A charitable remainder trust (CRT) is an irrevocable trust typically funded with highly appreciated assets. The CRT is structured so that there is a current beneficiary—either the donor or a named individual—and a remainder beneficiary, which is an IRS-qualified 501(c)(3) charity, such as a private foundation.

The CRT makes annual distributions to the donor in either a fixed amount or as a percentage of the value of the trust. These are paid over a number of years that can either be for life or for a set period, not to exceed 20 years. The remaining value of the CRT is then distributed to the charity.

As the example below illustrates, the tax benefits of a CRT include a potential charitable deduction in the year of the transfer equal to the amount that will remain for charity, as estimated according to IRS prescribed calculations based on an assumed factor for the donor’s longevity.

In addition, a CRT is exempt from investment income tax. Thus, appreciated assets can be sold and the full proceeds reinvested, allowing diversification of a concentrated position in a tax-efficient manner. If the donor chooses to contribute to a CRT under a Will, an estate tax savings is produced, not subject to any percentage limitations, with the value of the remainder interest passing to the charity.

Finally, a CRT can be an effective strategy for planning retirement as the trustee can sell the appreciated assets, reinvest the proceeds, defer payment of tax and delay distribution to the donor until age 65 when the donor is, presumably, in a lower tax bracket.

For investors that do not mind delaying charitable gifting, desire an income stream, have cash, appreciated securities, or real estate to donate, and may want multiple income recipients, a CRT may be a good gifting option.

In summary, for investors willing to delay charitable gifting, desiring an income stream, and in possession of cash, appreciated securities, or real estate to donate, a charitable remainder trust offers many benefits in addition to assisting charity:

• The donor receives an income stream either for life or a prescribed period of time up to 20 years. This income stream can either be a fixed dollar amount from the trust each year or as a percentage of the current value of the trust. No matter how much the trust made or lost in any given year, the donor will receive either the fixed dollar amount or the same percentage share each year, depending on the option elected.
• The donor receives an income-tax deduction on the donation made to the charitable trust, spread out over five years.
• Property, such as appreciated securities, can sold in the trust to fund payments to the donor free from capital gains taxes.
• The property given to the trust for charity outright upon death is excluded from the donor’s estate for the purposes of determining estate taxes.