Charitable Remainder Trust: Meaning, How it Works

Charitable remainder trusts (CRTs) provide income to beneficiaries. What's left goes to charity.
Dalia Ramirez
Erin Oppenheim
By Erin Oppenheim and  Dalia Ramirez 
Updated
Edited by Tina Orem

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A charitable remainder trust is an irrevocable trust that pays income to the donor or other noncharitable beneficiary for a set period. Whatever is left after that time period, called the remainder, goes to charity

IRS.gov. Charitable Remainder Trusts. Accessed Jan 26, 2024.
.

This type of trust works in the reverse of a charitable lead trust, which supports a charitable organization first and then passes the remainder to personal beneficiaries such as family members

FidelityCharitable.org. Charitable lead trusts. Accessed Jan 26, 2024.
. Both types of charitable trusts are often called “split interest” trusts because they split payments between the donor and a noncharitable beneficiary.

🤓Nerdy Tip

Charitable trusts support IRS-qualified public charities and private philanthropic foundations; they must meet specific requirements to qualify for tax-exempt status. Otherwise, the IRS considers them private foundations, which have their own tax rules and regulations.

Pros and cons of a charitable remainder trust

Advantages

Drawbacks

Terms and beneficiaries can’t be changed once the trust is set up.

Can help you establish a philanthropic legacy through long-term distributions while supporting your loved ones with a steady income.

Can be costly and complex to set up; you’ll likely need a lawyer or tax pro.

Types of charitable remainder trusts

Charitable remainder trusts can be structured as a fixed amount like a regular, annual salary (annuity trust) or as a percentage of the trust's total value (unitrust).

Type of trust

How it works

Charitable Remainder Unitrust (CRUT)

  • The annual payment amount is recalculated every year according to the value of the assets, which can fluctuate.

  • Annual payments from the trust to beneficiaries must be 5% to 50% of the fair market value of the trust's assets.

  • Allows additional contributions.

Charitable Remainder Annuity Trust (CRAT)

  • The annual payment amount is determined when the trust is created.

  • Pays a fixed dollar amount to beneficiaries each year, which must be 5% to 50% of the initial value of the property or assets placed in the trust.

  • Doesn’t allow additional contributions.

How a charitable remainder trust works

  1. The grantor (creator) identifies their beneficiaries, both charitable organizations and non-charitable heirs such as a spouse, children or grandchildren.

  2. The grantor selects a trustee to manage the trust. This can be a friend, family member or a third party, such as a bank.

  3. The grantor funds the trust with assets, including cash, real estate, publicly traded securities and certain types of closely held stock, bonds and other investments.

  4. The grantor drafts a trust deed with an estate planning attorney or other professional. In some states, you may need to register your charitable trust with a government agency such as the state attorney general or secretary. 

  5. Every year, the grantor or trustee fills out tax forms for the trust, typically IRS Form 990. You may also have to fill out a split-interest trust return, IRS Form 5227, or a trust return, IRS Form 1041 or 1041-A

  6. The trustee ensures the beneficiaries receive their income from the trust every year.

Frequently asked questions

Setting up a charitable remainder trust is often complex. The process can vary by state and jurisdiction, depending on the assets you wish to donate and your chosen beneficiaries. Consult an experienced estate planning attorney or tax pro to determine the best type of charitable trust for you and ensure you set it correctly.

Charitable remainder trusts (CRTs) and donor-advised funds (DAFs) are ways to donate to charitable organizations over time while potentially reducing your estate taxes.

The main difference is that charitable remainder trusts prove income to the grantor or their beneficiaries, while DAFs do not. You can, however, name a DAF as the beneficiary of a CRT, which can give you more control over the assets.

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