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Charitable Remainder Trust Guide

✅ A Charitable Remainder Trust is a tax-advantaged account that allows you to exit your winning positions but put off the associated income taxes, thereby growing your money faster with the magic of compounding. It’s kind of like a more flexible IRA. In concrete numbers, an investor with a $1 million capital gain could earn an extra $3.5 million over her lifetime with a Charitable Remainder Trust! Estimate your potential savings with our successful calculator.

Imagine that you own an asset that has done very well over the years, and you’re preparing to sell. You’ve spent years of your life investing time and money into these assets, and you’re about to be rewarded. However, you’re going to have to send a big portion of your earnings to the government. So you might be reluctant to sell because you don’t want to trigger a taxable event. But what if a Charitable Remaider Trust (CRT) could save you?

Ever heard of CRT? A tool that could allow you to exit your winning positions and also put off those income taxes for many years. In this guide, we’ll explain all the essentials on how Charitable Remainder Trusts work. But before we dive into the mechanics, here is a quick explanation of why these trusts are so valuable.

What Is A Charitable Remainder Trust?

A Charitable Remainder Trust is a tax-exempt account designed to reduce taxable capital gains income. In exchange for a promise to donate some of the trust’s assets to charity at the end of the trust’s term, you receive a huge tax benefit: You may defer the taxes you would otherwise pay when selling your assets.

In the meantime, the Charitable Remainder Trusts distribute income to you annually for a specified period and, when that period is over, donate the remainder — everything that hasn’t been distributed yet — to your chosen charity.

And, why is a CRT valuable? What are the benefits of tax deferral if you’re just going to have to pay those taxes in the future? The logic is actually pretty intuitive. Today, with a Charitable Remainder Trust, you get to pay zero taxes, reinvest those savings, and let them grow for many years. This is the same reason IRAs are the most popular retirement tool for most Americans.

Charitable Remainder Trust: Benefits

By deferring your taxes and reinvesting the savings, you can increase your returns by 50% or more. But how does a CRT trust make benefits happen?

1. Tax Deferral And Tax-Free Compounding (Also Known As “More Money”)

Charitable Remainder Trusts protect your gains from taxes when you sell, and the money you save is reinvested and continues to grow. For example, if you are a California resident and you have capital gains of $1 million, you would typically pay about $360,000, or 36%, in taxes, and you would be left with about $640,000 to invest (or spend!) going forward. If your shares were in a Charitable Remainder Trust, by contrast, the trust would keep the whole $1 million to reinvest.

In the meantime, you get to reinvest those savings. That’s an extra $360,000 reinvested, and, assuming average historical returns, that that extra investment could turn into more than $7 million over 40 years! Those are the tax implications of a charitable remainder trust, and the magic of the one-two punch of federal-tax-advantaged trusts and compounding.

2. Lower Effective Tax Rates

Another benefit of Charitable Remainder Trusts is that you can keep more of the proceeds from your sale through “tax smoothing,” or spreading out your income over time to lower the effective tax rate you pay on your big gain. Instead of realizing all of the income from your sale in one year, you can use them to spread that income out over many years and effectively smooth out your income and, therefore, your tax rate.

3. An Up-Front Tax Deduction

In addition, in exchange for the charitable gift you’ll make at the end of your trust, you get an immediate tax deduction in the year you fund your trust, usually equal to around 10% of the value of your assets.

How Does A Charitable Remainder Trust Work?

Setting up a Charitable Remainder Trust is easy.

  • Choose an asset. You, the individual setting up the trust, choose an appreciated asset that you’d like to contribute to a trust. This could be anything that has appreciated or is likely to appreciate significantly; the most common assets we see from our users are start-up equity, cryptocurrency, public stocks, small- and medium-sized businesses, real estate, and other private assets.
  • Designate a beneficiary. You designate an income beneficiary — the person who will receive payments from the trust every year. Most of our users choose to be the income beneficiary themselves and/or name a partner or child.
  • Transfer assets & get a deduction. You transfer your chosen assets to the trust, and you get an immediate charitable deduction, usually equal to about 10% of the value of the asset you put in.
  • Sell assets tax free. You sell your asset and, in most cases, the trust pays no taxes on that sale, allowing you to grow more money for longer.
  • Reinvest the savings. You’ve just saved as much as 40% on your taxes – more if these are short-term capital gains – and you get to reinvest those savings and diversify your portfolio.
  • Take your annual withdrawal. You will receive a distribution that depends on the type and length of Charitable Remainder Trust you choose.
  • Leave the remainder to charity. The remainder —whatever is left in the trust at the end of the trust’s term — is donated to a charitable organization. This is usually somewhere between 10% and 100% of the initial asset value.
  • Profit. Stepping back, you can see the gains: Charitable Remainder Trusts typically result in 50% to 100% greater returns, even after you make your charitable donation.

What Are The Tradeoffs of Charitable Remainder Trusts?

There are a few tradeoffs associated with setting up a CRT.

