Charitable Remainder Trusts (CRTs)

The calls follow patterns. The 65-year-old retiring executive whose $2.4M of accumulated employer stock represents enormous embedded gain and who wants to diversify but doesn't want to write a single capital-gains check. The widow whose late husband's family business interest is now ready for sale at $5M with virtually zero basis. The 70-year-old whose inherited family farm has appreciated dramatically over the decades and who has no farming successors. The professional couple whose retirement income picture is good but whose charitable intent is substantial. The high-earner approaching the federal estate-tax threshold who wants to coordinate lifetime income, charitable giving, and estate planning in a single structure.

The CRT is the workhorse of charitable estate planning, and the reason is that it does four things at once that usually require four separate decisions. It produces an immediate income-tax deduction at funding, defers the capital-gains tax that an outright sale of appreciated assets would otherwise trigger, generates an income stream for life or for a term of years, and delivers a significant charitable gift when the trust ends. For a family that already intends to give and that holds a low-basis asset it is ready to sell, those four results compound: the deduction offsets other income in the funding year, the deferral keeps the full pre-tax value working inside the trust, and the income stream is built on proceeds that were never reduced by an up-front capital-gains check. Whether that combination outperforms a simpler approach depends on the asset, the basis, the payout rate, the term, and the prevailing § 7520 rate — which is precisely the modeling we do before recommending a CRT. A CRT is also irrevocable: once funded, the structure and the charitable commitment generally cannot be undone, so it suits a settled charitable intent rather than a tentative one.

How a CRT works

1. Trust funding. The grantor irrevocably transfers assets to the CRT — typically highly appreciated stock, real estate, or business interests.
2. Charitable income-tax deduction. The grantor receives an immediate deduction under IRC § 170source equal to the present value of the projected remainder passing to charity.
3. Sale inside the trust. The CRT (a tax-exempt entity under IRC § 664source) can ordinarily sell the contributed assets without immediate trust-level capital-gains recognition, because a properly qualified CRT is itself exempt from income tax on the sale.
4. Reinvestment. Proceeds are reinvested in a diversified portfolio inside the trust.
5. Income distributions. The CRT pays the grantor (and optionally spouse, or term beneficiaries) the required annual amount — fixed annuity (CRAT) or variable unitrust amount (CRUT) — for the term of the trust.
6. Income taxation. Distributions are taxed under the "four-tier" system of IRC § 664(b)source — first as ordinary income, then capital gains, then tax-exempt income, then return of principal. The embedded capital gain from the inside-trust sale is gradually distributed and taxed over the income stream.
7. Termination. At the end of the trust term (or at the death of the last non-charitable beneficiary), remaining assets pass to the qualified charity (or charities) named in the trust document.

CRAT vs. CRUT — choosing the right structure

Two CRT types under IRC § 664(d)source:

• CRAT (Charitable Remainder Annuity Trust). Pays a fixed dollar annuity, computed at funding as a percentage of the initial value, the same amount each year regardless of how the trust performs. The appeal is predictability: the beneficiary knows the exact check. The trade-off is rigidity — a CRAT ordinarily cannot accept additional contributions after funding, and because the 10%-remainder test is run against a fixed annuity, lower § 7520 rates make that test harder to clear, which is why CRATs tend to be less common in low-rate environments.
• CRUT (Charitable Remainder Unitrust). Pays a fixed percentage of the trust's fair market value, recomputed each year, so the income rises and falls with trust performance. A CRUT can ordinarily accept additional contributions over time and adjusts the payout to the revalued assets, which is why most modern CRTs are drafted as CRUTs: the revaluation feature and the ability to add assets later give the structure room to grow with the family.

CRUT variations:

• Standard CRUT. Pays the unitrust percentage each year regardless of trust income or principal.
• NICRUT (Net Income CRUT). Pays the lesser of trust income or the unitrust percentage.
• NIMCRUT (Net Income with Makeup CRUT). Same as NICRUT, but when income is below the unitrust percentage in a given year, the shortfall is tracked and "made up" in later years when income exceeds the percentage. Used where the grantor wants timing flexibility — e.g., where assets are illiquid initially and income will increase later.
• FLIP-CRUT. Operates as NICRUT or NIMCRUT until a triggering event (typically sale of the contributed illiquid asset), then "flips" to standard CRUT operation. Particularly useful for CRTs funded with illiquid assets like real estate or closely-held business interests.

The minimum-payout and 10%-remainder tests

Under IRC § 664(d)source:

• Minimum payout. At least 5% and not more than 50% of trust value (initial value for CRAT; revalued annually for CRUT).
• 10% remainder test. The present value of the charitable remainder at funding must be at least 10% of the initial trust value. Computed using the IRS § 7520 rate, the payout rate, and the trust term.

The 10% test caps how high payouts can go for short-term CRTs. Most modern CRTs target 5%-7% payouts with terms designed to clear the test comfortably.

