Charitable Remainder Trust in Utah

A Charitable Remainder Trust is an irrevocable split-interest trust that pays income to one or more non-charitable beneficiaries for a term of years or for life, with the remaining assets passing to one or more charitable organizations at the end of the term. It is simultaneously a tax planning tool, an income planning tool, and a charitable giving vehicle — and it works particularly well when the asset being contributed is highly appreciated and low-basis.

The core tax mechanics are significant. A CRT is exempt from federal income tax under IRC § 664(c). When the trust sells an appreciated asset, it pays no capital gains tax on the gain. The full proceeds are reinvested, producing income on a larger base than the seller would have retained after a direct taxable sale. The grantor receives a partial charitable income tax deduction in the year of funding based on the present value of the charitable remainder interest, calculated using IRS tables and the applicable federal rate. And the contributed assets are removed from the grantor's taxable estate.

At Cutler Riley, a Charitable Remainder Trust is $3,000.

How a CRT Works

The grantor transfers appreciated assets — real estate, closely held business interests, publicly traded securities, or other qualifying property — into the trust. The trust is irrevocable from the moment of funding: the assets cannot be returned to the grantor.

The trust sells the contributed assets. Because the trust is a tax-exempt entity under IRC § 664(c), it pays no capital gains tax on the sale. The full, pre-tax proceeds remain in the trust and are reinvested to generate the income stream that will be paid to the income beneficiaries.

Income is paid to the non-charitable beneficiaries — the grantor, the grantor's spouse, or other named individuals — for the specified term. That term can be a fixed period of up to 20 years, the lifetime of one or more individuals, or some combination. Each payment received by the income beneficiary carries a tax character determined by the trust's distributable net income, ordered by the tier system under IRC § 664(b): ordinary income first, then capital gain, then tax-exempt income, then return of principal.

At the end of the trust term, the remaining assets — the "charitable remainder" — pass to the charitable organization or organizations named in the trust. Those organizations must be qualified charities under IRC § 170(c).

CRAT vs. CRUT: Choosing the Right Structure

The two primary forms of Charitable Remainder Trust differ in how the income payment is calculated, and the choice between them has meaningful consequences for both the income beneficiary and the charity.

Charitable Remainder Annuity Trust (CRAT).

A CRAT pays a fixed dollar amount each year, set at the time the trust is created as a percentage of the initial funding value. Under IRC § 664(d)(1), that percentage must be at least 5% and no more than 50% of the initial net fair market value of the trust assets. The payment never changes regardless of investment performance — which provides predictability for the income beneficiary but means the charitable remainder may be eroded or eliminated if the trust underperforms. A CRAT cannot receive additional contributions after the initial funding.

Charitable Remainder Unitrust (CRUT).

A CRUT pays a fixed percentage of the trust's net fair market value, recalculated each year. Under IRC § 664(d)(2), that percentage must be at least 5% and no more than 50%. Because payments fluctuate with asset values, a well-invested CRUT can produce growing income over time and generally leaves a larger remainder for charity than a CRAT under the same assumptions. A CRUT can receive additional contributions after the initial funding date, which makes it more flexible as a long-term giving vehicle.

A common CRUT variant is the Net Income with Makeup CRUT (NIMCRUT), which limits distributions to the lesser of the stated percentage or actual trust income in low-income years, with the ability to make up the shortfall in later years when income is higher. This structure is particularly useful when the contributed asset is illiquid — real estate that has not yet been sold, for example — because it allows the trust to defer large payments until the asset is sold and income is available.

IRS qualification requirements.

Both CRATs and CRUTs must satisfy two mandatory tests. The present value of the charitable remainder interest, calculated at the time of funding using IRS tables and the applicable § 7520 rate, must equal at least 10% of the initial net fair market value of the contributed assets. And the annuity or unitrust payment rate must not exceed 50%. A trust that fails either test does not qualify as a CRT and loses the associated tax benefits.

The Charitable Income Tax Deduction

In the year the CRT is funded, the grantor receives a charitable income tax deduction equal to the present value of the charitable remainder interest. That value is calculated using IRS actuarial tables, the § 7520 rate in effect at the time of funding, the payout rate, the length of the income term, and — for lifetime trusts — the ages of the income beneficiaries.

