Immediate income tax deduction
Based on the present value of what will eventually go to charity.
Why donors use a CRT
Capital gains deferred
The CRT can sell appreciated stock or real estate without triggering immediate capital gains tax — proceeds reinvest in full.
Estate tax lowered
Assets placed in a CRT leave your taxable estate, cutting the eventual estate tax bill.
The instrument
A balance between charitable causes and financial benefits
It should be acknowledged that such an approach presents a balance between supporting charitable causes and securing financial benefits for individuals or their families. CRTs are especially beneficial in CRT estate planning when considering methods to lower capital gains, provide for heirs, and leave a legacy.
No matter if you are considering a CRT for its philanthropic impact or its tax-smart structure, recognizing the fundamentals can present assistance in deciding if it fits into the long-term plans.
01Step by step
How a charitable remainder trust works
A CRT is an irrevocable trust structure used in estate planning to support both personal income goals and charitable giving.
Step 01
Contribute appreciated assets
Individuals contribute appreciated assets like cash, stocks, or real estate into the trust.
Step 02
Trust sells & reinvests
The CRT might sell these assets and reinvest the proceeds — generally without triggering immediate capital gains tax.
Step 03
You receive income
You (or a designated beneficiary) receive income from the trust for a set number of years or for life.
Step 04
Charity gets the remainder
After the income term ends, the remaining assets are transferred to one or more charitable organizations.
This arrangement presents specific CRT tax benefits. It covers a charitable trust tax deduction in the year the trust is funded — in accordance with the present value of the remainder that will eventually go to charity.
02Two flavors
Two main types of CRTs
Both follow specific charitable remainder trust rules and involve initial legal and administrative costs — weigh them against the long-term financial and philanthropic advantages.
CRAT
Charitable Remainder Annuity Trust
- Presents fixed annual payments that do not fluctuate with investment performance.
- A good fit if predictable income is preferred.
CRUT
Charitable Remainder Unitrust
- Pays a fixed percentage (usually 5–10%) of the trust’s value. Recalculated each year.
- The income may vary annually in parallel to the trust’s performance.
03Tax benefits
Key tax benefits of a CRT
A CRT might offer specific tax benefits beyond just supporting a worthy cause.
Income Tax Deduction
The donor may qualify for a charitable trust tax deduction in the year the trust is funded. Deduction varies with the present value of the remainder interest expected to pass to charity.
Capital Gains Tax Deferral
When appreciated assets like stocks or real estate are transferred to the trust, the CRT might sell those assets without resulting in immediate capital gains taxes. Trust reinvests the full proceeds.
Estate Tax Reduction
Since the assets placed in the CRT are removed from the donor’s taxable estate, such a structure can be leveraged in lowering estate tax liabilities.
04Distributions
Understanding CRT distribution rules
Distributions from a CRT are governed by IRS regulations that identify how much is paid out and how the taxation works.
The IRS necessitates that payments from a CRT follow a specific order of income taxation. It is generally referred to as “tiered” income:
Tier 1
Ordinary income
Includes interest and dividends as well as rental income, taxed at regular income tax rates.
Tier 2
Capital gains
Taxed at preferential long-term rates when applicable.
Tier 3
Tax-free return of principal
Generally not taxable to the recipient.
The type of assets used to fund the trust, their appreciation, and the trust’s investment performance all influence the taxation of the distributions. These rules shape both the donor’s tax exposure and the beneficiary’s annual income.
05Trade-offs
Things to watch out for
A CRT can present meaningful income and philanthropic impact — but consider these trade-offs before committing.
Irrevocable Transfer
Once assets are contributed, the decision is final. They cannot be taken back, or the trust’s terms cannot be changed.
Compliance Obligations
CRTs must establish full compliance with charitable remainder trust rules — annual filings, payout minimums, and IRS reporting requirements.
Tax and Legal Complexity
To fully leverage CRT tax benefits and the charitable trust tax deduction, the trust should be properly structured and administered in accordance with IRS guidelines.
Ongoing Expenses
Charitable remainder trust costs might cover legal, accounting, and investment advisory fees — especially if the trust holds complex assets.
Effect on Heirs
Since the remainder goes to charity, family members might receive less than they would through a traditional inheritance plan.
06Cost
Cost of setting up a CRT
Setup fees range with structure and asset complexity.
Setup fee range
$3K–$10K+
Higher for multi-beneficiary or complex investments
In addition to the initial cost, there are ongoing administrative expenses that must be factored in:
- Legal and trustee fees for maintaining the trust’s legal standing
- Annual tax filing and accounting services, required under IRS charitable remainder trust rules
- Investment management fees, if the trust assets are actively managed
07Best fit
Who should consider a CRT?
This strategy tends to work best for three profiles.
Profile 1
Highly appreciated asset holders
Real estate or stocks — donors who would like to prevent immediate capital gains taxes.
Profile 2
Retirees or near-retirees
Looking for a reliable income stream during retirement.
Profile 3
Philanthropic individuals
Interested in lowering estate tax exposure while still leveraging CRT tax benefits and the charitable trust tax deduction.
If flexibility or more direct control is a priority, specific alternatives like Donor-Advised Funds (DAFs) or Charitable Lead Trusts (CLTs) can be considered — offering different structures and benefits.
Wondering if a CRT fits your legacy?
Dimov NYC CPA works with individuals, families, and business owners to determine whether a CRT aligns with their broader goals. Call (212) 641-0673 or send the contact form for a confidential consultation.
08FAQ
CRT frequently asked questions
What are the pitfalls of a charitable remainder trust?
A CRT is irrevocable, subject to ongoing IRS compliance. It involves administrative costs and might lower assets available to heirs.
Charitable remainder trust distribution rules?
Distributions follow IRS ordering: ordinary income is taxed first. Then capital gains, and lastly, tax-free principal — in line with the charitable remainder trust rules.
Charitable trust tax benefits?
Major CRT tax benefits cover an income tax deduction and capital gains tax deferral as well as estate tax reduction through structured CRT estate planning.
How much does it cost to set up a charitable remainder trust?
Charitable remainder trust costs range from $3,000 to $10,000+ in general, plus ongoing legal, tax filing, and investment management fees.
12+ years
serving NYC
150,000+
returns filed
5 star
Google and Yelp
Open
evenings and weekends
From the record
On estate planning done right
“You’ve already paid tax on this money when you are earning it actively, and then all of a sudden it gets taxed again when it goes to your child or your grandchild or whoever it’s going to. So proper estate planning is very important.”
George Dimov, CPA
“If I have a tax issue that comes up, I immediately think of George because you’re very responsive and helpful and knowledgeable. And that’s exactly what you’re looking for in a very complex topic that you don’t want to get wrong.”
Kevin
Estate attorney
See if a CRT fits
Let’s find out if a charitable remainder trust is the right fit for your financial legacy
If you’re exploring tax-smart giving strategies or looking to incorporate a CRT into the estate plan, schedule a confidential consultation. Call (212) 641-0673 or send the contact form. No charge for the conversation.
Reviewed by George Dimov, CPA, New York, NY. Serving clients in all 50 states, 15+ years advising individuals and families on estate planning and charitable giving. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.