Capital-gains deferral mechanics

The CRT's primary benefit for owners of highly appreciated assets:

• Outside a CRT, an outright sale of appreciated assets ordinarily triggers immediate capital-gains tax — at federal long-term rates (generally 15% or 20%, plus the 3.8% net investment income tax for higher-income taxpayers) on top of New Jersey income tax. New Jersey does not apply a preferential capital-gains rate, so the gain is generally taxed as ordinary income at rates that reach 10.75% at the top bracket. The combined bite can take a meaningful slice off the top before a dollar is reinvested.
• Inside a CRT, the same sale generally triggers no immediate trust-level capital-gains recognition, because a qualified CRT is exempt from income tax under IRC § 664source. The full proceeds stay invested and working for the income stream rather than being reduced by an up-front tax.
• The embedded gain is recognized gradually as distributions are made under the four-tier system of IRC § 664(b)source. Distributions are taxed first as ordinary income from the trust's current-year ordinary income, then as capital gain, then as tax-exempt income, then as principal.
• For an appreciated asset with virtually zero basis, the entire sale proceeds plus subsequent investment income flow through the four-tier system. Until the embedded gain is exhausted, distributions are taxed as ordinary income or capital gains.
• The deferral benefit can be meaningful even though the embedded gain is ultimately taxed as it flows out. Three things drive that value: the grantor keeps full investment power on the entire pre-tax proceeds rather than on an after-tax remainder; the timing of income recognition is spread across the income stream instead of landing all at once in the year of sale; and the charitable deduction taken at funding can offset other income, softening the eventual tax. The deferral is real but it is not an escape — the gain is recognized over time, and whether the structure comes out ahead of a straightforward sale depends on the numbers, which is why we model it before recommending it.

Charitable remainder selection

Remainder beneficiaries must be qualified charities under IRC § 170(c)source. Options:

• Public charity (a 501(c)(3) classified as a 50%-type organization) — generally carries the highest deduction limits (commonly 30% of AGI for gifts of appreciated property; 60% for cash), which is why public charities are the most common remainder beneficiaries.
• Private operating foundation — treated similarly to public charity for deduction purposes.
• Donor-advised fund (DAF) at a sponsoring public charity (Fidelity Charitable, Schwab Charitable, NJ community foundations) — effective remainder vehicle with ongoing donor advisory privileges over how the remainder is ultimately granted.
• Community foundation with named-fund structures.
• Private non-operating foundation — lower deduction limits (20% of AGI for property gifts; 30% for cash) and additional restrictions; used where the grantor wants ongoing family involvement in grant-making.

CRTs are often drafted to allow the grantor to retain the limited power to substitute among qualified charities — preserving flexibility without compromising the deduction.

When a CRT may not be the right tool

A CRT is a strong fit for a specific set of facts, and naming where it does not fit is part of giving honest advice. The structure is irrevocable, so it rewards a settled charitable intent and penalizes hesitation; if the charitable commitment is uncertain, a revocable approach or a donor-advised fund usually serves the family better. A CRT is also at its strongest with a low-basis, highly appreciated asset that is genuinely ready for sale — when the basis is already high, the capital-gains deferral that powers the strategy has little to defer, and a simpler plan may produce a comparable result with less complexity and cost.

• Charitable intent is tentative. The remainder is permanently committed to charity; a family that may want those assets back, or for heirs, should generally look at a revocable structure instead.
• The asset is high-basis. With little embedded gain to defer, the central tax advantage is muted, and the administrative weight of a CRT may not earn its keep.
• Heirs need the principal. A CRT pays an income stream, not the underlying assets, to the non-charitable beneficiaries — the remainder goes to charity, not to children. Families focused on transferring principal to the next generation are usually better served by GRATs, IDGTs, or SLATs.
• Liquidity and administration matter. A CRT is a separate taxpayer that generally must file IRS Form 5227 each year and be administered for its full term, which adds ongoing cost and recordkeeping that a one-time gift does not.

None of this is a reason to avoid a CRT where the facts fit — it is the reason the recommendation comes after modeling, not before. The right answer turns on the asset, the basis, the payout rate, the term, the prevailing § 7520 rate, and the family's charitable and income goals together.

NJ tax considerations

• New Jersey does not offer a state-level charitable income-tax deduction equivalent to the federal § 170 deduction. New Jersey allows certain limited deductions on the NJ-1040 but generally does not provide a personal charitable-gift deduction, so the federal deduction is ordinarily the primary income-tax benefit of a CRT for a New Jersey resident.
• NJ repealed its estate tax effective 2018; the charitable gift at CRT termination doesn't help with NJ estate tax (there isn't one) but does help with federal estate tax for estates above the federal exemption.
• New Jersey inheritance tax under N.J.S.A. 54:34source generally exempts transfers to qualified charities, so the charitable remainder passing at the end of the trust term is typically free of New Jersey inheritance tax. Whether that exemption reaches every element of a particular plan depends on the beneficiaries and how the trust is structured.
• CRT-generated income distributed to NJ-resident grantors is subject to NJ income tax under the four-tier characterization.

