How a Charitable Remainder Trust Affects Your Taxes
Planning for the future—whether for retirement, your family, or your charitable goals—often comes with important tax considerations. When emotions are involved, especially in thinking about leaving a legacy or providing for loved ones after death, tax questions can feel overwhelming.
Many people want to make meaningful gifts to causes they care about but worry about how doing so could impact their personal or family finances. If you're someone who wants to give generously and still preserve income for yourself or your heirs, a charitable remainder trust (CRT) may be worth exploring.
The Law Offices of Steven H. Peck, Ltd., helps clients take full advantage of financial tools like CRTs to accomplish both philanthropic and financial goals. If you're curious about how a charitable remainder trust could reduce your tax burden while still supporting the people and causes that matter most to you, keep reading. Reach out today to explore how a CRT could align with your goals.
What Is a Charitable Remainder Trust?
A charitable remainder trust is an irrevocable trust that allows individuals to donate assets to a charitable cause while retaining the right to receive income for a specified period.
When that period ends—typically after a set number of years or upon the death of the income beneficiary—the remaining assets in the trust go to a chosen charitable organization.
People use CRTs for many reasons: reducing taxes, receiving income during retirement, or donating to causes close to their heart. What sets CRTs apart from other giving strategies is that they combine tax benefits with income generation.
There are two primary types of CRTs:
Charitable remainder annuity trust (CRAT): Pays a fixed annual amount.
Charitable remainder unitrust (CRUT): Pays a percentage of the trust’s value, recalculated each year.
Both options offer unique tax advantages that can be tailored to meet individual goals.
Tax Benefits of a Charitable Remainder Trust
One of the most attractive features of a CRT is its potential to reduce various types of taxes. When structured properly, a CRT can help lower income tax, avoid capital gains tax, and reduce estate tax liabilities.
Here’s a closer look at how that works.
Income Tax Deductions
Donating to a CRT qualifies as a charitable gift, even though the charity doesn’t receive the assets immediately. Because of this, donors can take a charitable income tax deduction in the year the trust is established.
Factors that affect the deduction include:
The type and value of assets donated
The amount of income retained by the donor
The length of time the trust pays income
The applicable IRS interest rate (used to calculate present value)
The IRS requires that the deduction be calculated based on the present value of the charitable remainder interest. This can get technical, but the deduction is often significant, especially if the charity is set to receive a large portion of the trust at the end of the term.
Capital Gains Tax Avoidance
When appreciated assets (like stocks or real estate) are sold, the seller typically owes capital gains tax. However, transferring those assets to a CRT before the sale can avoid this immediate tax hit.
Here’s how this benefit works:
The CRT sells the appreciated asset without paying capital gains tax.
The full proceeds are reinvested to produce income for the donor.
Over time, the donor receives payments from the trust and pays income tax on the portion attributable to gains—but spread over many years.
This strategy allows donors to convert high-growth, low-income assets into a steady stream of income, without the upfront tax burden.
Estate Tax Reduction
Since CRTs are irrevocable, the donated assets are removed from the donor’s estate. That means they won’t be subject to estate taxes upon the donor's death.
This can be especially advantageous for high-net-worth individuals concerned about the federal estate tax or potential state-level estate taxes. Removing large, appreciating assets from the estate not only reduces the taxable estate value but also freezes the asset's value at the time of transfer.
Income Stream for Life or a Term of Years
One reason many people choose a CRT is the income component. A CRT allows donors (and possibly other beneficiaries) to receive income for life or for a term of up to 20 years.
Depending on the structure (CRAT vs. CRUT), this income can be fixed or variable. For retirees or those planning for retirement, this income can provide much-needed financial security while still allowing them to give to charity.
Income stream benefits include:
Predictable payments over time
Diversification of assets to support retirement income
Ability to name additional beneficiaries (e.g., a spouse or child)
It’s important to remember that although income is taxable, spreading it out over time—especially when paired with capital gains deferral—can make the overall tax impact much smaller.
