Charitable remainder trusts: income for you, a gift later, a deduction now

A charitable remainder trust is a deal with three parties: you put appreciated assets into an irrevocable trust, the trust pays you (or you and a spouse) income for life or a term of years, and whatever remains at the end goes to charity. In exchange, you get a partial tax deduction today and — the headline feature — the trust can sell your appreciated assets without paying capital gains tax at the sale. It's a genuinely powerful tool for a specific person: charitably inclined, holding a large low-basis position, wanting income. For everyone else, it's an expensive way to give away your principal.

The mechanics in one pass

• You transfer assets — ideally highly appreciated stock, a business interest before sale, or real estate — into the trust. The transfer is irrevocable: this money is no longer yours.
• The trust sells the assets tax-free (it's a tax-exempt entity) and reinvests the full pre-tax proceeds in a diversified portfolio.
• It pays you a fixed percentage (a CRUT, recalculated on the balance each year) or a fixed dollar amount (a CRAT) — between 5% and 50% annually, though most are set at 5–7%.
• You take an immediate income tax deduction for the present value of what charity is projected to receive — which must be at least 10% of what you contributed.
• At the end (your death, or a term up to 20 years), the remainder passes to the charities you named — which you can usually change along the way.

Why the tax deferral matters: the full pre-tax engine

Sell $1 million of zero-basis stock personally and you might keep $700,000–$760,000 after federal and state capital gains taxes; that smaller amount is what compounds for you. Sell it inside a CRT and the full $1 million compounds, with your payout calculated on the bigger base. The gain isn't erased — it's deferred and dribbled out: each distribution to you carries out the trust's income under a four-tier system (ordinary income first, then capital gains, then tax-free income, then principal), so you pay tax gradually as you receive payments rather than all at once at the sale.

CRUT vs. CRAT, and the useful variants

• CRUT (unitrust): pays a fixed percentage of the trust's value, revalued annually — payments rise and fall with the portfolio, giving you inflation participation. The default choice, and the only type you can add assets to later.
• CRAT (annuity trust): pays a fixed dollar amount forever — predictable, but inflation erodes it, and low-rate environments can make CRATs fail the IRS qualification tests entirely.
• NIMCRUT (net income with makeup): pays the lesser of the stated percentage or actual income, banking shortfalls to 'make up' later — used to park growth now and turn on income at retirement.
• Flip CRUT: starts as a NIMCRUT, then flips to a standard CRUT on a trigger event — the standard structure for unsellable assets like real estate, so no payout is owed before the property sells.

Who actually fits — and what it costs

1. The profile: a concentrated appreciated position of roughly $500,000+ (below that, setup and administration costs eat the benefit), real charitable intent, a desire for lifetime income, and heirs otherwise provided for.
2. Expect $5,000–$15,000 in setup legal fees, plus annual administration, trustee, and tax-filing costs (a CRT files its own returns).
3. The deduction depends on age, payout rate, and IRS interest rates: older donors and lower payout rates mean bigger deductions. It must clear the 10% remainder test or the trust doesn't qualify.
4. Time it before the sale: contribute stock before a signed, binding deal to sell the company — contribute after the deal is effectively done and the IRS can tax you on the gain anyway under assignment-of-income rules.
5. Compare the alternatives first: a donor-advised fund (simpler, full deduction, no income back), qualified charitable distributions from an IRA at 70½+, or just gifting appreciated shares outright. A CRT wins specifically when you need the income stream.

Bars like these are the honest sales pitch — and the honest caveat is what they omit: the remainder. Add a fourth, invisible bar labeled 'what your heirs give up' before deciding.

The bottom line

A charitable remainder trust converts a low-basis position into a lifetime income stream on a full pre-tax base, hands you a deduction now, and endows your charities later — in exchange for irrevocably giving away the remainder. If you're charitable, concentrated, and income-hungry, it's one of the most elegant structures in the code. If you're just tax-averse, the math will disappoint you: somewhere in every CRT projection, a charity is getting the money your heirs aren't. Make sure that's the point, not the surprise.