What Is a Charitable Remainder Trust?

A Charitable Remainder Trust (CRT) is an irrevocable trust governed by IRC Section 664 that accomplishes three goals simultaneously: avoiding capital gains tax on appreciated assets contributed to the trust, providing a stream of income to the donor or other beneficiaries, and generating an immediate charitable income tax deduction under IRC Section 170. The trust pays income for a term of years (up to 20) or for the lifetime of one or more beneficiaries, then distributes the remaining assets to a designated qualified charity.

As described in "Billionaire Wealth Strategies" (Jim Dew, 2024), Chapter 9, the CRT falls under the "R" (Reduce) component of the DEAPR framework.

How Does a Charitable Remainder Trust Work?

The donor transfers appreciated assets (stocks, real estate, business interests) into the CRT. Because the trust is tax-exempt under IRC Section 664, the CRT can sell the contributed assets without recognizing capital gains at the trust level. The full, pre-tax proceeds are reinvested, creating a larger income-producing base than would exist after a taxable sale where federal capital gains tax of up to 23.8% (20% long-term rate plus 3.8% NIIT under IRC Section 1411) would reduce the investable amount.

The donor receives annual distributions and claims an upfront charitable income tax deduction under IRC Section 170 based on the present value of the charity's remainder interest. The IRS Section 7520 discount rate, published monthly, determines the present value calculation. Higher IRC Section 7520 rates increase the charitable deduction; lower rates reduce it.

Two primary CRT structures exist under IRC Section 664:

CRAT (Charitable Remainder Annuity Trust) pays a fixed annual dollar amount, set at inception as between 5% and 50% of the initial fair market value of assets transferred. No additional contributions are permitted after funding. The fixed payment provides income predictability but does not adjust for inflation or portfolio growth.

CRUT (Charitable Remainder Unitrust) pays a percentage of trust value recalculated annually, also set between 5% and 50%. Additional contributions are permitted. The variable payment adjusts with portfolio performance, providing a hedge against inflation but introducing income variability.

Under both structures, the charity's remainder interest must equal at least 10% of the initial fair market value contributed, as required by IRC Section 664(d). Failing this test disqualifies the trust.

When Do Entrepreneurs Use Charitable Remainder Trusts?

Concentrated stock positions benefit from the CRT structure because the trust can diversify a single-stock holding without triggering capital gains to the donor. The donor receives an income stream from the diversified portfolio rather than holding concentrated risk.

Business sale proceeds directed into a CRT before the sale close allow the trust to receive business interests and sell them tax-free at the trust level. The timing of the contribution relative to the sale is critical; contributing after a binding sale agreement may cause the IRS to treat the gain as realized by the donor.

Highly appreciated real estate transferred to a CRT avoids the capital gains that a direct sale would trigger. For properties with low basis, the capital gains tax savings can be substantial, though the donor permanently gives up ownership.

Philanthropic entrepreneurs use CRTs to align wealth with charitable values while maintaining income. The CRT provides income during the donor's lifetime and benefits the charity after the trust term ends.

How Does Dew Wealth Approach Charitable Remainder Trusts?

One Dew Wealth client placed commercial real estate holdings into charitable remainder trusts. The strategy allowed income from the properties during his lifetime while ensuring the assets would benefit his synagogue after his passing. For him, Make Rich Real was not about maximizing net worth but about aligning wealth with values. The CRT provided the vehicle to achieve both tax efficiency and philanthropic impact.

The Fractional Family Office^® coordinates CRT planning with the estate attorney, tax advisor, and investment team. The irrevocable nature of the CRT means the decision cannot be undone. Assets contributed are permanently removed from the donor's estate (producing an estate tax deduction under IRC Section 2055), but the donor loses the ability to change the ultimate charitable beneficiary unless the trust document specifically reserves that right.

CRT income distributions follow a four-tier ordering rule under IRC Section 664(b): ordinary income first, then capital gains, then other income, then return of principal. The tax character of distributions depends on the trust's internal accounting, not the donor's personal tax situation.