How we work a CRT decision

A Charitable Remainder Trust is a modeling decision before it is a drafting decision. Before recommending one, we run the numbers that actually determine whether it serves you: the asset and its basis, the payout rate you need, the trust term, the prevailing § 7520 rate, the projected charitable deduction at funding, and how the four-tier income taxation is likely to fall across the years of the income stream. We test the 5%-payout and 10%-remainder requirements under IRC § 664(d)source, weigh a CRAT against the CRUT variations, choose and coordinate the charitable remainder beneficiary, and integrate the trust with the rest of your estate plan — then we draft. If the modeling shows a simpler path serves you better, we will tell you that, because the goal is the right structure, not the most elaborate one.

If you hold a low-basis asset you are ready to sell and your charitable intent is real, a short conversation will tell us quickly whether a CRT is worth modeling for you. The estate-planning questionnaire is the fastest way to give us the picture; from there we map the deduction, the income stream, and the charitable gift to your actual numbers. Estate planning at the firm is led by Britt J. Simon, Esq., the firm's Managing Partner.

Frequently Asked Questions

What is a Charitable Remainder Trust (CRT)?

A CRT is an irrevocable trust that pays income to non-charitable beneficiaries (typically the grantor and spouse) for a period of years or for life, after which the remaining trust assets pass to one or more qualified charities. CRTs are tax-exempt entities under IRC § 664. The grantor receives a charitable income-tax deduction at funding for the present value of the projected remainder going to charity; appreciated assets contributed to the CRT can be sold inside the trust without triggering immediate capital gains tax; income payments to the grantor are taxed as they flow.

What's the difference between a CRAT and a CRUT?

Two CRT types under IRC § 664. CRAT (Charitable Remainder Annuity Trust): pays a fixed annuity amount each year, computed at funding as a percentage of the initial fair market value. Annuity is the same dollar amount each year regardless of trust performance. CRUT (Charitable Remainder Unitrust): pays a fixed percentage of the trust's fair market value, recomputed annually. Income amount varies year-to-year based on trust performance. Most modern CRTs are CRUTs because of the asset-revaluation feature and the ability to add assets later (CRATs typically cannot accept additional contributions). Both must satisfy minimum-distribution and minimum-remainder requirements under IRC § 664(d).

What is the charitable income-tax deduction at funding?

Under IRC § 170, the grantor receives an income-tax deduction equal to the present value of the projected remainder interest passing to charity. The calculation uses IRS-prescribed tables, the trust's payout rate, the trust term, and the IRS § 7520 rate (a federal interest rate updated monthly). Higher payout rates and longer trust terms produce smaller remainder calculations and smaller deductions. The deduction is subject to AGI percentage limitations (30% of AGI for gifts to most public charities; 60% for cash; lower for private foundations) with five-year carryforward of unused deduction.

Why use a CRT for highly appreciated assets?

The classic CRT use case: highly appreciated assets (long-held stock, real estate, business interests). Selling outside a CRT triggers capital-gains tax. Contributing to a CRT and selling inside the trust does not — the CRT is a tax-exempt entity, so it pays no tax on the sale. The full sale proceeds are then invested for the income stream. The grantor gets: (1) immediate charitable income-tax deduction; (2) deferred (rather than immediate) recognition of capital gains, paid out gradually through income distributions; (3) income stream for life or term; (4) significant charitable gift at trust termination. Particularly powerful for closely-held business interests preparing for sale, concentrated stock positions, and inherited real estate ready for liquidation.

Can I change the charity that receives the remainder?

CRTs can be drafted to allow the grantor to retain the power to change the charitable remainder beneficiaries — substituting one qualified charity for another during the grantor's lifetime. The retained power doesn't undo the charitable deduction (because the remainder is still going to a qualified charity; the grantor just retains the choice of which one). The power must be drafted as a limited power — the grantor can only substitute among qualified charities, not redirect to non-charitable beneficiaries. Many CRTs name a donor-advised fund or community foundation as the initial remainder beneficiary, with the donor's family directing the eventual charitable allocation through the DAF or foundation framework.

What are the minimum payout and remainder requirements under IRC § 664(d)?

CRTs must satisfy specific minimums: (1) The annual payout rate must be at least 5% and not more than 50%. (2) The present value of the charitable remainder at funding must be at least 10% of the initial value of the trust assets. Both calculations use IRS-prescribed factors — the § 7520 rate, the payout rate, and the trust term. The 10% remainder requirement effectively caps how high payouts can go for shorter-term CRTs. Modern CRTs typically target 5%-7% payouts with terms designed to clear the 10% test comfortably.

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