A Charitable Remainder Trust (CRT) allows you to contribute pre-sale business interests to a trust, avoid immediate capital gains tax on the sale within the trust, receive an income stream from the trust for your lifetime (or a set term), and leave the remainder to charity at the end. The result is a larger asset base generating income for you, a charitable income tax deduction in the year of contribution, and a significant charitable legacy, at the cost of the assets ultimately passing to charity rather than heirs.
A CRT is an irrevocable trust, once you transfer assets to it, you can't take them back. The trust sells the contributed business interests and reinvests the full proceeds (no capital gains tax at the trust level) into a diversified portfolio. You receive an annual income distribution (either a fixed dollar amount, a CRAT, or a percentage of trust assets, a CRUT) for your lifetime or for up to 20 years.
The tax benefits are significant. In the year you fund the CRT, you receive a charitable income tax deduction equal to the present value of the remainder interest that will eventually pass to charity. This deduction is limited to 30% of your AGI in the funding year, with a 5-year carryforward for any excess. More importantly, the capital gains on the sale aren't recognized immediately, they're distributed to you over time as the trust makes income payments, spreading the tax burden across many years.
The CRT strategy must be executed before the business sale is pending. If you fund the CRT with business interests after a sale is negotiated or agreed to in principle, the IRS may apply the step-transaction doctrine and treat the gain as recognized by you at the time of contribution, negating the tax benefit. The CRT must be the seller, not you. This requires that the CRT be funded well before any binding agreement to sell.
CRTs are best suited for business sellers who: have significant charitable intent, are comfortable with the assets ultimately going to charity rather than heirs, want a guaranteed income stream in retirement, and have time to establish the trust before the sale process begins. For sellers who want to pass assets to children, a CRT combined with an 'asset replacement trust' (using some of the tax savings to fund a life insurance trust for heirs) can achieve both goals.
Key facts
- CRT is an irrevocable trust, assets can't be returned to the donor once transferred
- The trust pays no capital gains tax when it sells the contributed business interests
- The donor receives an income tax deduction in the year of funding equal to the present value of the charitable remainder (typically 20-40% of the funded amount)
- Income distributions to the donor are taxed under a four-tier system (ordinary income, capital gains, other income, return of basis), gains are distributed out before return of basis
- The charitable remainder must be at least 10% of the initial fair market value of assets contributed, this limits how aggressively income can be structured
- Must be funded before the sale is pending, the step-transaction doctrine applies
What is the difference between a CRAT and a CRUT?
A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount each year, providing predictable income but no inflation protection, and it can't receive additional contributions. A Charitable Remainder Unitrust (CRUT) pays a fixed percentage of the trust's value each year, so payments fluctuate with investment performance but can keep up with inflation. CRUTs are more common for business sale planning because the payments can grow over time.
What charity receives the remainder from my CRT?
You designate the charitable beneficiary (or beneficiaries) when the trust is established. This can be a specific public charity, a private foundation, or a donor-advised fund. A donor-advised fund as the remainder beneficiary is common, it gives you flexibility to direct the charitable gifts to specific causes over time, rather than committing to a specific charity at the time the trust is established.
