A charitable remainder trust can turn a meaningful gift into two sources of good: Payments for you or another person you choose, followed by support for a charity whose work matters to you.
The trust receives assets, makes payments for a lifetime or a permitted term of years, and ultimately distributes the remainder to charity. It can be especially useful when you have appreciated property, want to diversify and would welcome an income stream. The charitable commitment is central to the plan.
Key takeaways
- A charitable remainder trust is irrevocable, with a genuine charitable remainder.
- Payments can be a fixed amount or a percentage of the trust’s annually determined value.
- A sale inside a qualifying trust may defer capital-gains tax to the income beneficiaries. It does not simply erase the gain.
- The charitable deduction, annual reporting and funding details should be reviewed together.
Choosing the payment structure
A charitable remainder annuity trust, or CRAT, pays a fixed dollar amount based on the initial contribution. A charitable remainder unitrust, or CRUT, generally pays a fixed percentage of the trust’s value as determined each year. A CRUT payment can rise or fall with the portfolio, and a properly drafted CRUT can accept later contributions. A CRAT generally cannot.
The statutory payout range is 5% to 50%, but the permitted rate for a particular plan is constrained by the charitable remainder and other qualification tests. The charitable remainder must have an actuarial value of at least 10% of the contribution. A term of years cannot exceed 20 years; a lifetime arrangement follows the permitted measuring lives.
Choosing a rate calls for more than maximizing the first payment. We consider the expected duration, investment assumptions, inflation, expenses and the gift you want the charity to receive.
Is appreciated property a good fit?
Often, yes. Publicly traded shares with a substantial unrealized gain are a familiar example. Instead of selling them personally and contributing the remaining cash, you may be able to contribute the shares to a qualifying trust before a sale becomes binding. The trust can then sell and reinvest, subject to the applicable tax rules.
The trust takes the existing basis; the gain has not disappeared. A qualifying charitable remainder trust generally does not pay regular income tax on the sale. Its later payments carry out accumulated income and gains to the beneficiaries under prescribed ordering rules. This can spread the tax cost over time while more of the sale proceeds initially remain available for investment.
Cash can also fund the trust, although cash brings no built-in gain to defer. Real estate and closely held business interests require additional review of marketability, valuation, debt, operating income and the timing of any proposed sale. Unrelated business taxable income can trigger a substantial excise tax. A transfer made after the right to sale proceeds has effectively become fixed may leave the gain taxable to the donor.
For these reasons, the most useful conversation happens while there is still time to choose how the transaction will proceed.
What can I deduct?
A qualifying lifetime contribution may produce an income-tax charitable deduction for the calculated value of the charity’s future interest. The deduction is not the entire value contributed because the trust also provides payments to noncharitable beneficiaries.
The payment terms, measuring lives or term, applicable valuation assumptions and the kind of property contributed all matter. Income-based limits and substantiation rules can restrict the deduction available in a particular year. Noncash gifts may require a qualified appraisal and additional tax forms. Your tax adviser should calculate the deduction and any carryforward as part of the plan.
Annual returns and payments
A charitable remainder trust files Form 5227 annually. It also provides Schedule K-1 information to recipients so they can report the taxable character of their payments. That reporting is required even though the trust is generally exempt from regular income tax.
Payments are classified under a tier system that generally carries out ordinary income first, then capital gain, followed by other income and finally principal. The amount received and the amount taxable are therefore not necessarily the same. Accurate basis and accumulated-income records matter from the first contribution onward.
How it fits the rest of your plan
The remainder is committed to charity, so these assets will not ultimately pass to children in the same way as an outright inheritance. We consider that choice alongside other family resources, insurance and gifts. Retained payment rights and the identity of the income beneficiaries also affect estate and gift tax treatment; the word “charitable” does not answer every tax question.
This is primarily a charitable and financial planning arrangement. It should not be presented as a general way to shield your own assets or payments from creditors. Retained interests, transfer circumstances and applicable law need a separate analysis.
The trustee must respect restrictions on dealings with the donor and other related persons. Personal use of trust property, loans and sales involving those persons can raise self-dealing problems. Clear administration helps the gift work as intended.
Comparing other ways to give
An outright charitable gift or a donor-advised fund may suit a donor who wants the charitable benefit now and does not need payments back. With a donor-advised fund, the sponsoring charity owns the contribution and the donor retains advisory privileges over grants and investments, subject to its policies.
A charitable gift annuity offers payments under a contract with a charity. A gift through your will, revocable trust or retirement-account beneficiary designation may fit a different timing or family priority. Each option deserves its own tax calculation. The most appealing arrangement is the one that serves both your generosity and your life.
Questions donors ask
Can I change the charity later?
The document can often reserve a power to select another qualified charitable recipient. That flexibility must be properly drafted and does not turn the charitable remainder back into a family asset.
Can I withdraw extra principal?
The standard arrangement provides the scheduled annuity or unitrust payments, rather than a personal account from which you can make additional withdrawals. We plan for an appropriate reserve outside the trust before funding it.
Sources and further reading
See the IRS overview of charitable remainder trusts, Internal Revenue Code section 664, and the Form 5227 instructions.
Contact Verras Law to arrange a conversation with Spiro about your plans. Meet in Palm Harbor, in Tampa or St. Petersburg by appointment, or by Zoom or teleconference.