A charitable remainder trust (CRT) is one of the most effective tools available when a client holds a highly appreciated asset and has both income needs and charitable intent. The structure is well established, but the setup process involves several moving parts, and getting them right requires coordination among your client, their attorney, their financial advisor, and the charitable beneficiary.
This article walks through what is involved in setting up a CRT, who does what, and where Pinellas Community Foundation fits into the process.
A Quick Recap: What a CRT Does
A charitable remainder trust is an irrevocable trust that allows a client to contribute an appreciated asset, receive an income stream from the trust for a term of years or for life, and then transfer the remaining assets to a named charity when the trust ends. Your client also receives a partial charitable deduction in the year the trust is funded.
There are two primary structures: the charitable remainder annuity trust (CRAT), which pays a fixed dollar amount each year, and the charitable remainder unitrust (CRUT), which pays a fixed percentage of the trust’s value recalculated annually. The CRUT is more commonly used because it allows the payout to adjust with the trust’s performance.
Who Is Involved in Setting Up a CRT
Setting up a CRT is a team effort. Here is how the roles typically break down:
- Estate attorney: Your client’s estate planning attorney drafts the trust document, ensures it meets IRS requirements, and handles execution.
- Financial advisor: The financial advisor identifies the right asset for funding, models the income stream and tax impact, and coordinates with other advisors on timing and structure.
- CPA / tax advisor: The CPA or tax advisor calculates the charitable deduction, confirms the tax treatment of trust distributions, and advises on the year of funding.
- Charitable beneficiary: The charitable beneficiary, such as PCF, receives the remaining trust assets at the end of the trust term and applies them according to the client’s charitable intentions.
PCF does not draft CRT documents or provide legal or tax advice. Our role is to be a knowledgeable, reliable charitable partner, one who understands how remainder assets will be received, invested, and deployed, and who can speak clearly to that process so your client feels confident in the arrangement.
The Setup Process, Step by Step
Step 1: Identify the Right Asset: CRTs work best when the asset has appreciated significantly and would trigger a large capital gain if sold outright. Common examples include real estate, concentrated stock positions, and closely held business interests. For the CRT structure to function as intended, the asset generally must be transferred into the trust before any sale occurs. The trust, not your client, then sells the asset.
Step 2: Choose the Trust Structure: Work with your client and their estate attorney to decide between a CRAT and a CRUT, and to set the payout rate and trust term. The trust must satisfy IRS requirements, including a payout rate between 5% and 50% and a projected charitable remainder value of at least 10% of the initial contribution. The attorney will run the required IRS actuarial calculations.
Step 3: Name the Charitable Beneficiary: The trust document names one or more charitable organizations as remainder beneficiaries. If your client names PCF, they can direct the remaining assets into a fund at PCF, including a Donor Advised Fund, so that the giving continues to reflect their values even after the trust ends. Successor advisors or family members may continue recommending grants through the DAF structure, allowing the charitable intent to extend across generations.
Step 4: Draft and Execute the Trust: The estate attorney drafts the trust document. Once executed, the CRT becomes a separate irrevocable legal entity. Your client has limited ability to change the terms after this point, so it is important that all decisions regarding asset, structure, beneficiary, and payout rate are finalized before signing.
Step 5: Fund the Trust: Your client transfers the asset into the trust. For appreciated securities, this is typically a brokerage transfer. For real estate, a deed transfer is required and must be handled carefully to avoid triggering the gain before the trust is in place. Proper sequencing and coordination among the advisor, attorney, and trustee are critical at this stage.
Step 6: Trust Administration Begins: Once funded, the trust sells the asset and invests the proceeds. The trustee, which can be the client, a corporate trustee, or another party, manages distributions and files annual tax returns for the trust (Form 5227). Distributions to the client are taxable and follow a four-tier ordering system.
Step 7: Remainder Distribution to PCF: At the end of the trust term, the remaining assets are distributed to the named charitable beneficiary. If PCF is named, our team coordinates the receipt of assets and applies them to the fund or purpose your client designated. We are glad to discuss this step in detail with advisors and clients before the trust is established, so expectations are fully understood from the outset.
Common Questions Advisors Ask
- Can PCF share the remainder with other charities? PCF can be named alongside other charities as co-beneficiaries, with percentages allocated to each.
- Can the remainder go into a DAF at PCF? Yes. Clients can name a Donor Advised Fund at PCF as the beneficiary, which allows family members to continue making grant recommendations after the trust ends.
- Can the client change the charitable beneficiary later? While some CRTs may reserve limited flexibility, charitable beneficiary provisions are generally intended to be permanent once the trust is established. This is one reason it is important to discuss PCF’s stewardship with your client before the trust is signed.
- How long does the process take? The timeline varies. Trust drafting typically takes two to six weeks depending on the attorney. Funding real estate typically takes longer due to appraisal, deed transfer, and due diligence requirements. Start the conversation early, particularly for year-end planning.
Want to talk it through? PCF’s team works with advisors at every stage of CRT planning. We can speak with you or sit in on a client conversation to answer questions about the charitable side of the arrangement. Book a meeting here.
