Charitable reimainder Trust (CRT) - finanCIAL advisors and consultants

Glover Park Wealth Management, LLC is a SEC registered investment adviser (RIA). Our financial advisors provide ultra-high net worth clients with access and the ability to setup a Charitable Remainder Trust (CRT) through our third-party custodian, Charles Schwab & Co., Inc.

What is a Charitable Remainder Trust (CRT)?

A Charitable Remainder Trust (CRT) is an irrevocable trust designed to provide income to the donor (or other designated beneficiaries) for a specified period of time. The income periods are typically setup for the life of the donor, spouses' life of the donor, or a fixed term of up to 20 years. The Charitable Remainder Trust will ultimately benefit one or more charitable organizations in which the client selects.

Once established, the charitable remainder trust is an irrevocable trust and cannot be revoked, altered, or changed in ways that change its core structure. Charitable Remainder Trusts are particularly popular among Ultra-High Net Worth (UHNW) Individuals because they combine philanthropy with sophisticated tax planning, estate planning, and wealth management strategies.

Donors to a Charitable Remainder Trust convert highly appreciated assets such as (stocks, bonds, ETFs, mutual funds, partnership interests, c-corporation stock, real estate, art, cryptocurrency and more) into a reliable and predictable income stream which avoids capital gains on the appreciate asset contribution since it is being donated ultimately to charity.

The IRS recognizes Charitable Remainder Trusts as tax-exempt entities, meaning the trust itself does not pay taxes on capital gains, dividends or income that the trust generates. This status is key to their appeal for wealth management and high net worth clients. Donors contribute assets to the Charitable Remainder Trust, which then manages and distributes funds according to the trust's terms. At the end of the income period, the remaining assets (the "remainder interest") is passed or donated to the designated charities, fulfilling the charitable intent of the trust.

How Charitable Remainder Trusts (CRTs) Work?

Here's a detailed breakdown of how a Charitable Remainder Trust operates, especially in the context of UHNW individuals looking to sell an appreciated asset tax-free and generate lifetime income:

• Asset Contribution: The donor transfers appreciated assets—such as stocks, real estate, artwork, or business interests—into the CRT. These assets are often ones that have grown significantly in value which have a low-cost basis and large unrealized capital gain, creating a large potential capital gains tax liability if sold by the individual directly in a brokerage account. By placing them in the trust, the donor relinquishes ownership of the highly appreciated asset but gains other significant benefits in doing so.

• Tax-Free Sale of Assets: Once inside the CRT, the trust can sell the contributed assets without incurring capital gains taxes. This is because the CRT is a tax-exempt entity under IRS rules. For UHNW individuals, this is a major advantage: For example, if an individual owns a stock which was originally purchased for $1 million, and the stock has appreciated to $10 million in value which is a $9 million unrealized gain. A direct sale of the stock would trigger capital gains tax on the $9 million profit (up to 20% federal rate plus state taxes and potential net investment income tax). In a Charitable Remainder Trust, the stock sale happens tax-free, preserving the full proceeds for reinvestment.

• Reinvestment and Income Generation: The trust invests the sale proceeds in a diversified portfolio (e.g., stocks, bonds, deferred income annuities, immediate income annuities, or other income-producing assets which are allowed by the IRS). The donor then receives regular income payments from the CRT. These payments can be structured for life, providing a steady income stream that replaces or supplements other retirement income. The payout rate is typically set between 5% and no more than 50% of the trust's value, depending on the type of CRT and IRS requirements (e.g., the remainder interest must be at least 10% of the initial value). This income is taxable via federal and state taxes to the recipient, but it's often spread out over time, allowing for tax deferral and potentially lower effective tax rates.

• Charitable Remainder: Upon the donor's death (or the end of the term), the remaining assets in the trust are distributed to the chosen charities. This "split-interest" nature—benefiting both the donor during their lifetime and charities afterward—is what qualifies the Charitable Remainder Trust for its tax advantages.

For UHNW individuals, this process is ideal for assets like concentrated stock positions (e.g., from a tech company founder) or real estate holdings. It allows them to "monetize" the asset without a massive tax hit, diversify investments through the trust, and secure lifelong income while aligning with philanthropic goals.

Types of Charitable Remainder Trusts

There are two main types of CRTs, each with different payout structures:

• Charitable Remainder Annuity Trust (CRAT): This provides a fixed annual payment (annuity) based on a percentage of the initial fair market value of the assets contributed. For example, if you fund a CRAT with $5 million at a 5% payout rate, you'd receive $250,000 annually, regardless of how the trust's investments perform. CRATs are more predictable but cannot accept additional contributions after setup.

• Charitable Remainder Unitrust (CRUT): This pays a variable amount annually to the donor, calculated as a fixed percentage of the trust's value, revalued at the end of each year. If the trust grows (e.g., due to strong investment returns), payments increase; if the value of the trust decreased, then payments decrease. CRUTs offer inflation protection and can accept additional contributions, making them more flexible for UHNW donors who may want to add assets over time.

UHNW individuals often prefer CRUTs for their growth potential, especially if they're funding with high-growth assets.

Tax Benefits for Ultra-High Net Worth (UHNW) Clients

CRTs offer multiple layers of tax efficiency, making them a powerful tool for UHNW individuals wealth preservation:

• Avoidance of Capital Gains Tax: As noted, the trust sells assets tax-free, deferring or eliminating capital gains tax that could otherwise reach hundreds of millions for UHNW portfolios.

• Charitable Income Tax Deduction: Upon funding the CRT, the donor receives an immediate income tax deduction equal to the present value of the remainder interest going to charity. This is calculated using IRS tables based on factors like the donor's age, payout rate, and interest rates. For cash contributions, the deduction can be up to 60% of adjusted gross income (AGI); for appreciated assets, up to 30%. Unused deductions can carry forward for five years.

• Estate Tax Reduction: Assets in a CRT are removed from the donor's taxable estate, potentially reducing estate taxes (which apply to estates over $13.61 million per individual in 2026, subject to inflation adjustments). This is critical for UHNW families who are looking to minimize the 40% federal estate tax rate.

• Income Tax on Distributions: While distributions are taxable, they follow a "tiered" system: First ordinary income, then capital gains, then tax-exempt income, and finally return of principal (tax-free). This can result in more favorable tax treatment over time.
  

Considerations and Potential Drawbacks

• Irrevocability: Once the trust is funded, you can't reclaim assets, it is an irrevocable trust.

• Minimum Requirements: CRTs typically need at least $100,000–$500,000 to justify setup costs (legal fees, administration), making them better suited for HNW & UHNW individuals.

• Charitable Commitment: At least 10% of the initial value must go to charity as a remainder interest.

• Risks: Investment performance affects income (especially in CRUTs), and there's no guarantee of principal preservation unless invested in US Treasury Bonds.

UHNW individuals should consult tax advisors, estate attorneys, and CPAs to model scenarios, as rules can vary by state and personal circumstances.

Charles Schwab & Co., Inc. is the third-party custodian of client assets for Glover Park Wealth Management, LLC.

Schedule a meeting with Glover Park Wealth Management, LLC today to learn more about how our financial advisors and wealth management consultants can help with Charitable Remainder Trust strategies to diversify highly concentrated assets and generate income for life.