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How Does Charitable Remainder Trust Tax Deduction Work?

When you put assets into a Charitable Remainder Trust, you’re entitled to an immediate tax deduction worth at least 10% of the value of the assets. And although the up-front tax deduction isn’t the most significant financial benefit of a CRT, it’s immediate and tangible. You’re entitled to an immediate 10% deduction of the value of the assets you put into your trust — cash in your pocket this year. But, what is a Charitable Remainder Trust tax deduction, and how can you calculate it?

This short article explains all the critical concepts of a Charitable Remainder Trust deduction.

What Is The Charitable Remainder Trust Tax Deduction?

As people set up their CRT (Charitable Remaider Trust), they often wonder how big will their charitable deduction be and how much their CRT will donate to charity.

The tax deduction you get for putting cash or assets into a Charitable Remainder Trust is equal to the value in today’s dollars of the amount that the IRS estimates go to your chosen charity at the end of the trust’s term. Essentially, the IRS is giving you an upfront credit today for the expected value of the donation you’ll make many years later.

So, for example, if you put assets worth $1 million into a lifetime CRT and choose the maximum payout rate available, you might expect, given a few assumptions, to leave about $300K for charity when you pass away. Using the IRS’s interest rate (called the 7520 rates) — this month, it’s 1.6% — we can calculate the value today of that future $300K to account for the time value of money. It’s $100,010, close to the 10% we mentioned earlier.

Main Values

To qualify you for your CRUT tax deduction, we calculate the amount you expect to donate at the end of your trust which is based on three things:

  1. How long the trust is expected to run
  2. The annual payout rate
  3. The value of the assets you gift to the trust

The first two items are specified in the trust. To figure out the third item we need the current value of the trust’s assets so we can determine what they’re expected to be worth down the road, to calculate the tax deduction. Consistent with IRS rules, we get you a qualified appraisal.

  • For publicly traded stock, that’s easy: The public share price counts.
  • For crypto: There’s a public price for each crypto asset, though the IRS doesn’t just accept that price as the current fair-market value. So we work with a qualified valuation firm to validate the number and get a higher deduction for you.
  • For minimum liquid assets — startup equity or other private equity, for example — the qualified appraisal is a bit more involved. We still work with a third-party valuation firm, but the valuation process involves a more complete review, kind of like a slimmed-down version of the one a company will commission when it needs a new 409a valuation.

How To Use Your CRT Deduction?

For most people, this is easy. You can use your CRUT tax deduction to write off your income that is subject to the highest tax rate. This is usually ordinary income and short term capital gains, which are taxed at the highest rates. So if you have a $100,000 deduction and income subject to 50% federal and state taxes, you could expect to save $50,000 on your taxes this year.

Plus, if your deduction is so big that you can’t use it all in one year — nice problem to have! — you can carry all or part of it forward for up to five years.

Limitations for Charitable Remainder Trust Tax Deduction

While the charitable deduction you receive relies on your CRT structure and how much you donate, there are limits on how much of your tax deduction you can use in a specific year. That limitation is set by how much you earn in a given year, your Adjusted Gross Income (AGI), and what you donate to the CRT. You can write off a certain percentage of your AGI. That amount depends on the asset you donate to the CRT, whether cash or long-term capital gains or short-term capital gains. Below is a table outlining the AGI deduction limitations.

AmountIncome Deduction limit: Adjusted Gross Income (AGI) is defined as gross income minus adjustments to income. Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income.
MoneyDonation amount60%
Long-term capital assetsProperty owned by the donor for more than one year.Fair market value
Short-term capital assets and ordinary income propertyProperty owned by the donor less than one year, and any asset that, if sold, would generate ordinary income if sold by the donor.Cost basis

Next Steps

While the charitable tax deduction isn’t the biggest financial benefit of a CRT, it is a nice upfront tax reduction. The tax deduction you recieve is tied to your trust structure, how much you donate to the trust and the type of assets you donate to your Charitable Remainder Trust. Hopefully you should have a good idea of how all these aspects work to determine your charitable tax deduction and future tax savings!

See our suggested investment strategies to know more about CRUTs. Schedule a meeting with our team, or evaluate your potential return on investment with our Charitable Remainder Trust calculator.

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.