Charitable Remainder Trust (CRT)
A trust that sells your appreciated asset tax-free, pays you an income stream from the full proceeds, gives you an immediate charitable deduction, and eventually benefits the charity you choose — often producing better financial outcomes than a direct sale.
Suppose you bought a rental property 20 years ago for $300,000. It is now worth $2 million. If you sell it, you pay federal capital gains tax of approximately $404,600 (23.8% on $1.7 million of gain). You net $1,595,400 to reinvest. At a 5% return, that generates $79,770 per year in income.
A Charitable Remainder Trust offers a different path. You contribute the property to the trust before any sale agreement is signed. The trust — which is a tax-exempt charitable entity — sells the property and pays no capital gains tax. The full $2 million is reinvested. At the same 5% return, the trust pays you $100,000 per year. That is $20,230 more annual income — for life — simply because the trust avoided the capital gains tax on the sale.
You also receive an immediate charitable income tax deduction in the year you fund the trust, equal to the present value of what the charity will eventually receive. At the end of the trust term (or at your death), whatever remains passes to the charitable organization you designate.
Charitable Remainder Unitrust (CRUT): Pays you a fixed percentage of the trust's value, recalculated every year. If the trust grows, your payment grows. If it declines, your payment declines. More common because it provides inflation protection and doesn't cap the upside. A 5% CRUT on a $2 million trust pays $100,000 the first year; if the trust grows to $2.4 million, you receive $120,000 the second year.
Charitable Remainder Annuity Trust (CRAT): Pays you a fixed dollar amount every year regardless of investment performance. More predictable but less flexible. The payment is set when the trust is funded and never changes.
Most clients prefer the CRUT for the growth potential. We model both options with your specific numbers — age, asset value, payout rate, and projected investment returns — before you choose.
The most common objection to a CRT: "My children will receive less because the charity gets the remainder." This concern is addressed through a paired strategy called the Wealth Replacement ILIT.
The CRT pays you a larger annual income stream than you would have received from a direct sale. You use a portion of that larger income stream to pay premiums on a life insurance policy held in an Irrevocable Life Insurance Trust (ILIT). The life insurance death benefit — received by your children income-tax-free and estate-tax-free — replaces the wealth that passes to charity. Your children receive the same inheritance they would have received without the CRT. The charity receives the CRT remainder. And the capital gains tax that would have been triggered by a direct sale is permanently eliminated.
- No capital gains tax when the CRT sells the contributed asset — the trust is a tax-exempt charitable entity. The full sale proceeds are reinvested with no tax haircut.
- Immediate charitable income tax deduction in the year of funding — typically 20% to 40% of the asset's fair market value, depending on your age and the payout rate. The older you are and the lower the payout rate, the larger the charitable deduction.
- Income stream from a larger invested base — because no tax was paid on the sale, more money is working for you, generating a larger income stream than a taxable sale would have produced.
- CRT assets are outside your taxable estate — the assets contributed to the trust are not part of your estate at death, reducing potential estate tax exposure.
- Works with any appreciated capital asset — real estate, publicly traded stock, closely held business interests, cryptocurrency, art — anything with a low basis and significant appreciation.
- Income you receive from the CRT is taxable — it is not tax-free income. The character follows the trust's four-tier income system: ordinary income first, then capital gains, then other income, then return of corpus. Early distributions are often partially ordinary income.
- The CRT is irrevocable — once you contribute the asset, the transfer is permanent. You cannot change your mind, reclaim the property, or redirect the charitable remainder.
- Timing is critical — the asset must be contributed to the trust before any binding sale agreement exists. If you sign a purchase agreement and then fund the CRT, the IRS will disregard the trust and tax you directly on the gain. The contribution must be genuinely unconditional.
- Annual Form 5227 is required with a strict April 15 deadline — unlike most tax returns, the CRT information return has no automatic extension. Late filing is $20 per day. We track this deadline for every CRT client.
- The charitable deduction is limited to 30% of adjusted gross income for appreciated property gifts — excess carries forward for 5 years. In a high-income year, you may not be able to use the full deduction immediately.
Model the economics — CRT vs. direct sale comparison
Before any documents are drafted, we prepare a detailed comparison of the CRT outcome vs. the direct sale outcome for your specific asset. This includes the capital gains tax avoided, the projected charitable deduction and its value at your tax rate, the projected income stream for your life expectancy at various payout rates, and the projected trust remainder for charity. You see the full financial picture before making any commitment.
Shurek — before any external costs are incurredSelect the CRT structure — CRUT or CRAT, payout rate, term
Based on the modeling, we advise on the optimal CRT type, payout rate, and term. A higher payout rate produces more income but a smaller charitable deduction (because less is expected to remain for charity). A lower payout rate does the opposite. The IRS requires the charitable remainder to be at least 10% of the initial value — we confirm this test is satisfied at the chosen payout rate and your age.
Shurek advises — you decide based on income needs and charitable goalsEstate attorney drafts the CRT document
The CRT is a legal trust instrument that must satisfy specific IRS requirements under Section 664. The document specifies the trust type, the payout rate and timing, the income beneficiaries and their term, the charitable remainder beneficiary, the trustee, and the governing law. We provide the attorney with the tax parameters; the attorney drafts the document; we review it for technical compliance before it is executed.
Estate attorney drafts — Shurek reviews for tax complianceContribute the asset — before any sale agreement
The property is transferred to the CRT before any purchase agreement is signed with any buyer. The title to real estate is transferred via deed; securities are transferred in kind to the trust's brokerage account; other assets via appropriate transfer documentation. The transfer must be complete and unconditional before any sale discussions become binding. We coordinate the mechanics of the transfer with your custodians and the attorney.
