Charitable remainder trust

1. Crat Vs. Crut

• Standard CRUT Pays the fixed percentage annually regardless of trust income.
• Net income CRUT (NICRUT) Pays the lesser of the unitrust percentage or actual trust income.
• Net income with makeup CRUT (NIMCRUT) Same as NICRUT but tracks shortfalls and "makes up" deficits in later high-income years. Popular for deferred income planning.
• FLIP CRUT Starts as a NICRUT and "flips" to a standard CRUT upon a triggering event (e.g., sale of illiquid asset).

2. Income Stream

• The donor (or named noncharitable beneficiaries) receives payments for life or a term of up to 20 years.
• Payments can be made annually, semi-annually, quarterly, or monthly.
• For a CRAT, the payment amount is locked in at creation. For a CRUT, payments are recalculated each year based on the trust's fair market value.
• If both spouses are named as beneficiaries, payments continue for both lifetimes (joint and survivor).

3. Tax Benefits

• Partial income tax deduction: The donor receives an upfront charitable income tax deduction equal to the present value of the charitable remainder interest. The deduction is typically 20-50% of the...
• Capital gains avoidance: When the trust sells contributed appreciated assets, no capital gains tax is owed at the time of sale. The full proceeds are reinvested, providing a larger income base.
• Estate tax reduction: Assets in the CRT are removed from the donor's taxable estate.
• Tax-deferred growth: Trust assets grow tax-free inside the trust (the trust itself is tax-exempt).
• Deduction limits: Cash contributions are deductible up to 60% of AGI; appreciated property up to 30% of AGI. Unused deductions carry forward for 5 years.

4. Funding With Appreciated Assets

• Publicly traded stock with large unrealized gains
• Real estate that has appreciated significantly
• Closely held business interests (with proper structuring)
• Cryptocurrency (treated as property)

5. 5% Minimum Payout Rule

• The annual payout must be at least 5% but no more than 50% of the trust's initial value (CRAT) or annual value (CRUT).
• The 10% remainder test: The actuarial value of the charitable remainder must be at least 10% of the initial contribution at the time of funding. If the payout rate is too high or the term too long,...
• In practice, most CRTs use payout rates of 5-8% to satisfy both the minimum payout and the 10% remainder test.

6. Remainder To Charity

• At the end of the income term (death of the last income beneficiary or end of the term of years), all remaining trust assets pass to the designated charity or charities.
• The charitable remainder beneficiary must be a qualified 501(c)(3) organization.
• The donor can change the charitable beneficiary at any time (unless the trust instrument prohibits it).
• Multiple charities can be named, and the allocation can be adjusted during the trust term.
• If the charity ceases to exist, the trust document should include a successor charity provision.

7. Setup Process

• Consult an estate planning attorney and financial advisor experienced with CRTs.
• Choose the CRT type (CRAT vs. CRUT vs. NIMCRUT vs. FLIP CRUT) based on income needs.
• Select the payout rate and term — run projections to ensure the 10% remainder test is satisfied.
• Draft the trust document (must comply with IRS requirements; IRS provides sample forms in Rev. Proc. 2005-52 through 2005-59).
• Appoint a trustee (can be the donor, a trusted individual, a bank, or a professional trust company).
• Fund the trust by transferring assets.
• Obtain a qualified appraisal for non-publicly-traded assets.
• File Form 5227 (Split-Interest Trust Information Return) annually.
• Claim the charitable deduction on your income tax return (Form 1040, Schedule A).

Common Mistakes

• Setting the payout rate too high
• Not running the numbers
• Forgetting the trust is irrevocable
• Ignoring the tax character of distributions
• Failing to name successor charitable beneficiaries

Pro Tips

• Pair a CRT with an Irrevocable Life Insurance Trust (ILIT)
• Use a FLIP CRUT for illiquid assets
• Consider a NIMCRUT for retirement planning
• Fund with appreciated stock before a sale or IPO
• Name a donor-advised fund (DAF) as the charitable remainder beneficiary

Sources

• Charitable Remainder Trusts - Fidelity Charitable
• Charitable Remainder Trusts - IRS
• Charitable Remainder Trusts: What to Know - Charles Schwab
• Guide to Charitable Remainder Trusts - Greater Houston Community Foundation
• Charitable Remainder Trust Guide - Valur
• Charitable Remainder Trusts - Wealthspire
• CRT FAQs - ACTEC Foundation

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