For business owners balancing financial, estate, and tax planning while seeking to support meaningful causes, a charitable remainder trust (CRT) can be an effective solution. While the benefits of these trusts are compelling, it’s important to understand what a charitable remainder trust is, how it works, and what the pitfalls of a charitable remainder trust may include. Partnering with legal and tax professionals is essential to navigate these complex arrangements successfully.

What is a Charitable Remainder Trust?

A charitable remainder trust is an irrevocable trust that allows a donor to contribute assets, gain an immediate tax deduction, and receive income for a set period—typically for life or up to 20 years—before the remaining assets are passed to a designated charity.

Here’s a simplified breakdown of how it works:

• The donor sets up the CRT and names a qualified U.S. charitable organization as the remainder beneficiary.
• Assets such as cash, stocks, real estate, or private business interests are transferred into the trust.
• The donor receives a partial tax deduction based on the present value of the charitable interest.
• The trust may hold or sell the assets and reinvest the proceeds.
• Regular income payments are made to one or more non-charitable beneficiaries (including the donor).
• After the trust term ends, the remaining assets go to the charity.

Two main CRT structures exist:

• Charitable remainder annuity trust (CRAT): Pays a fixed amount each year.
• Charitable remainder unitrust (CRUT): Pays a set percentage of the trust’s annual value.

Both options must distribute at least 5%, but no more than 50%, of the trust’s assets annually.

Tax Deductions & Benefits

One of the most appealing features of a charitable remainder trust is the potential for a substantial tax deduction. By contributing highly appreciated assets into an irrevocable trust, donors can avoid immediate capital gains taxes and receive an upfront deduction based on the value of the charitable remainder.

If the trust later sells the assets, capital gains taxes are deferred until beneficiaries receive distributions—allowing the trust to reinvest the full value. Additionally, assets within an irrevocable charitable trust are removed from the donor’s estate, reducing potential estate taxes and probate complications.

However, since tax regulations vary by state, it’s critical to work with professionals who understand the nuances of local and federal law.

What are the Pitfalls of a Charitable Remainder Trust?

While the structure can offer considerable advantages, there are pitfalls of a charitable remainder trust that donors must consider:

• Irrevocability: CRTs cannot be undone once created, limiting flexibility.
• Complex Administration: Ongoing tax filings, compliance rules, and fiduciary responsibilities require expert oversight.
• Costs: Setup and administration expenses can be significant and may not be justified for smaller estates or contributions.
• Trustee Responsibilities: The trustee must be capable of managing investments, distributions, and regulatory compliance.
• IRS Scrutiny: The IRS has warned against misuse of charitable trusts, even listing CRT abuse on its “Dirty Dozen” tax scams list. Improper setup or asset transfer timing can nullify tax advantages.

Final Thoughts

A charitable remainder trust can serve as a powerful tool for wealth preservation, income generation, and charitable giving—but only when structured correctly. With guidance from qualified advisors, donors can maximize tax efficiency, avoid common pitfalls, and ensure long-term charitable impact.

Have questions about setting up a charitable remainder trust or understanding its fit within your broader strategy? Contact Holbrook & Manter for personalized, expert assistance