Charitable Remainder Trusts Explained: A Guide on CRTs

How Setting Up a Charitable Remainder Trust Reduces Capital-Gains Taxes

A Charitable Remainder Trust (CRT) is a tax-advantaged account that allows you to sell your appreciated positions but mitigate the associated income tax, thereby growing your money faster with the magic of compounding. For example, an investor with a $1 million capital gain could earn an extra $3.5 million over their lifetime with a CRT.

Let’s say you own an asset that has grown in value over the years and you’re preparing to sell, but that would mean paying a significant portion of your earnings to the government as a capital-gains tax. You might be reluctant to sell because you don’t want to trigger a taxable event—that’s where a Charitable Remainder Trust can help.

A Charitable Remainder Trust is one of the most effective tools to defer capital-gains taxes on appreciated assets. As a tax-exempt trust, it can sell what you contribute without an immediate tax bill, reinvest the full proceeds, and pay you cash distributions. In a high-tax state, that can mean deferring taxes on as much as almost 40% of your gain at exit!

This guide will explain how Charitable Remainder Trusts work.

What Is a Charitable Remainder Trust?

A Charitable Remainder Trust is a tax-exempt account that reduces taxable capital-gains income. In exchange for a promise to donate some of the trust’s assets to charity at the end of the trust’s term, you can defer the taxes you would otherwise pay when selling your assets, a considerable tax benefit.

Once the CRT is set up, you then receive cash distributions as determined by Charitable Remainder Trust rules for a specified period. When that period is over, donate the remainder—everything that hasn’t been distributed to you or your family—to your chosen charity.

You can estimate your potential returns with our easy-to-use CRT calculator.

 

Benefits of a Charitable Remainder Trust

By deferring your taxes and reinvesting the savings, you can increase your returns by 50% or more. Let’s dive into the specific benefits:

1. Tax Deferral and Tax-Free Compounding (a.k.a. More Money)

Charitable Remainder Trusts protect your gains from taxes when you sell; the money you save is reinvested and continues to grow.

For example, if you are a California resident and you have capital gains of $1 million, you would typically pay about $360,000, or 36%, in taxes, and you would be left with about $640,000 to invest (or spend!) in the future. If your shares were in a Charitable Remainder Trust, the trust would keep the whole $1 million to reinvest.

In the meantime, you get to reinvest those savings. That’s an extra $360,000 reinvested, assuming your average historical returns; that additional investment could turn into more than $7 million over 40 years! That’s the key benefit of a Charitable Remainder Trust and the power of the one-two punch of tax-advantaged trusts and tax-free compounding interest.

2. Lower Effective Tax Rates

Another benefit of Charitable Remainder Trusts is that you can keep more of the proceeds from your sale through “tax smoothing” or spreading out your income over time to lower the effective tax rate you pay on your gain.

Instead of realizing all of the revenue from your sale in one year, you can use a CRT to spread that income out over many years to effectively smooth out your tax rate.

Plus, in exchange for the charitable gift you’ll make at the end of your trust, you get an immediate Charitable Remainder Trust tax deduction during the year you fund your trust, usually equal to around 10% of the value of your assets.

3. An Upfront Tax Deduction

In addition to tax-free compounding and a lower tax rate, a Charitable Remainder Trust offers an upfront tax deduction to reduce your income taxes the next time you file.

For example, if you’re in the highest-income federal-tax bracket (37%) and your CRT deduction is $100,000, you’ll save $37,000 on your federal tax bill—that’s money that stays in your bank account instead of going to the IRS.

Note that you can’t deduct the total value of the assets you transfer into the trust. Instead, the deduction equals the present value of what ultimately goes to charity, which must be at least 10% of the assets contributed to the CRT. The IRS calculates the tax-deduction size based on the value of the contributed assets, the annual payout rate to the beneficiary (which itself must be 5–50%), the trust’s term, and a set interest rate (IRS Section 7520) the IRS uses to assume the growth rate of the assets to be donated.

How Does a Charitable Remainder Trust Work?

A Charitable Remainder Trust is effectively an irrevocable, “split-interest” trust that pays you or other beneficiaries an annual income and donates what’s leftover at the end of its term to charity—all while giving you tax benefits on your capital gains for a net-positive impact on your wealth.

The nuances of how a CRT functions come down to which type of CRT you choose, which we’ll delineate below. But at a high level, here’s a step-by-step breakdown of how a Charitable Remainder Trust works:

1. Fund the CRT

Transfer assets into the CRT that you would otherwise have to pay capital-gains taxes on if you were to sell those assets. Technically, because a Charitable Remainder Trust is irrevocable, you sacrifice permanent ownership of the assets—but since you can designate the trustee (and you’re allowed to choose yourself as the trustee), you’ll retain full control.

