A charitable remainder trust (CRT) lets you convert highly appreciated stock, real estate or a closely held business into a stream of income for yourself or your family, take an income tax deduction now, and leave what remains to a charity you choose. Doing it correctly requires careful drafting, compliance with the federal tax rules that govern these trusts, and attention to New York trust law. We help individuals, families and business owners design, fund and administer charitable remainder trusts in New York.
What Is a Charitable Remainder Trust?
A charitable remainder trust is an irrevocable trust that pays income to the donor, or to other named beneficiaries, for a fixed term of years or for life. When the term ends, whatever remains in the trust passes to one or more designated charities. Because part of the gift is charitable, the donor receives an immediate income tax deduction equal to the present value of the charitable remainder interest.
CRTs are governed by Section 664 of the Internal Revenue Code. When the trust is created by a New York resident or funded with New York property, it must also comply with New York’s Estates, Powers and Trusts Law (EPTL). Properly structured, a CRT combines income, tax and legacy planning in a way that few other vehicles can.
Types of Charitable Remainder Trusts
There are two primary types of CRT, and choosing between them is one of the most important decisions you will make.
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Charitable Remainder Annuity Trust (CRAT)
A CRAT pays a fixed dollar amount to the income beneficiary each year, equal to at least 5% but no more than 50% of the initial fair market value of the trust assets. Because the payment is fixed, a CRAT provides predictable income, but it does not allow additional contributions after the trust is funded.
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Charitable Remainder Unitrust (CRUT)
A CRUT pays a fixed percentage, between 5% and 50%, of the trust’s assets as revalued each year. Payments rise and fall with the value of the trust, so the beneficiary shares in growth as assets appreciate, and additional contributions are permitted. Unitrusts come in several variations, summarized below; we cover them in more detail on our charitable remainder unitrust page.
| Variation | What it pays |
|---|---|
| Standard CRUT (STAN-CRUT) | The fixed percentage every year, regardless of how much income the trust actually earned. |
| Net Income CRUT (NICRUT) | The lesser of the fixed percentage or the trust’s actual income for the year. |
| Net Income with Makeup CRUT (NIMCRUT) | The lesser of the percentage or actual income, but shortfalls in lean years can be made up in later years when income is higher. |
| Flip CRUT | Starts as a NICRUT and converts to a standard CRUT on a triggering event, such as the sale of an illiquid asset. |
Key Benefits of a Charitable Remainder Trust
The first benefit is an immediate income tax deduction for the present value of the charitable remainder. If the deduction is larger than you can use in the year of the gift, the unused portion can be carried forward for up to five additional years.
The second is the avoidance of capital gains tax when appreciated assets are sold. The CRT itself is tax-exempt, so when the trustee sells the contributed stock or real estate, no capital gains tax is due at the trust level, and the full sale proceeds are reinvested to produce income. This is also what makes a CRT a practical way to diversify a concentrated stock or real estate position without an immediate tax hit.
Third, the trust produces a lifetime income stream for the donor and, if desired, other beneficiaries. Fourth, the contributed assets are removed from the taxable estate, which reduces both federal and New York estate tax. Finally, the remainder creates a lasting charitable legacy for the causes that matter to you and your family.
Assets Commonly Used to Fund a CRT
Almost any appreciated, marketable asset can be contributed. New Yorkers most often fund CRTs with publicly traded stocks and mutual funds carrying large unrealized gains; Manhattan, Brooklyn and other New York real estate held for many years; closely held business interests and LLC units; artwork, collectibles and other tangible personal property; and cash, when the goal is an income tax deduction without liquidating other holdings.
Each asset class raises its own legal and tax issues. Mortgaged real estate can generate unrelated business taxable income (UBTI) inside the trust. S corporation stock cannot be held by most CRTs without disqualification, so it must be handled with particular caution. We evaluate each proposed contribution before it is made so that a well-intended gift does not become a costly misstep.
How New York Law Affects Your CRT
CRTs are primarily a creature of federal tax law, but New York law governs much of their administration and enforcement. The New York Attorney General’s Charities Bureau has jurisdiction over charitable trusts and may require notice of the trust’s creation, annual filings and reporting under the EPTL and Article 7-A of the Executive Law.
New York also imposes its own estate tax with a separate exemption amount, and its so-called “cliff” provision can cause an estate exceeding 105% of the exemption to lose the exemption entirely. Assets placed in a properly drafted CRT are removed from the taxable New York estate, and they pass outside probate as well.
Common Uses for a Charitable Remainder Trust
The classic New York case is the owner of a highly appreciated apartment building or brownstone who wants to sell, defer the capital gains tax and generate retirement income. A second common case is the long-time employee of a New York company who holds a concentrated stock position and wants to diversify. Business owners use CRTs when planning the sale of a closely held company as part of an exit or succession strategy.
Others use a CRT to supplement retirement income while making a meaningful gift to a university, hospital, religious institution or community foundation. Some families name a CRT as the beneficiary of retirement accounts as a replacement for the stretch IRA strategy.
The CRT Planning Process
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Goal-setting consultation
We discuss your income needs, tax concerns, family dynamics and charitable intent.
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Modeling and analysis
We run projections on payout rates, deduction values and after-tax cash flow.
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Selection of trust type and trustee
We recommend a CRAT, a CRUT or one of the variations, and help you choose between an individual trustee, a corporate trustee or the charity itself as trustee.
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Drafting the trust instrument
We prepare a trust document tailored to you that follows the IRS sample language and New York law.
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Funding the trust
We coordinate the transfer of assets, including title work for real estate and proper retitling of securities.
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Ongoing administration
We assist with required filings, including IRS Form 5227, New York Charities Bureau registrations and annual valuations.
Why the Drafting Matters
CRTs sit at the intersection of estate planning, tax law and charitable giving. Mistakes in drafting, funding or administration can trigger excise taxes, jeopardize the trust’s tax-exempt status or expose the trustee to personal liability. We work with your financial advisor, accountant and chosen charity so that the trust functions as intended for decades. If a CRT is not the right fit, a charitable lead trust, which reverses the order of the charitable and family interests, may be.
If you are considering a charitable remainder trust as part of your New York estate plan, call us at 212-233-1233 or email [email protected]. We will review your goals, tell you whether a CRT is the right tool and outline a clear path forward.
