For families who want to support a favorite charity without immediately giving away assets they may still need for retirement, a Charitable Remainder Trust, or CRT, can offer an unusual compromise.
A CRT allows a donor to place assets in an irrevocable trust, provide income to themselves or other beneficiaries for life or a term of up to 20 years, and ultimately transfer what remains to one or more qualified charities.
For the right family, an estate planning lawyer can coordinate CRT planning with appreciated assets, retirement income, charitable giving, capital gains planning, and broader wealth-transfer goals.
How a Charitable Remainder Trust Works
A donor transfers cash, investments, real estate, or other appropriate property into an irrevocable trust.
The CRT then makes required payments to at least one noncharitable beneficiary. That could be the donor, a spouse, or another individual. When the payment period ends, the remaining trust property passes to the designated charitable beneficiary.
The trust must be structured so the actuarial value expected to remain for charity is at least 10% of the property initially contributed.
Because a CRT is irrevocable, assets transferred into it cannot simply be taken back if the donor changes their mind.
CRAT vs. CRUT: Two Ways to Generate Lifetime Income
There are two primary CRT structures.
A Charitable Remainder Annuity Trust, or CRAT, pays a fixed dollar amount each year based on the initial value of the trust.
A Charitable Remainder Unitrust, or CRUT, instead pays a fixed percentage of the trust’s value, recalculated annually.
For both structures, the payout generally must be at least 5% and no more than 50%, while still satisfying the 10% charitable remainder requirement.
A CRAT may appeal to someone who values predictable payments. A CRUT can provide payments that rise or fall with the value of the trust’s investments.
Why Appreciated Assets Can Make CRT Planning Attractive
One of the most common CRT strategies involves highly appreciated assets.
Suppose a Wisconsin family owns stock purchased decades ago for $100,000 that is now worth $1 million. Selling the stock personally could generate substantial capital gain.
Instead, the family may contribute the stock to a properly structured CRT before a binding sale occurs. A CRT is generally tax-exempt, allowing it to sell and reinvest appreciated property without immediately paying the capital-gains tax that an individual seller ordinarily would.
That does not make the gain disappear.
The CRT retains the donor’s carryover basis, and taxable income and capital gain can later flow out to the income beneficiary through annual distributions. The strategy generally defers and spreads taxation rather than magically eliminating it.
The Charitable Deduction Is Only Partial
Funding a CRT may also create a current charitable income-tax deduction.
The deduction is not equal to the entire amount transferred because the donor or another beneficiary retains an income interest. Instead, the deduction generally equals the present actuarial value of the charitable remainder.
The calculation depends on factors including:
- Asset value
- Beneficiary age
- Length of the payment term
- Payout percentage
- Applicable federal interest rates
The IRS also applies normal charitable-deduction limitations.
The 10% remainder test prevents families from setting an extremely aggressive payout rate that leaves too little expected value for charity.
How CRT Payments Are Taxed
CRT distributions follow a special ordering system.
The IRS generally characterizes payments in this sequence:
- Ordinary income
- Capital gains
- Other income, including certain tax-exempt income
- Return of trust principal
Each beneficiary receives a Schedule K-1 showing how that year’s payments should be reported.
This is why CRT planning should involve an estate planning attorney, CPA, financial adviser, and investment professional rather than being treated simply as a charitable donation.
A Charitable Remainder Trust can turn appreciated wealth into lifetime income while building a meaningful charitable legacy, but only when the tax rules, investment strategy, beneficiaries, and charitable objectives fit together. Krause Estate Planning & Elder Law Center helps Wisconsin families coordinate trusts, charitable giving, wealth transfer, and legacy planning with their broader estate strategy. Contact an estate planning lawyer today to determine whether a CRT belongs in your family’s long-term plan.
Frequently Asked Questions
1. What is a Charitable Remainder Trust?
It is an irrevocable split-interest trust that provides income to noncharitable beneficiaries before ultimately transferring the remainder to charity.
2. What is the difference between a CRAT and CRUT?
A CRAT pays a fixed annual dollar amount. A CRUT pays a percentage of trust assets recalculated each year.
3. What tax benefits can a CRT provide?
A properly structured CRT may create a partial charitable deduction, defer capital-gains taxation on appreciated assets sold by the trust, and support estate and philanthropic planning.
4. Which assets work well?
Highly appreciated publicly traded securities and certain appreciated real estate are common candidates. Closely held business interests and other complex assets require much more careful analysis before transfer.
5. How are distributions taxed?
Under the IRS tier system, distributions generally carry out ordinary income first, then capital gain, then other income, and finally principal.
6. Can I change the charity?
Possibly. The trust can be drafted to reserve a power to change the charitable remainder beneficiary among qualified charities. IRS guidance recognizes CRT arrangements in which the donor retained that power.
7. What is the 10% remainder test?
At creation, the actuarial value expected to pass to charity must generally equal at least 10% of the contributed property’s value.
8. Can I revoke the CRT?
Generally no. A CRT is irrevocable, and contributed assets cannot simply be reclaimed.
9. Can I serve as trustee?
Potentially, but CRT administration involves investment duties, tax filings, valuations, distribution calculations, and strict self-dealing rules. Independent or professional administration may be preferable for complex assets.
10. How does a CRT compare with a DAF or charitable gift annuity?
A CRT provides income to noncharitable beneficiaries before charity receives the remainder. A Donor-Advised Fund generally transfers legal control immediately to a sponsoring charity while allowing the donor advisory privileges over grants and investments. A Charitable Gift Annuity is typically a simpler contractual arrangement in which a charity promises fixed payments in exchange for a charitable gift. Each serves a different income and philanthropic objective.
TL; DR:
- An estate planning lawyer can help Wisconsin families use a charitable remainder trust to balance charitable giving with lifetime income, creating a strategy that supports both loved ones and long-term philanthropic goals.
- Effective CRT planning can be especially valuable for highly appreciated assets, allowing families to coordinate tax planning, potential capital gains tax benefits, and broader estate tax planning objectives.
- Thoughtful trust planning can structure payments to income beneficiaries while ultimately directing the remaining trust assets to selected charitable beneficiaries, supporting intentional wealth transfer and philanthropic planning.
- A well-designed charitable remainder trust should fit within broader Wisconsin estate planning, asset protection, and family wealth planning goals, with careful attention to ongoing trust administration and estate law Wisconsin.
- By combining income planning, legacy planning, and strategic charitable giving, an estate planning lawyer can help families create a more tax-efficient plan that preserves financial flexibility while supporting causes they care about.