2. Claim Your Upfront Tax Deduction

When you first fund the Charitable Remainder Trust, you immediately receive a charitable deduction of 10% of what you put in to offset your federal & state income taxes.

3. Tax-Free Asset Reinvestment

You or your trustee manages the assets in the CRT, and since Charitable Remainder Trusts are tax-exempt, no capital-gains taxes are triggered when you sell; instead, proceeds are reinvested in the CRT.

4. Earn Annual Distributions

For a pre-set term of up to 20 years, your lifetime (or another beneficiary’s lifetime), or a combination of both, you receive regular cash distributions.

5. Final Distribution to Charity

When the term of the CRT expires, the value of any remaining assets is transferred to a charity of your choosing.

Different Types of Charitable Remainder Trusts

There are a few types of Charitable Remainder Trusts, but just two at a high level: a Charitable Remainder Annuity Trust (CRAT) and a Charitable Remainder Unitrust (CRUT).

When comparing CRAT vs. CRUT, as an annuity, a CRAT pays out a fixed amount of the trust’s assets determined at the start of the term which cannot change over time, and as a unitrust, a CRUT pays out a fixed percentage of the trust’s assets every year on an amount that can go up or down depending on how the trust grows.

If your assets grow over time, a CRUT, by definition, will pay out more distributions every year, and you have more control over when you can take your distributions. Plus, per the IRS, a CRUT can last much longer than a CRAT; a longer trust term means more tax-free growth and more distributions for you and your family.

Types of Charitable Remainder Unitrusts (CRUTs)

CRUTs come in three subtypes:

1. Standard CRUT: A default CRUT, it pays a fixed percentage of its value annually regardless of its income.
2. Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT): NIMCRUTs limit payments to actual net income.
3. Flip Charitable Remainder Unitrust (Flip CRUT): Flip CRUTs switch from an income-limited model to a standard model upon a specific triggering event.

See what a CRUT can offer you over time with our CRUT calculator:

Which Assets to Include (and Exclude) in a Charitable Remainder Trust to Maximize Growth

Fund a Charitable Remainder Trust with assets that have grown, or are likely to grow, substantially in value, but avoid assets that could jeopardize the trust’s tax-exempt status, create unrelated business income, or trigger self-dealing.

Assets to Include in a CRT

The best assets in a Charitable Remainder Trust have large built-in gains, or are likely to appreciate soon, and are ones you plan to sell. The bigger the gain, the more the trust’s tax exemption is worth.

• Public stock and ETFs. Easy to transfer and value, and the most common way to diversify a concentrated position without an immediate capital-gains bill.
• Startup and closely held stock. Low-basis shares contributed before an IPO or acquisition can be sold inside the trust tax-free. Because they’re illiquid until that event, they pair best with a Flip CRUT or NIMCRUT, which pay little until the asset sells. A CRAT or standard CRUT owes payouts from year one, which can force awkward in-kind distributions.
• Cryptocurrency and Bitcoin. Charitable Remainder Trusts are great for holding both crypto and bitcoin. Long-held bitcoin and other tokens often carry very low basis. Gifts over $5,000 generally need a qualified appraisal for the deduction.
• Debt-free real estate. Likewise to crypto and bitcoin, a Charitable Remainder Trust for real estate is a good idea; long-held land or investment property often have large gains. Real estate is illiquid, so a Flip CRUT is usually the best fit.
• Alternatives and art. Private equity, hedge-fund interests, and collectibles can work, with caveats (e.g., tax deductions can be limited relative to the asset’s market value).
• Cash. Little tax benefit, but useful for covering trust expenses without selling other assets. At Valur, we set up CRTs without upfront legal costs and with low-cost ongoing maintenance.

What to Invest in a CRT after the Sale

Once the trust sells, it can generally invest in the same asset classes you’d hold in a taxable account. Trustees must follow the prudent-investor rule, which usually means a diversified portfolio, and can’t self-deal, such as buying a home for a beneficiary to live in.

The trust type should shape the strategy:

• NIMCRUTs pay the lesser of net income or the payout rate. Holding growth assets, like non-dividend stocks, keeps realized income low, defers distributions, and lets more compound tax-free. The trade-off is less liquidity in down years, though the trustee can rotate into yield to fund a distribution, then back.
• Standard CRUTs and CRATs pay regardless of income. Choosing among different strategies for Charitable Remainder Trusts can depend on income; e.g., standard CRUTs and CRATs suit income-oriented portfolios like dividend stocks, bonds, and rental property. Yield above the payout rate stays in the trust and keeps compounding tax-free. A CRAT’s fixed payment never rises, so growth only benefits the charity.

