How Does a Charitable Remainder Trust Work?

Jason R. Zimmerman, MBA | August 12, 2016


A charitable remainder trust is a tax-exempt irrevocable trust that allows the client to transfer property to the trust and maintain an income stream. Because a charitable remainder trust is a tax-exempt entity, it can sell highly appreciated assets without realizing a current income tax liability. The CRT must make payouts at least annually. At the termination of the charitable lead trust, the balance of the assets are distributed to a qualified organization such as a public charity or a private foundation.

How Does a Charitable Remainder Trust Work?

charitable remainder trust infographic1. The client irrevocably transfers property to the trustee of a charitable remainder trust and receives a federal income tax deduction for the present value of the charity’s remainder interest, subject to limitations.

2. The trustee pays the donor either a fixed percentage of the initial value of the trust (annuity trust) or a specified percentage of the trust assets as revalued each year (unitrust). If the donor chooses to have the income assigned to a beneficiary other than a spouse, the donor is still responsible for income taxes. Payments to the beneficiary are subject to the federal gift tax but may qualify for the gift tax annual exclusion.

3. The client creates an irrevocable life insurance trust (ILIT), the beneficiaries of which are typically the client’s family members.

4. The client makes annual, scheduled or lump sum gifts of cash or other assets to the ILIT. Often, the amount of the gift made to the ILIT coincides with the life insurance premium.
5. ILIT purchases a life insurance policy on the client’s life, retains ownership rights and designates the ILIT as the beneficiary of the policy.

6. Upon the client’s death, the ILIT assets, including life insurance, pass to the ILIT beneficiaries free of income tax and transfer tax.

7. When the charitable remainder trust terminates, the charitable lead trust remainder is transferred to the charity.

Any Federal tax strategy contained herein is not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Code. Past performance does not guarantee future results. Guarantees, ratings, and benefits provided by life insurance products are subject to the claims-paying ability of the issuing insurance company.

Written by:

Jason R. Zimmerman, MBA

Senior Advisor

Jason Zimmerman is a Senior Advisor at Schechter with over 20 years of insurance and financial services experience.