CRT
CRT is an irrevocable trust that pays income to one or more non-charitable beneficiaries (typically the donor or spouse) for a term of years or for life, with the remainder going to a charitable beneficiary. The donor receives an upfront tax deduction equal to the present value of the charitable remainder.
CRTs are commonly used for capital-gains-deferral planning on concentrated low-basis stock. The donor contributes the stock to the CRT; the CRT sells the stock without recognising capital gains (because the CRT is tax-exempt for its own income); the CRT then invests the proceeds in a diversified portfolio and pays income to the donor over the trust term. At the end of the term, whatever remains in the trust passes to the charitable beneficiary.
The tax mechanics: the donor receives an immediate income tax deduction equal to the present value of the charitable remainder (calculated using IRS-prescribed actuarial tables). The income payments to the donor are taxable, but with a complex 4-tier ordering rule that determines whether each payment is ordinary income, capital gains, tax-exempt income, or return of basis. The tier ordering is designed to recognize the most-taxed income first.
CRTs come in two main varieties. A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount annually. A Charitable Remainder Unitrust (CRUT) pays a fixed percentage of the trust's annual fair market value. CRUTs are more popular because they grow with the trust assets, providing inflation protection. NIMCRUT and FLIPCRUT variants add complexity for specific planning situations.
Synthetic UHNW households with concentrated low-basis stock should include CRT scenarios for diversification. Trust accounting needs the 4-tier ordering ledger (ordinary income, capital gains, tax-exempt, return of basis) for distribution character. Term-of-years vs lifetime variants both used; CRUT vs CRAT distinction shapes the annual-payout calculation.
Common pitfalls
- Computing payouts as a fixed % of initial value (CRAT-style) when a CRUT-style annual revaluation was intended — different vehicles, different math.
- Skipping the 10% remainder requirement — CRT must show at least 10% of contribution value going to charity at term-end, by IRS actuarial calculation.
- Forgetting the 4-tier ordering on distributions — payment character matters for the donor's tax treatment.
- Letting the trust hold UBTI-generating assets — CRTs lose their tax exemption on UBTI and become subject to 100% excise tax on the UBTI.
Examples
Donor age 65 with $5M of concentrated stock, basis $500k. Funds CRUT with the stock; 5% annual unitrust payout for life. Year 1: trust sells stock (no recognized gain — CRT is tax-exempt), reinvests in diversified portfolio. Donor receives ~$250k/year (5% × current value). Donor immediate deduction: ~$1.5M (PV of charitable remainder). At donor's death (~20 years later), residual trust value passes to charity. Net effect: $4M of capital-gains deferral; lifetime income; charitable bequest.