  • A CRT is an irrevocable trust, so you can’t just change your mind after you contribute assets. With that said, the trust isn’t locked in until you contribute, so there is some flexibility on the front end.
  • You are only allowed to withdraw a certain percent of trust assets each year, so in the early years of the trust you are giving up liquidity of assets for the potential of greater future wealth. But the distributions add up quickly, so you’ll typically have access to 100% of your initial asset value after 7 or 8 years.

Charitable Remainder Trust Example

An example will be helpful. Take Olivia, an employee of a successful startup who joined the company around Series B. Her shares are worth about $250,000 according to the 409a valuation, but she got them when they were worth almost nothing. She expects the company to go public at the end of the year, at which point she will sell her shares for about $1 million.

Olivia puts her shares into a lifetime trust today. She’ll get a tax deduction this year of approximately $25,000 (that’s 10% of the current 409a value).

Then, when her company goes public, she will sell the shares. Because her shares are in the trust, she won’t pay any taxes now. So instead of sending $360,000 to California and the federal government this year, she will get to invest her $1 million and let it grow.

Every year, Olivia will receive an annual distribution from her Charitable Remainder Trust. The default distribution will be around 5% of the trust’s assets — $50,000 in year 1, and more as her trust grows over the years. By taking advantage of tax smoothing, she’ll end up paying a (much lower) 24% total tax rate on those annual distributions.

Due to the magic of compounding and income smoothing, Olivia’s money will grow much faster in a tax-free trust. Taking the numbers we gave you above—most importantly, a $1 million exit — using a lifetime Charitable Remainder Trust, Olivia’s gains would be striking. She could keep about $5 million after taxes, compared to $1.4 million if she just left her shares in a taxable account —that’s about a 250% additional return!—and she’d get to give $1.7 million to her chosen charity to boot.

charitable remainder trust
Charitable Remainder Trust Example

Different Types Of Charitable Remainder Trusts

Charitable Remainder Trusts come in a variety of flavors. You can choose between a Charitable Remainder Unitrust (CRUT) and a Charitable Remainder Annuity Trust (CRAT); between a Term trust and a Lifetime trust (or even one that runs longer than your lifetime). We address each of these choices in a separate series of articles, but here’s how we think about the tradeoffs at a high level.

For years, the CRAT was the standard approach because it was simple and easy to understand. But over time, creative minds realized CRUTs result better. What’s the difference? This Charity Remainder is a “unitrust,” which means it pays out a fixed percentage of the trust’s assets every year, and that amount can go up or down depending on how the trust grows. Instead, an “annuity” Charitable Remainder pays out a fixed amount of the trust’s assets, determined at the start of the term, and that amount cannot change over time. This might seem like an esoteric distinction, but it has real consequences: If your assets grow over time, a CRUT, by definition, will pay out larger distributions every year and you have more control over when you can take your distributions. Plus, per IRS rules, a CRUT can last much longer than a CRAT, and a longer trust term means more tax-free growth and more distributions for you and your family.


Do CRTs Give Your Gains To Charity?

This charitable giving is great—you get to reap the benefits of tax-free growth, you get to give some money to charity and take a deduction. And because of the way the trust is structured, you still come out ahead in the end. How? You do have to commit a portion of the assets to charity, but you get tax-free growth in the meantime, and that growth outweighs any charitable gift.

Why Are CRTs Allowed?

When we explain the magic of Charitable Remainder Trusts, most people ask: Why does this work? In short, the government has decided that it’s willing to allow people to get tax-free growth in exchange for a promise that they’ll give some money to charity in the future. Since the assets that are left in a Charitable Remainder Trust at the end will go to a tax-exempt entity, the trust doesn’t pay taxes on its capital gains (and you won’t pay taxes until you withdraw your money).

How Much Does It Cost to Set Up A Charitable Remainder Trust?

With most attorneys it would cost abut $10,000-$25,000 and 6 weeks or more to set up a Charitable Remainder Trust. With Valur, you can get set up at no cost and in less than 24 hours! To get started, you can create an account and fill out your information.{

Charitable Remainder Trust Length

Most of our customers feel concerned about how long do Charitable Remainder Trusts last. A CRT can last for a specific number of years up to 20 years or the lifetime of one or more people. However, it’s convinient to set up the trust for as long as possible to grow your assets faster by taking advantage of deferring taxes for a longer period. Also, each of these structures has benefits and costs, and we’ve worked with our legal partners to design our trusts in a way that enhances the value while minimizing the drawbacks.

Next Steps

According to Charles Schwab, Charitable Remainder Trusts are “particularly suited for appreciated assets,” because they allow for tax deferral, reinvestment, diversification and, most importantly, significantly improved returns.

Read more on how to deal with CRTs for crypto to learn more about our CRT series.If you still have any questions, reach out to schedule a meeting, or use our Charitable Remainder Trust calculator to see the potential return on investment given your situation.

About Valur

We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy.