Compass Newsletter - Articles

Creating a Legacy Beyond Yourself: Charitable Remainder Trusts

By Deborah R. Lush
(Summer 2011)

A charitable remainder trust (CRT) provides a strategy for clients to create a legacy beyond themselves by making a charitable gift to a charity of the client’s choosing, while at the same time also satisfying personal financial goals and minimizing taxes. This article explores the CRT as part of any estate plan.

CRT Basic Description. A CRT is an irrevocable trust created when a client makes a gift to the trustee of the CRT and the trustee agrees in return to pay to the income beneficiary (who may be the client) an income stream for a specified period of time. At the end of the trust, which often occurs on the client’s death, a charity or charities chosen by the client receive the remaining assets in the trust and the trust terminates. Often, a CRT is called a “split-interest” trust, because it has both private (the income beneficiary) and public (the charity) interests.

Does the CRT Pay Taxes? No! The CRT is a tax-exempt entity, which is the key behind much of its potential. The CRT trustee must act carefully to invest the trust in a manner that avoids the realization of unrelated business taxable income (UBTI), because UBTI will subject the trust to a 100% excise tax on the UBTI received.

Possible Tax and Financial Benefits of a CRT. While each client’s situation is unique, clients may take advantage of many of the following benefits when establishing a CRT:

  1. Tax-Free Transfer. Transferring appreciated assets to a CRT, which is a tax-exempt trust, allows the asset to be sold without incurring capital gains taxes that might otherwise be due on the transfer. This allows the client to effectively sell the asset without eroding it by capital gains taxes. For this strategy to be effective, the contribution must happen before negotiations with a potential buyer have begun.
  2. Converting Illiquid Assets to Cash Flow. Often the asset transferred to a CRT is illiquid, like real estate, and the client is reluctant to sell the asset due to the capital gains taxes that would be due on the sale. The CRT allows the client to effectively convert the illiquid asset into a source of cash flow in a client’s portfolio, and without erosion for capital gains taxes. This can fill an important role in the client’s investment and retirement portfolio.
  3. Current Income Tax Deduction. The client’s gift to the CRT may qualify for an immediate charitable income tax deduction, which could offset any other income reported on the client’s income tax return.
  4. Retirement Planning and Asset Management. Often, one goal of retirement is to reduce the energy spent managing assets and investments. And often, an asset that is appropriate for transferring to a CRT has demanded significant energy from the client for its maintenance and growth. A CRT satisfies both pieces to this: it provides the means to dispose of a management-intensive asset and the mechanism to provide professional asset management during the client's later years.
  5. Gift and Estate Tax Planning. The CRT can minimize a client’s gift and estate tax burden by effectively removing the asset from the share of the client’s estate subject to gift and estate taxes.

When Should Clients Consider a CRT? A CRT is most effective for clients who meet the following criteria:

  • Are ready to transfer an asset that would generate a significant tax liability
  • Need income now or in the future
  • Have charitable goals and interests
  • Want to minimize their income and estate tax liability

While none of these factors is determinative, the greater their application, the more likely the CRT will offer a satisfying solution.


To illustrate the CRT, imagine a married couple each 52 years old who own highly-appreciated real estate and are ready to simplify and perhaps diversify their assets. The asset is valued at $2,000,000, and since they only paid $1,000,000 for the property, they would have to pay taxes on $1,000,000 worth of gain were they to sell the property. By instead transferring the property to CRT, the couple would fund the trust with an asset worth $2,000,000, which the trustee could then sell to invest in other assets if prudent. The trust would then pay the couple an income interest equivalent to 5% of the trust assets each year for the couple’s lifetimes, for an estimated income over 38.5 years of $5,717,609. Assuming the trust earns 7% and pays 5%, the trust grows by 2%, which more than doubles the charitable gift to $4,287,044.

This illustration shows how the transfer of an asset worth $2,000,000 into a CRT can result in a payment to the client over 38.5 years of $5,717,609 and a payment to the charity of $4,287,044. Of course, the illustration is limited to its assumptions, including rates of return. Nevertheless, the picture is clear that a CRT can produce very tangible benefits.


This article describes and illustrates the tangible benefits of a CRT, which allows a client to minimize taxes while satisfying personal financial goals. But the CRT is equally valuable for its intangible benefits, notably, the satisfaction of contributing to a meaningful charity and enabling priceless public benefits through the charity’s activities. These intangible benefits are endless, and creating a CRT is equivalent to creating a legacy beyond yourself.