Charitable Remainder Trusts

CHARITABLE REMAINDER TRUSTS

A Charitable Remainder Trust (CRT) is a tax-exempt, irrevocable trust that allows individuals to convert highly appreciated assets into a potential income stream while ultimately benefiting a charitable organization. CRTs are popular among philanthropically inclined investors and high-net-worth individuals who seek to reduce income taxes, avoid capital gains tax, receive an income stream, and make a charitable gift.

STRUCTURE & FUNCTION

A CRT operates in two phases: the income phase and the charitable remainder phase. When the trust is created, the donor transfers assets—typically appreciated securities, real estate, or other valuable property—into the trust. The CRT then sells those assets without incurring capital gains tax due to its tax-exempt status, and reinvests the proceeds to generate income.

During the income phase, the trust pays a stream of income to one or more non-charitable beneficiaries (usually the donor or family members) for a specified period—either up to 20 years or for the life of the beneficiaries. At the end of the trust term, the charitable remainder phase begins: the remaining assets are transferred to one or more designated charitable organizations.

There are two primary types of CRTs:

Charitable Remainder Annuity Trust (CRAT) Pays a fixed dollar amount annually, regardless of the trust’s performance.
Charitable Remainder Unitrust (CRUT) Pays a fixed percentage (minimum 5%) of the trust’s annually recalculated value.

TAX BENEFITS

CRTs offer several substantial tax advantages:

Charitable Income Tax Deduction The donor receives an immediate income tax deduction in the year the trust is funded. The deduction is based on the present value of the remainder interest ultimately passing to charity, calculated using IRS actuarial tables and the Section 7520 rate.
Capital Gains Tax Deferral Since the CRT is a tax-exempt entity, it can sell appreciated assets without triggering capital gains tax. This allows the full value of the asset to be reinvested to generate income.
Estate Tax Reduction By removing assets from the donor’s estate, a CRT can also help reduce estate taxes. However, many donors will establish and fund an Irrevocable Life Insurance Trust (ILIT) to partially or fully replace the value of the assets diverted to charity.
Income Stream The donor or other beneficiaries receive income during the trust term, which can be beneficial for retirement planning or providing for family members.

USE CASES

CRTs are particularly useful for:

Asset Diversification Donors with low-basis, highly appreciated assets looking to diversify.
Charitable Giving With Income Those who want to support a charitable cause while maintaining an income stream.
Estate Planning for Heirs Estate planning strategies aiming to reduce taxable estates and provide for heirs.

LIMITATIONS & CONSIDERATIONS

Irrevocable Structure CRTs are irrevocable: once funded, assets cannot be reclaimed by the donor.
Complex Administration Administration is complex, requiring professional legal and tax guidance.
Valuation & Performance Risk Valuation and trust performance may impact the income stream and charitable deduction.

This information is for educational purposes only and does not constitute tax, legal, or investment advice. Consult your own advisor before acting on any strategy discussed.

1031 Capital Solutions
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services through Concorde Asset Management, LLC (CAM), an SEC-registered investment adviser. 1031 Capital Solutions is independent of CIS and CAM.Charitable Remainder Trusts (CRT) is irrevocable and typically requires a donation of substantial assets. Legally, individuals no longer have control of the assets in the trust. Distributions from the CRT to the income beneficiaries might be taxable as ordinary income. Depending on the amount of assets donated, individuals may not be able to take the full tax deduction in the same year as the donation, however, it can be spread out over a five-year period.