding months. The Code Sec. 7520 rate is 120 percent of the federal mid-term rate rounded to the nearest 0.2 percent. It is published monthly by the IRS in a revenue ruling. Which of the three rates you select could make an important difference. Note that the higher the interest rate selected, the larger the income, gift, or estate tax charitable contribution deduction. And, in those cases in which the lead annuity interest is subject to gift tax, the higher the interest rate, the lower the amount of the taxable gift.


CRUTs are similar to CRATs in several ways, such as the fact that the payout rate in a CRUT must also be at least five percent, but not more than 50 percent of the net fair market value of its assets, valued annually and, with respect to each contribution of property to the trust, the value of the remainder interest must be at least 10 percent of the net fair market value of such property as of the date the property is transferred to the trust.

However, in a CRUT, the annual payments may instead be fixed at the lesser of a stated percentage or the amount of income the trust actually produces. Such trusts are sometimes referred to as income exception unitrusts or net income unitrusts (NICRUTs). When the income produced is less than the unitrust payment amount, a payment deficiency builds up. Then, if the trust later produces income in excess of the unitrust payment amount, the difference is distributed to the beneficiary until the deficiency buildup is gone.

CRATs vs. CRUTs—Advantages and Disadvantages

A CRAT is generally inferior to a CRUT if the trust assets are expected to appreciate rapidly. This is because in a CRAT, all of the trust return in excess of the payout rate accumulates and goes to the charity at the end of the trust term. However, in a CRUT, because the unitrust assets must be revalued each year, part of the growth in principal is paid to the holder of the unitrust interest in the form of higher annual payments. On the other hand, for this same reason, a CRUT may not be advantageous when asset values fall.

If the assets to be transferred to the charitable trust are difficult-to-value assets, such as closely held stock or real estate, a CRAT may be a better planning device than a CRUT. The fact that the assets in a CRUT must be re-valued each year adds expense and administrative inconvenience.

Another difference between CRATs and CRUTs is that it is possible to make additional contributions to a CRUT and receive a charitable deduction each year a gift is made. This could prove advantageous for investors with a large position in a stock that they wish to sell over a period of years. Alternatively, a CRAT cannot accept additional gifts.

For further information on how a charitable remainder trust may be a valuable tool to implement as part of your planning strategy, please contact our office for information on our alliance affiliates. 

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