What it is
TL;DRA CRT is an irrevocable trust that pays the donor (or another non-charitable beneficiary) an income stream for life or for a term of years, then transfers the remainder to charity. Funded with appreciated assets, the trust sells without capital-gains tax and pays the donor over time on the deferred gain.
The donor gets a current-year charitable deduction equal to the present value of the remainder (subject to a 10% minimum). The trust sells the asset, reinvests, and pays out at least 5% per year.
Best uses: appreciated stock with low basis, real estate that would trigger a huge gain, or any asset where the donor wants income but not a lump sum.
Who it's for
Donors with significantly appreciated assets, charitable intent, and a desire for income, not those who simply want to avoid tax.
- ✓Owners with $1M+ of concentrated appreciated stock or real estate
- ✓Donors with genuine philanthropic intent
- ✓Retirees needing income who also want to leave a charitable legacy
- ×Donors who want the heirs to inherit the asset (CRTs end up at charity)
- ×Anyone needing a lump sum from the asset
- ×People without genuine charitable intent, IRS scrutinizes 'fake' CRTs aggressively
How it works
1. Choose CRAT or CRUT
CRAT: fixed dollar annuity. Same payout every year regardless of trust value. Simpler, but vulnerable to investment underperformance.
CRUT: payout is a fixed percentage (5-50%) of the trust's annually revalued assets. More flexible, allows additional contributions, can be structured with net-income or NIMCRUT variations.
2. Fund the trust with the appreciated asset
Contribute the asset before any sale negotiations begin. The trust then sells the asset itself, no recognized gain to the donor, no gain to the tax-exempt trust.
Pre-arranged sales are the death of the CRT. If the donor has signed an LOI or has a binding obligation to sell before contributing, the IRS treats the gain as the donor's under the assignment-of-income doctrine. Contribute first, sell later, and document the gap.
3. Receive the charitable deduction
The present value of the remainder going to charity, calculated using the §7520 rate and the term/payout, is the donor's current-year charitable deduction. Must be at least 10% of the contribution to qualify.
4. Receive distributions taxed under §664 four-tier rules
Distributions to the beneficiary carry out income in this order: ordinary income, capital gains, tax-exempt income, return of principal. The deferred capital gain comes out gradually over the trust term.
A worked example
Bridget owns $2,500,000 of publicly traded stock with $300,000 basis. She is 65, wants reliable income for life, has charitable intent toward her alma mater, and wants the current deduction in a year she has a $400,000 RMD pushing her into the 35% bracket. She contributes the stock to a 5% CRUT with a 25-year term.
| Sell stock directly, then donate cash | Contribute to 5% CRUT first | |
|---|---|---|
| Capital gains tax on sale | $524,000 | $0 (immediate) |
| Net invested after sale | $1,976,000 | $2,500,000 |
| Year-1 charitable deduction | $2,000,000 | $880,000 |
| Year-1 income tax saved (35%) | $700,000 | $308,000 |
| Annual income to Bridget (5% CRUT) | , | $125,000 (initial) |
| Eventual amount to charity | $2,000,000 now | ≈ $1,800,000 in 25 yrs |
| Year-1 tax + investable principal advantage | ≈ $524,000 |
Direct donation gives a bigger upfront deduction. The CRUT gives a smaller deduction but defers the gain, preserves the full $2.5M of investable capital, and provides Bridget with $125k+ of annual income for 25 years. Right answer depends on whether the donor needs income, here Bridget does.
Limits and risks
CRTs are irrevocable. Once funded, the donor cannot get the principal back. This is not a tool to test charitable intent, it is for donors who have already decided.
Annual payout must be at least 5% and not more than 50%, and the present value of the remainder must equal at least 10% of the initial contribution. Aggressive payout rates can flunk the 10% test.
Self-dealing rules apply. The donor cannot rent property to, lend to, or transact with the trust. Violations trigger excise taxes that escalate quickly.
IRS scrutinizes CRTs for pre-arranged sales (assignment of income), valuation of contributed assets (qualified appraisal required for non-public assets over $5,000), and self-dealing. A clean transaction documents the gap between contribution and sale, has a qualified appraisal in the file, and uses arm's-length trustees.
IRS reference
- IRC §664Charitable remainder annuity trusts (CRATs) and unitrusts (CRUTs).
- IRC §170(f)(2)Charitable deduction for the present value of the remainder interest.
- Rev. Proc. 2005-52 through 56IRS-approved CRT forms.