A charitable remainder trust, often abbreviated CRT, is a split interest trust that provides income to one or more noncharitable beneficiaries for a period of time, after which the remaining trust property passes to a qualified charity. These trusts are popular tools in estate and tax planning because they combine philanthropic goals with income and tax advantages. Paralegals in estate planning practices should understand how they work, and exam questions often test the basic vocabulary.

The Basic Structure

A charitable remainder trust involves several parties.

The grantor (settlor or donor): the person who creates and funds the trust.
The trustee: the individual or institution that manages the assets, invests them, and makes payments.
The income beneficiary: the person who receives payments during the trust term, often the grantor, a spouse, or another family member.
The remainder beneficiary: the qualified charity that receives what is left at the end of the term.

The trust is irrevocable. Once the grantor transfers assets to the trust, the grantor cannot take them back, although the grantor may retain the power to change the charitable beneficiary in many cases. The trust term may be for the life or lives of the income beneficiaries or for a fixed term of up to twenty years.

Two Main Types

Charitable Remainder Annuity Trust (CRAT)

A CRAT pays a fixed dollar amount each year, set at the outset as a percentage of the initial fair market value of the trust assets. The payout must be at least five percent and no more than fifty percent of the initial value. The payment never changes, regardless of how the trust investments perform. A CRAT does not permit additional contributions after the initial funding. Because the payment is fixed, a CRAT can appeal to beneficiaries who want predictable income, but it provides no inflation protection.

Charitable Remainder Unitrust (CRUT)

A CRUT pays a fixed percentage of the value of trust assets, revalued annually. The percentage must again be between five and fifty percent. Because the trust is revalued each year, the payments rise when the investments grow and fall when they decline. Additional contributions are generally allowed. Variants include the net income unitrust, which pays the lesser of the fixed percentage or actual trust income, and the net income with makeup unitrust, which allows catch up payments later.

Requirements to Qualify

To be treated as a charitable remainder trust under the Internal Revenue Code, the trust must meet a number of requirements.

The payout rate must be between five and fifty percent.
The present value of the charity's remainder interest must be at least ten percent of the initial value of the contributed assets.
There must be a probability of exhaustion test for CRATs, so that the chance of the trust running out of assets before the charity receives anything is very low.
The remainder beneficiary must be a qualified charitable organization.
The trust document must follow the required form and prohibit other noncharitable distributions.

The Internal Revenue Service has published sample forms for these trusts, and many practices begin drafting from these models.

Tax Benefits

Income Tax Deduction

When the grantor funds the trust, the grantor may be entitled to an income tax charitable deduction equal to the present value of the remainder interest that will go to charity. The deduction is subject to percentage limits based on adjusted gross income, and unused amounts may be carried forward.

Capital Gains Deferral

One of the most attractive features is the treatment of appreciated assets. A donor who contributes highly appreciated stock or real estate to a charitable remainder trust avoids immediate capital gains tax, because the trust is tax exempt and can sell the asset without paying tax at the trust level. The trust then reinvests the full proceeds, producing greater income for the beneficiary. The beneficiary is taxed as payments are received, under a four tier system that characterizes distributions as ordinary income, capital gain, other income, or return of principal in a specified order.

Estate Tax Reduction

Assets in the trust are generally removed from the grantor's taxable estate, and the charitable remainder may produce an estate tax charitable deduction if the interest is created at death or the grantor retains no included interest. If the grantor is the only income beneficiary, the trust assets may still be included in the estate with an offsetting charitable deduction.

Common Funding Assets

Publicly traded securities with significant appreciation.
Closely held business interests, subject to special rules.
Real estate that the owner wants to sell without immediate capital gains tax.
Cash, though this offers fewer tax advantages than appreciated assets.

Assets subject to debt, or assets that produce unrelated business taxable income, can create problems and should be reviewed carefully by the attorney.

How Paralegals Assist

A paralegal helping with a charitable remainder trust may gather asset valuations and basis information, confirm the tax exempt status of the proposed charity, prepare the trust draft and funding documents, retitle assets into the trust name, obtain a taxpayer identification number, and calendar annual filing deadlines. The trustee must file an annual information return and track the tier characterization of distributions. Accurate recordkeeping matters because errors can jeopardize the trust's tax qualification.

Risks and Drawbacks

The gift is irrevocable, so the family will not receive the remainder.
Administrative and legal costs can be significant, which makes small trusts less practical.
Payments are taxable to the beneficiary, and the trust must follow strict rules.
Heirs may be disappointed. Some donors purchase life insurance in a separate trust to replace the value passing to charity.

Frequently Asked Questions

Can the grantor serve as trustee?

Often yes, though many grantors choose an independent trustee, especially when the trust holds hard to value assets such as real estate or business interests.

Can a CRT last longer than the beneficiary's lifetime?

No. The trust ends at the end of the measuring lives or the fixed term, which cannot exceed twenty years.

What is the difference between a CRT and a charitable lead trust?

A charitable lead trust is the reverse. The charity receives payments first, and the remainder passes to family or other noncharitable beneficiaries.

Can the donor change the charity?

Many trusts allow the grantor to retain the right to substitute one qualified charity for another, which adds flexibility.

Keep Building Your Knowledge

Trust terminology is a frequent exam topic. Register for free to get started, review terms such as remainder and annuity with our flashcards, and look at the pricing plans for the complete study package.

Understanding Charitable Remainder Trusts: Structure, Types, and Benefits