You hold a stock. It’s up 200%. Selling it means a massive tax bill. Keeping it means you still pay those future capital gains if you eventually sell. There is a third option, though it requires letting go of control.
A charitable remainder trust (CRT) is a financial instrument that sits at the intersection of income generation and philanthropy. It is irrevocable. Once assets move into the trust, you cannot take them back. In exchange for that surrender, the trust pays you (or your beneficiaries) an income stream for life or a set number of years. When that period ends, the remaining assets go to a qualified charity.
It is not a magic bullet for tax avoidance. It is a structured trade-off.
The Mechanics of the Trade-off
The structure is specific. You transfer appreciated assets—stocks, real estate, private company stock—into an irrevocable trust. The trust sells the assets. Because of the tax-exempt status of the charity, the trust sells without triggering immediate capital gains tax. This is the core advantage.
If you sold the stock personally, you would pay 15% to 20% in federal capital gains plus state taxes. You would then reinvest the net proceeds. With a CRT, the full value of the asset is reinvested. The pool of money is larger. The income stream is calculated based on that larger pool.
Who gets paid? You, the donor. Or your spouse. Or both. The payment is called an “annuity” if it is a fixed dollar amount, or a “unitrust” if it is a fixed percentage of the trust’s annual value, adjusted for inflation. You choose the structure. You choose the duration.
The Tax Deduction: How Much and When
You get a charitable income tax deduction. But not for the full value of the asset. You get a deduction for the present value of the interest that will eventually go to charity.
This value is lower than the asset’s current market price. Why? Because you are keeping an income stream. The longer the income term, the smaller the charitable remainder, and thus the smaller the deduction.
The deduction is subject to limits. Generally, you can deduct up to 30% of your adjusted gross income (AGI) in the year of the contribution. Any excess can be carried forward for up to five years.
It is not a full deduction. It is a partial one. And it comes later. You file the return for the year of funding. The deduction is claimed then, subject to the AGI caps.
Income Options and Risks
There are two main types of CRTs.
- Charitable Remainder Annuity Trust (CRAT): Pays a fixed amount annually. The percentage must be at least 5% of the initial fair market value. The payout does not fluctuate with market performance. If the market crashes, you still get the same check. If the market soars, you still get the same check.
- Charitable Remainder Unitrust (CRUT): Pays a fixed percentage of the trust’s revalued assets each year. If the portfolio grows, your payment grows. If it shrinks, your payment shrinks. This is often preferred for inflation protection.
