Strategic Uses of Charitable Remainder Trusts in Retirement

Imagine a retirement where you not only have a reliable income stream but also the satisfaction of knowing you’re making a lasting impact on the causes you care about. A charitable remainder trust (CRT) is a tax-efficient donation strategy that might be the tool you need to help make this vision a reality.  

In this blog, we explore how CRTs may support retirement planning in ways that extend beyond simply generating income by blending financial security with charitable giving. 

A CRT is a tax-exempt, irrevocable trust designed to provide income to one or more beneficiaries for a set period of time—either for life or up to 20 years. At the end of the term, the remaining assets are distributed to one or more designated charities.

While CRTs are designed to prioritize the needs of the income beneficiary first, it’s worth briefly mentioning another charitable trust, the charitable lead trust (CLT). Understanding the key differences between CRTs and CLTs, particularly in how they distribute income and ultimately transfer assets, is crucial for informed charitable planning. Unlike a CRT, a CLT distributes income to a charity for a set period before the remaining assets pass to heirs. CLTs are often used to reduce estate taxes and facilitate wealth transfer, whereas CRTs focus on providing a retirement income stream first, followed by charitable giving after the income term ends. 

Retirement planning often involves building a mix of income sources: Social Security, pensions, investment portfolios, and sometimes annuities. A charitable remainder trust offers an additional source of consistent income and may be used to complement these traditional streams. When incorporating a CRT into your financial planning, there are two primary payout structures to consider:

▪︎ Charitable Remainder Annuity Trusts (CRATs): Provide fixed annual payments, offering predictability.

▪︎ Charitable Remainder Unitrusts (CRUTs): Provide a percentage of the trust’s assets, recalculated annually, which allows payments to grow over time if the trust’s investments perform well. 

Depending on your risk tolerance and income needs, one option may be more appropriate than the other. It’s important to remember that donating appreciated stock to fund a CRT may yield a higher income stream compared to selling the assets outright and paying immediate capital gains taxes. This flexibility makes CRTs a practical component of diversifying retirement funds. 

In retirement, many individuals face unexpected tax hurdles, particularly if they draw from taxable investment accounts or sell appreciated assets. CRTs offer important tax considerations that may significantly enhance a retirement strategy, especially for those seeking tax-efficient donation vehicles.

▪︎ Immediate Charitable Income Tax Deduction: When you fund a CRT, you may qualify for a partial income tax deduction based on the estimated amount that will eventually go to charity. This may be particularly valuable in high-income retirement years.

▪︎ Tax-Deferred Growth Within the Trust: Assets inside the CRT grow tax-deferred, allowing for potentially greater accumulation and higher future payouts.

▪︎ Capital Gains Tax Elimination on Asset Transfers: If you fund your CRT with highly appreciated assets, the trust may sell them without incurring capital gains taxes. This preserves more of the principal to generate income, which could be advantageous compared to selling assets outright. 

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