Assets to Avoid Putting in a CRT

No type of asset is strictly disallowed in CRTs by explicit statutory prohibition, but some can trigger tax, penalties, or lost benefits.

Assets That Undercut the Tax Benefit

• Assets already under contract. If a sale is effectively final before the transfer, the IRS taxes the gain to you anyway, and the proceeds sit in the trust where you can’t use them to pay that bill. Fund the trust before signing a binding agreement.
• S corporation stock. A CRT is an ineligible S corp shareholder, so the transfer can terminate the company’s S election for every shareholder.
• Low-gain assets. Losing positions, recent purchases, or QSBS-eligible stock you could sell tax-free anyway gain little from a CRT, and QSBS-stacking helps with tax exclusion for QSBS-eligible stock even further. Sell losing positions yourself to harvest the losses.
• Savings bonds. Accrued interest on Series EE or HH bonds is taxed to you at transfer.

Assets That Create Unrelated Business Income

Per IRS regulations, a CRT owes an excise tax equal to 100% of its unrelated business taxable income (UBTI).

• Operating partnership and LLC interests, including MLPs. Active business income flows through as UBTI. Review the operating agreement or prospectus first.
• Mortgaged real estate. Debt-financed income is generally UBTI, and if the trust takes on your personal debt, it can lose CRT status entirely.

Assets That Raise Self-Dealing Issues

• Your personal residence. Living in a home the CRT owns is self-dealing; you’d forfeit the Section 121 home-sale exclusion.
• Stock slated for redemption. If you own more than 35% of a company’s voting stock, a company buyback after the transfer is generally prohibited, unless offered to all shareholders on equal terms.

Assets with Smaller Deductions or Added Complexity

• Art and other tangible property. The deduction is delayed until the trust sells and is generally limited to your cost basis, not market value.
• Restricted or professional-corporation stock. First-refusal rights or state-licensing rules can block or complicate the transfer.

Can an Annuity Go in a CRT?

Technically yes, a trust can own an annuity, but it’s rarely wise to place an annuity in a Charitable Remainder Trust.

• Gifting a nonqualified annuity triggers ordinary income tax on its accumulated gain immediately (as per U.S. Code), the opposite of deferral.
• Annuity gains are ordinary income, so there’s no capital-gains tax to avoid.
• An annuity’s main selling point, tax deferral, is redundant inside a tax-exempt trust like a Charitable Remainder Trust.

FAQs

How Much of Your CRT Goes to Charity?

In most cases, the IRS estimates that you (or your beneficiaries) will receive ~90% of the asset value from the Charitable Remainder Trust and the charity will receive ~10%. In exchange for giving up that 10%, you get tax-free growth and a charitable deduction for 10% of the trust’s value—meaning almost everyone comes out ahead over time.

Why Are CRTs Allowed?

When we explain the magic of Charitable Remainder Trusts, most people ask: Why does this work? In short, the government tolerates & grants tax-free growth in exchange for a charity-donation promise; even the IRS lists tax deferral as one of the benefits of a Charitable Remainder Trust. Plus, because the law treats a Charitable Remainder Trust as tax-exempt, the trust doesn’t pay taxes on its capital gains (and you only pay taxes as you receive distributions).

How Much Does It Cost to Set Up a Charitable Remainder Trust?

With most attorneys, the cost to set up a Charitable Remainder Trust would be about $10–25,000 and six weeks or more of time. Using Valur as your trust administrator instead, you can get your CRT set up at no upfront cost and usually within 24 hours! Simply create an account to get started.

What Is the Term Length of a Charitable Remainder Trust (CRT)?

A CRT can last for a specific number of years up to 20 or for the lifetime of one or more beneficiaries. Financially, it’s usually best to set up the trust for as long as possible to grow your assets faster because you’re deferring taxes longer. At Valur, we worked with our legal partners to design trusts that enhance the value and minimize the drawbacks for our clients.

Why Charitable Remainder Trusts with Valur Make Sense

According to Charles Schwab, transferring highly appreciated assets into a Charitable Remainder Trust when you want or need to sell them protects the assets’ full fair-market value.

In short, CRTs allow for tax deferral, reinvestment, diversification, and, most importantly, significantly improved returns.

Creating a Charitable Remainder Trust with Valur means you can leverage the platform we’ve built that democratizes advanced tax planning for everyone. With Valur, you can reduce your taxes by six figures or more, and at less than half the cost of traditional providers.

From selecting the right strategy to handling setup, administration, and ongoing optimization, we take care of the hard work so you don’t have to. The results speak for themselves: our customers have generated over $3 billion in additional wealth through our platform.

Want to see what Valur can do for you or your clients? Explore our Learning Center, use our tax-savings calculators or schedule a time to chat with us today!