Choosing the Right Assets to Fund a CRT
Not all assets are ideal for funding a CRT. Certain types of assets offer better tax benefits and liquidity.
Best-suited assets include:
Appreciated publicly traded securities
Real estate held for investment
Privately held business interests (with caution)
Cash (less tax benefit, but useful in some cases)
Assets to approach with caution include:
IRAs or qualified retirement accounts (subject to tax rules)
Tangible personal property (limited deductions)
S corporation stock (not permissible due to tax rules)
Selecting the right assets is critical for maximizing tax advantages. Attorney Steven H. Peck advises clients throughout Cook County, Lake County, McHenry County, and DuPage County on which assets to consider and how to make the transfer in a way that supports their long-term financial goals.
Important IRS Rules and Requirements
CRTs are governed by strict IRS rules. Failing to follow these can result in losing the trust’s tax-exempt status.
Key requirements to follow include:
The remainder interest to charity must be at least 10% of the trust's initial value.
The trust must be irrevocable.
The income beneficiaries and payment terms must be clearly defined at creation.
Annual filings (Form 5227) and trust accounting must be maintained.
Because CRTs must meet specific IRS definitions, legal counsel plays a crucial role in setting them up correctly. The Law Offices of Steven H. Peck, Ltd. works closely with clients to prepare the required documents and maintain compliance year after year.
Benefits for Donors With Charitable Intent
For those who already donate regularly or wish to leave a significant legacy, a CRT amplifies their giving power. Rather than giving assets outright, a CRT allows donors to generate income and ultimately make a larger donation in the future.
Benefits for charitably inclined individuals:
Receive income during life while planning a future gift
Maintain influence over how the charitable portion is distributed
Support multiple charities with one trust
Create a lasting legacy
Donors don’t need to be wealthy to set up a CRT, though the strategy often appeals to those with appreciated assets and a desire to support charitable causes in a more strategic way.
Common Mistakes to Avoid
Despite the many advantages, there are pitfalls to avoid when setting up or managing a CRT. Common errors include:
Using illiquid or hard-to-value assets: These can complicate income payouts and valuations.
Setting unrealistic payout rates: Payouts above IRS limits can disqualify the trust.
Failing to account for all tax consequences: Income tax, capital gains, and potential unrelated business income tax (UBIT) must all be considered.
Not reviewing the trust annually: Beneficiaries, investments, and charitable remainder amounts should be reviewed periodically.
Before creating a CRT, individuals should seek guidance on how to structure the trust to meet their financial, tax, and charitable goals. The Law Offices of Steven H. Peck, Ltd. helps clients sidestep these risks and build CRTs that serve their purposes long-term.
Alternatives to Consider
While CRTs are powerful tools, they may not be right for everyone. Other charitable giving options might better suit some individuals’ goals.
Alternatives to CRTs include:
Donor-advised funds: Offer flexibility and simplicity, but no income stream.
Charitable lead trusts: Provide income to charity first, then return the remainder to the donor or their heirs.
Outright gifts: Simple and immediate, but with fewer tax benefits.
Private foundations: Allow for long-term control and family involvement.
Each tool has its advantages, and the right choice depends on factors like tax situation, charitable goals, and desired level of control. Exploring all options with a legal professional helps individuals make informed decisions.
Reach Out to an Experienced Trust Lawyer
A charitable remainder trust can offer generous tax benefits, financial security, and a powerful legacy. But to fully take advantage of these benefits, it's important to work with someone who understands how to structure the trust properly and align it with broader estate planning goals.
Whether you live in Cook County, Lake County, McHenry County, or DuPage County, the Law Offices of Steven H. Peck, Ltd. in Riverwoods, Illinois, offers thoughtful, client-focused guidance. They work with individuals and families to turn charitable wishes into smart financial planning.
Reach out to the Law Offices of Steven H. Peck, Ltd. today to find out if a charitable remainder trust is the right move for you.