How Does a Charitable Remainder Trust Work?

Brad Smith • September 24, 2020

A couple lives a life well with their income. However, the biggest asset they own is a tract of unimproved real estate that the wife received from her parents many years ago. The land was part of the family’s farm and is located in prime area that is growing in value. The couple is looking for ways to supplement their retirement income, which is based solely on their retirement accounts.

What can they do to generate retirement income and not have to pay a significant proportion of their profit in capital gains? One strategy would be to establish a Charitable Remainder Trust (CRT). 

The wife would transfer the land to an irrevocable trust created to provide payments to her and her husband for the rest of their lifetime. At the death of the surviving spouse, the trust property would be transferred to a charitable organization named in the wife’s trust agreement.

When having the CRT, the trustee, in this case would be the wife, can sell the trust property and reinvest the proceeds, without have to pay any immediate tax on the gain. The couple would have more money for retirement in a CRT than if they sold the land and invested the proceeds. There is also an option of investing their tax savings outside of the trust to produce additional income.

An Annuity Trust versus a Unitrust

The CRT can be either an annuity trust or a unitrust. The types of CRT used will determine how payments from the trust are calculated. If a Charitable Remainder Annuity Trust (CRAT) is chosen, the couple will receive annual payments of a set percentage of the trust’s initial fair market value. The percentage will need to be at least 5% and may not be more than 50%.


If they choose a Charitable Remainder Unitrust (CRUT), they would receive an annual income based on the fair market value of the trust property, which is revalued each year. That percentage must be at least 5% and not more than 50%. Once the trust ends, the trustee transfers of the remaining trust assets to the charity.


These are complex legal strategies that need to be considered in tandem with an overall estate and tax plan. You should speak with an experienced, estate planning attorney to learn if using CRTs would be a good strategy for you and your family.

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