For most attorneys, CPAs, and financial advisors, CRTs don’t come along every day. However, because a CRT can be such an effective planning tool in certain situations, it’s useful to have basic knowledge about how they work.
Here are six important points to keep in mind.
What is a CRT? Once the CRT is established, it serves as a standalone trust. This trust pays an income stream to the client (and potentially other beneficiaries such as a spouse or children) for life or for a certain period of years. According to the trust’s terms, whatever assets are left when the income stream ends will pass to a charity, such as your client’s fund at Communities Foundation of Texas (CFT).
When does your client receive a charitable benefit for a CRT? Because the transfer of assets to the CRT is irrevocable, your client is eligible for an up-front charitable income tax deduction in the amount of the present value of the charity’s future interest, calculated according to IRS-prescribed rules and interest rates. Also that assets held in a CRT are excluded from your client’s estate for estate tax purposes.
Who is best served by establishing a CRT? A CRT is typically an ideal planning vehicle for your clients that own highly appreciated assets, including marketable securities, real estate, or closely-held business interests. Because a CRT allows these types of assets to be sold within the trust without triggering immediate capital gains taxes, the proceeds may be reinvested.
Why are some trusts called CRATs and some called CRUTs? A “charitable remainder annuity trust” (CRAT) is a type of CRT that distributes a fixed dollar amount each year to the income beneficiary. However, your client cannot make additional contributions to a CRAT.
A “charitable remainder unitrust” (CRUT), on the other hand, is a type of CRT that distributes a fixed percentage, at least five percent (5%) annually based on the balance of the trust assets (revalued every year). Unlike a CRAT, your client may make additional contributions to a CRUT during his or her lifetime.
When is a CGA a better planning option? The current tax laws permit a client over the age of 70 ½ to make a one-time transfer from an IRA of up to $54,000 (2025 limit) to a CRT or other split-interest vehicle, such as a charitable gift annuity (CGA). This is sometimes called a “Legacy IRA. Because the cost of setting up a CRT usually means that a $54,000 CRT is impractical, a client who wants to leverage the Legacy IRA opportunity may lean toward a CGA instead.
A CGA is established once your client makes a gift of cash or appreciated assets to a charity in exchange for a fixed stream of income for life. Once the lifetime payments are complete, the remaining portion of the gift is given to the charity. Your client will receive an immediate income tax deduction for the gift.
How can you and your clients learn more? As is the case with any question you encounter from a client about charitable giving techniques, our team of experts are available to assist you – both in navigating the options and identifying strategies that best meet your client’s needs.
