Charitable Remainder Trust (CRT)

A Charitable Remainder Trust (CRT) is a specific type of trust designed to provide income to a beneficiary while ultimately distributing the remaining assets to a designated charity upon the beneficiary’s death or the expiration of the trust term.

The CRT operates in two main phases: the income phase and the remainder phase. During the income phase, the trust pays a specified percentage of its assets to the income beneficiary, which can be an individual or multiple individuals. This payment can be structured as a fixed dollar amount (Charitable Remainder Annuity Trust – CRAT) or as a percentage of the trust’s value revalued annually (Charitable Remainder Unitrust – CRUT).

At the end of the income phase, the remaining assets in the CRT are transferred to the charity or charities chosen by the grantor. This structure allows the grantor to receive a charitable income tax deduction at the time of the trust’s creation, based on the present value of the charitable remainder. Additionally, the CRT can help reduce potential estate taxes, as the assets transferred to the trust are no longer considered part of the grantor’s taxable estate.

Example: If a person establishes a CRT with a $1 million asset and specifies a 5% payout to themselves as the income beneficiary, they would receive $50,000 annually for a set term (e.g., 20 years). After 20 years, whatever assets remain in the CRT would be donated to the chosen charity. This not only provides income during their lifetime but also fulfills philanthropic goals.

In Texas, including areas like Houston, CRTs can be a strategic option for individuals seeking both income tax benefits and charitable giving opportunities. However, it is advisable to consult with legal and tax professionals to ensure compliance with state laws and to optimize the trust’s structure.