The Economics of a Charitable Remainder Trust

“This seems too good to be true.” That is the reaction of many clients when the economic benefits of a charitable remainder trust are explained.

Let’s start with the basics. A charitable remainder trust (CRT) allows a donor and/or a donor’s spouse to make a gift in trust to charity. The CRT pays to the donor(s) a portion of the trust (called a “unitrust interest”) or a fixed annuity. At the death of the donor(s), the remaining portion of the CRT passes to the American Heart Association or other charity(ies) selected by the donor(s). CRTs must meet a requirement that at least 10% of the remainder value of the CRT passes to charity. This test is based upon an actuarial calculation made at the time of the formation of the CRT. There are two types of CRTs.

• Charitable Remainder Unitrust (CRUT): Every year, a CRUT pays a fixed percentage of the beginning-of-year value of the CRUT to the donor(s) until their passing. If the value of a CRUT increases, the unitrust payment also increases. The potential for increases in the unitrust payment is seen as an inflation hedge and explains why CRUTs are the type of CRT used most often.


• Charitable Remainder Annuity Trust (CRAT): A CRAT pays a fixed amount for the lifetime of the donor(s). This amount is determined by the value of the property initially contributed multiplied by a fixed percentage and will not change as the value of the assets inside the CRAT change. CRATs allow for predictability of cash flow.

If a person is charitably inclined but still would like to retain access to funds for living expenses, a charitable remainder trust can be the perfect vehicle. Unlike a gift to a charity made in a donor’s Last Will and Testament, a charitable remainder trust provides both an income tax deduction and a charitable federal estate tax deduction. Gifts at death to a charity do not create an income tax deduction for the donor but avoid federal estate tax (and state inheritance tax where applicable).

Let’s assume a couple is motivated to support the mission of the American Heart Association and is retired or nearing retirement. The couple would like some additional income during their retirement years. Let’s further assume that the couple has a highly appreciated asset, such as a portfolio of marketable securities held for more than one year. The portfolio has a significant value but does not generate a great deal of income, perhaps 3% per year. One spouse is 70 years old, and the other spouse is 72. Let’s also assume the portfolio has a current fair market value of $1,000,000 and has a tax basis of only $200,000. Keeping the asset in retirement means the couple can count on income of about $30,000 per year from the portfolio. Alternatively, the couple could sell the portfolio, pay the tax and reinvest the remainder of the money in securities or other assets that generate more income. Let’s further assume that the couple files a joint return for federal income tax purposes and have earnings from other assets that result in adjusted gross income for federal income tax purposes of $250,000. (State income taxes and sales costs would affect these calculations but are not included for purposes of this illustration). The sale of the marketable security portfolio in 2026 results in a capital gain of $800,000 (the fair market value of $1,000,000 less the basis of $200,000). The sale is subject to federal capital gains at a rate of 15% on proceeds up to $363,700 and 20% on the remaining $436,300 in proceeds, resulting in federal capital gains taxes of $141,815 and a federal net investment income tax of $30,400 (3.8% of $800,000). Taxes have claimed $172,215 of the proceeds, and the couple has a net amount of $827,785 remaining from the sale of the asset to invest for a retirement income stream.

Let’s assume instead that the couple wishes to establish a CRUT. The couple establishes the CRUT in June of 2026 and donates the securities to the CRUT. As donors, the couple receives an up-front charitable deduction as long as the donors correctly document the transfer with a Form 8283 with the donors’ income tax return for the tax year of the donation to the CRUT. The donors wish to retain a unitrust payment equal to 5% of the value of the CRUT. The initial payment amount to the donors would be $50,000, pro-rated for any short year. The donors have generated an immediate income tax deduction of $400,100 (the current value of the remainder interest that passes to the charity at the termination of the CRUT). When unitrust payments are received by the donors, they are taxed in the following order: ordinary income, capital gains, tax-exempt income and return of principal. In our example, most of the unitrust payments would be taxed as capital gains. Because the capital gains tax is spread out over the donor and/or the donor’s spouse’s lifetime, the marginal tax rate applied to the capital gains portion of the distribution in our example is reduced to 15%. The donors can apply the $400,100 income tax deduction against this income and other income of the donors provided the donors itemize on the donors’ income tax return. However, in each year, the donors will be limited to 30% of the adjusted gross income which is further reduced by a new 0.5 % adjusted gross income tax floor. Any unused charitable deduction can be carried forward for five (5) years after the year of the gift. This will result in the CRUT retaining all the proceeds of the sale intact to provide significant income for the donors in their retirement years. If the corpus of the CRUT grows faster than 5% per year, the unitrust payments will increase for the donors. Upon the death of the surviving donor, the remaining assets pass to the American Heart Association and avoid federal estate tax.

The income tax advantages of a CRT, coupled with the ability of a donor to support the mission of a charity, make this technique extremely attractive for clients to consider in the right circumstances. Finally, the CRT is a wonderful long-term planning vehicle for professional advisors to stay engaged with their clients. Wealth managers can manage the trust investments during the lifetime term(s) of the trust, attorneys can continue to advise the client and trustee related to ongoing trust documentation, legal and compliance requirements, and trust officers, if employed, can benefit by providing trust fiduciary and administrative services. The CRT is a win-win for clients, society, and advisors alike.

About the Author

Kent Endacott
Attorney at Law

Kent Endacott is a co-founder of Endacott Timmer; he has been serving the Lincoln community for more than 30 years. Kent’s close collaboration with his clients allows him to understand their objectives and build comprehensive estate and business succession planning solutions that are specifically tailored to transition their estates and businesses to successive generations in a careful and tax-efficient way.