What is a Charitable Remainder Trust?

A Charitable Remainder Trust (CRT) is a type of irrevocable trust designed to reduce taxable income and support charitable causes. It allows you to convert highly appreciated assets (like real estate, stocks, or a business) into income for yourself or others, while ultimately benefiting a charity. Adding life insurance to a Charitable Remainder Trust (CRT) strategy can help preserve wealth for your heirs while still achieving your charitable goals.

How It Works:

1. You donate an appreciated asset (e.g., real estate or stock) to the CRT.

2. The CRT sells the asset — but because it’s a tax-exempt entity, it pays no capital gains tax on the sale.

3. The trust pays you (or another beneficiary) an income stream for life or for a set term (up to 20 years).

4. After the term ends, the remaining assets go to a charity you choose.

How It Saves You Money:

1. Avoid Capital Gains Tax:

   • If you sell the asset outright, you pay capital gains tax.

   • If the CRT sells it, there’s no immediate capital gains tax because the CRT is tax-exempt.

2. Get a Charitable Income Tax Deduction:

   • You receive a partial income tax deduction in the year you donate, based on the present value of the remainder interest going to charity.

3. Reduce Estate Taxes:

   • Assets transferred to a CRT are removed from your taxable estate, reducing potential estate taxes.

4. Defer Taxes on Income:

   • You receive an income stream from the trust, but income tax is spread out over time, potentially lowering your annual tax bracket.

Example:

• You own $1 million in stock with a $100,000 cost basis.

• If sold outright: You pay capital gains on $900,000.

• With a CRT: You transfer the stock to the CRT. The CRT sells it tax-free.

• You receive annual income (e.g., 5% per year = $50,000).

• You also get an immediate income tax deduction based on what the charity is projected to receive (e.g., around $300,000 present value).
  
  * This example is hypothetical and for illustrative purposes only. Actual outcomes will depend on your specific age, tax bracket, asset values, market performance, and current IRS discount rates.
  Charitable trusts and life insurance strategies involve complex legal and tax considerations.
  Always consult with a qualified estate planning attorney, tax advisor, and financial planner before implementing a CRT or related strategies. 

Types of CRTs:

• CRUT (Charitable Remainder Unitrust) – Pays a fixed percentage of trust value, recalculated annually.

• CRAT (Charitable Remainder Annuity Trust) – Pays a fixed dollar amount annually.

Considerations:

• It’s irrevocable — once you transfer the asset, you can’t take it back.

• You need to work with a qualified estate planning attorney and CPA.

• The charity must be IRS-qualified.

• It's best used for highly appreciated assets where tax savings are significant.

? The Issue:

When you transfer an asset to a CRT, the asset (and its value) will eventually go to a charity, not your heirs. This can create a concern:

"I'm avoiding taxes and helping a cause I care about — but my children lose out on that inheritance."

? The Solution: Use Life Insurance to Replace the Donated Wealth

You can use some of the income you receive from the CRT to pay premiums on a life insurance policy held in an Irrevocable Life Insurance Trust (ILIT). This creates a tax-free inheritance for your heirs.

? How It Works – Step-by-Step:

1. Transfer appreciated asset to CRT
   → CRT sells asset tax-free
   → You avoid capital gains tax

2. CRT pays you income for life or term (e.g., $50,000/year)

3. Use part of that income to fund a life insurance policy
   → The policy is owned by an ILIT (to keep it out of your estate)
   → Heirs receive tax-free death benefit when you pass

4. When you die:

   • Charity gets what's left in the CRT

   • Heirs get the life insurance death benefit (e.g., $1M)

? Example:

• You donate a $1M asset to a CRT.

• CRT avoids $200K in capital gains tax and pays you 5% annual income = $50K/year.

• You use part of that income (e.g., $10K/year) to buy a $1M life insurance policy.

• When you pass:

  • The charity receives the remaining trust assets