The deduction is subject to AGI limitations. For contributions of appreciated property to a public charity, the deduction is limited to 30% of adjusted gross income in the year of funding, with any excess carried forward for up to five years. Deductions for contributions to private foundations are subject to more restrictive limits. Because the deduction is tied to the § 7520 rate, the structure of the trust — particularly the payout rate and the income term — should be modeled in coordination with a CPA before funding to confirm that the deduction will actually be usable in the grantor's tax situation.

Capital Gains Deferral: A Concrete Example

Assume a grantor holds real estate purchased for $100,000 that is now worth $1,000,000. A direct sale would produce $900,000 of long-term capital gain. At a 23.8% combined federal rate (20% long-term capital gains rate plus 3.8% net investment income tax), the tax on that gain is approximately $214,200 — leaving roughly $785,800 to reinvest.

If instead the grantor contributes the property to a CRUT before sale, the trust sells the property and retains the full $1,000,000. The trust reinvests on a base approximately 27% larger than the after-tax proceeds from a direct sale. That larger reinvestment base produces a larger income stream over the term and a larger charitable remainder at the end.

The gain is not eliminated — it comes out of the trust over time through the IRC § 664(b) tier system, characterized as capital gain distributions in each year it is distributed. But deferral and spread of the gain over the income term, combined with the charitable deduction in the year of funding, materially changes the economics compared to a taxable sale.

The Wealth Replacement Trust

A CRT removes the contributed assets from the grantor's estate, which is a feature for estate planning purposes. It also means that the income beneficiaries' heirs do not inherit the contributed assets — those assets pass to charity at the end of the trust term. For grantors who want both the CRT benefits and the ability to leave an inheritance for family, the standard solution is a Wealth Replacement Trust.

A Wealth Replacement Trust is typically an Irrevocable Life Insurance Trust (ILIT) funded with a life insurance policy. The grantor uses a portion of the CRT income stream to pay premiums on a policy held by the ILIT. At the grantor's death, the ILIT receives the death benefit income-tax-free and distributes it to the family outside the taxable estate. The result, in theory, is that the family receives an amount equivalent to — or greater than — the assets that passed to charity, without the insurance proceeds being subject to estate tax.

Common Questions

Who should consider a CRT?

The structure is most useful for individuals who hold a highly appreciated, low-basis asset — typically real estate, a closely held business interest, or a concentrated stock position — who want to sell without incurring immediate capital gains tax, who need or want an income stream for life or a fixed period, and who have some philanthropic motivation. All three elements generally need to be present for a CRT to make sense.

Can I name my own charity?

The charitable remainder beneficiary must be a qualifying organization under IRC § 170(c). This includes public charities, private foundations, and donor-advised fund sponsors. You can name multiple charities, and in some structures you can retain the ability to redirect the charitable remainder among qualifying organizations after the trust is created.

Can the income term be changed after the trust is created?

No. A CRT is irrevocable. The income term, the payout rate, and the charitable remainder beneficiaries are fixed at the time of funding and cannot be changed. This is one reason the design and modeling work before funding is critical.

What happens if a CRAT runs out of assets?

If the trust assets are depleted before the end of the income term, payments simply stop — the charity receives nothing and the income beneficiaries receive nothing further. This is called the probability of exhaustion problem and is one reason CRAT payout rates must be carefully calibrated. CRUTs are self-adjusting by design: payments decrease as asset values fall, but the trust is less likely to be exhausted because it never pays more than its stated percentage of current value.

How much does a Charitable Remainder Trust cost at Cutler Riley?

A CRT is $3,000. That includes custom trust design, drafting, and coordination with your financial advisor and CPA. Book a free consultation and we'll assess whether a CRT fits your situation before you commit.

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Ready to Explore a Charitable Remainder Trust?

A CRT at Cutler Riley is $3,000. Book a free consultation and we'll walk you through whether the structure fits your asset, your income needs, and your charitable goals — and model the tax and income implications with your CPA before you commit to anything.

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