Wealthy Americans Use CRTs for Income, Tax Savings

CRTs allow taxpayers to place assets into an irrevocable trust, receive annual payments, and designate the remainder for charity. Katie Sheehan, managing director at SVB Private, states CRTs are ideal for high-net-worth clients, especially those asset-rich but cash-poor, recommending at least $1 million in assets due to administrative complexity.

The strategy has regained popularity due to higher IRS Section 7520 interest rates, which increase the upfront tax deduction by assuming faster trust asset growth. There are two main types: Charitable Remainder Annuity Trusts (CRATs) provide a fixed annual income determined at funding, while Charitable Remainder Unitrusts (CRUTs) offer variable payments based on the trust's annually revalued fair market value, potentially increasing income if assets appreciate.

For example, a couple funding a $1 million CRAT at 7% payout receives $70,000 annually, with about $365,000 tax-deductible, according to Sheehan. A similar CRUT yields an initial $70,000, with about $480,000 tax-deductible, and payments grow with asset appreciation.

IRS requirements include a maximum term of 20 years or lifetime, 5% to 50% annual payout, and at least 10% of the remainder going to charity. Tax benefits include an upfront income tax deduction, estate tax exemption for trust assets, and deferred capital gains tax.

Eric Mann, partner at Neal Gerber Eisenberg, highlights the capital gains deferral as a major advantage for business owners selling appreciated assets, allowing full reinvestment of proceeds before taxes are paid on distributions. Sheehan notes CRTs are relatively straightforward due to IRS prescriptions.