Shurek coordinates — attorney handles deed for real estateTrustee sells the asset tax-free and invests
After the transfer, the trustee sells the asset. No capital gains tax is recognized at the trust level — the trust is tax-exempt. The full proceeds are reinvested in a portfolio designed to generate the income needed to make the required annual distributions to you. The investment strategy should balance income generation with long-term growth to sustain the trust throughout your lifetime.
Trustee executes the sale and manages investments — financial advisor may assistClaim the charitable deduction and begin annual distributions
In the year of funding, we calculate and document the charitable deduction on your Form 1040 (via Form 8283 for non-cash contributions). The trust begins making your annual or quarterly distributions per the trust document. We prepare the Form 5227 annually and issue your income reporting document (1099 or K-1) for each year's distributions.
Shurek — prepares all annual tax filings for the trust and your personal return| Form | Name | When Due | What It Does and Why It Matters |
|---|---|---|---|
| 5227 | Split-Interest Trust Information Return | April 15 annually — NO automatic extension | Required every year the CRT exists — this is the trust's annual tax information return. Reports income, deductions, distributions, charitable remainder value, and trustee information. The April 15 deadline is strict — unlike individual returns, there is no 6-month automatic extension available. Late filing is $20 per day. We begin preparation in March for every CRT client to ensure this deadline is met. |
| 8283 | Noncash Charitable Contributions | Filed with your Form 1040 in year of funding | Required when you contribute a non-cash asset (real estate, stock, other property) to the CRT. Reports the description, basis, and fair market value of the contributed asset. For contributions of property worth over $5,000 (virtually always the case for a CRT), a qualified independent appraisal must be attached. For publicly traded stock, no appraisal is needed — just the standard price documentation. |
| 1040 Schedule A | Itemized Deductions — Charitable Contribution | Filed with your Form 1040 in year of funding | Reports the charitable deduction. You must itemize deductions (not take the standard deduction) to claim the CRT charitable deduction. The deduction is limited to 30% of AGI for appreciated property contributions. Any excess carries forward for 5 years and can be claimed in subsequent returns. |
| 1099 or K-1 | Income Reporting to Beneficiaries | January 31 of the following year | Each year the trust makes distributions to you, it issues a 1099-R (for annuity-type distributions) or a Schedule K-1 documenting the income character — ordinary income, capital gains, or return of corpus — using the four-tier system. The character of income determines how it is taxed on your personal return. We prepare these documents as part of the annual Form 5227 preparation. |
Full economic modeling of the CRT vs. direct sale comparison. Advising on CRT type, payout rate, and optimal structure for your situation. Reviewing the trust document for tax compliance. Preparing Form 8283 and the charitable deduction documentation. Preparing Form 5227 annually (on time — this is a hard deadline we protect). Issuing your annual income reporting document. Advising on investment strategy within the trust to sustain distributions.
Drafts the CRT trust instrument to satisfy IRS requirements under Section 664. Handles deed transfer for real estate contributions. Coordinates with the trustee on administrative matters. Advises on choice of charitable beneficiary and whether a donor-advised fund should be the charitable remainder recipient (which provides flexibility to direct grants over time).
Contribute the asset before any sale agreement is signed — this timing requirement is non-negotiable and cannot be reversed. Select the charitable beneficiary. Receive your annual income stream. Optionally, consider the wealth replacement ILIT strategy to ensure your heirs receive an equivalent inheritance funded by a portion of the larger CRT income stream.
The CRT has a strict annual filing requirement with no automatic extension — a deadline that catches many trustees off guard. Understanding the full compliance calendar is essential to maintaining the trust's tax-exempt status and your income stream.
CRITICAL: Asset Contributed Before Sale Is Binding
The contributed asset must be transferred to the CRT before any purchase agreement is signed or any binding commitment to sell exists. Once a sale is essentially certain, the IRS will disregard the CRT and tax you directly on the gain. This timing requirement is absolute and cannot be undone. We coordinate this timing before any asset marketing or buyer discussions.
Form 8283 and Charitable Deduction — Filed with 1040
In the year you fund the CRT, we prepare Form 8283 documenting the non-cash contribution and claiming the charitable deduction on Schedule A. The deduction may be limited to 30% of AGI in the funding year — we calculate any carryforward and track it on subsequent returns for up to 5 years.
Form 5227 DUE — NO AUTOMATIC EXTENSION
The most important annual deadline for any CRT client. Form 5227 must be filed by April 15 every year the trust exists. Unlike individual returns, there is NO automatic 6-month extension available. Late filing carries a $20/day penalty. We begin Form 5227 preparation in March for every CRT client — this deadline will not be missed.
Trust Valued — Annual Distribution Calculated
For a Charitable Remainder Unitrust, the trust is valued at the beginning of each year and the payout percentage is applied to determine the year's distribution. We coordinate with the trustee on the valuation and confirm the distribution amount. Changes in portfolio value directly affect your annual income — we advise on investment strategy to sustain the required payout.
Income Character Determination — Four-Tier System
We determine the character of your annual CRT distribution under the four-tier income ordering rules: (1) ordinary income, (2) capital gains, (3) other income, (4) return of corpus. Early in the trust's life, distributions are typically partly ordinary income and partly capital gains — the gains from the original asset sale flow through over time. We calculate this correctly each year.
Charitable Remainder Passes to Charity
At the end of the trust term or at your death, remaining assets pass to the designated charitable organization. The charity provides a written acknowledgment. No estate tax on the CRT assets — they are outside your estate. We coordinate the final Form 5227, confirm the charitable distribution, and document the trust termination.