Charitable Remainder Trusts Secure Income — and a Legacy

Selling a business, inheriting stock, or receiving a major windfall can feel like a financial turning point. But without a strategy, that wealth can trigger a significant tax bill and leave you wondering how to turn those assets into reliable retirement income. A charitable remainder trust offers a powerful solution.

Quick Answer: How a Charitable Remainder Trust Can Secure Income

A charitable remainder trust (CRT) is an irrevocable trust that can turn highly appreciated assets—such as pre-IPO stock, a sold business interest in 2025, or long-held investment property—into predictable income for life or up to 20 years, while ultimately benefiting charity.

CRTs can provide:

1. A secure income stream for you or your family

2. An immediate charitable deduction on your income tax

3. Deferral of capital gains taxes when selling appreciated assets

4. Potential estate tax reduction by removing assets from your taxable estate

Funding a CRT is considered a tax deductible gift, allowing you to claim a charitable deduction while securing income and receiving favorable tax treatment on appreciated assets.

At Third Act Retirement Planning, we often use charitable remainder trusts for clients who have just sold a business, inherited a large concentrated stock position, or received NIL income, and want both steady retirement income and a biblical, legacy-minded giving strategy.

Income from a CRT can be paid monthly, quarterly, or annually, typically between 5% and 7% of trust assets (subject to IRS rules). This gives you a concrete sense of the cash flow you can expect throughout retirement.

One critical note: a CRT is irrevocable. Once you fund it, you cannot reclaim those assets. This decision must be made in advance of major sales or as part of a broader retirement and estate plan developed with an attorney, CPA, and fiduciary advisor.

What Is a Charitable Remainder Trust?

In plain English, a CRT is an irrevocable “split-interest” trust that pays income to you (or loved ones) for life or up to 20 years, with what’s left going to one or more qualified charities at the end.

CRTs are authorized under U.S. tax laws (specifically IRC §664) and are commonly used by families with appreciated stock, closely held businesses, or real estate they plan to sell between now and the 2030s. The structure allows you to convert assets into income while supporting charitable organizations you care about.

Here’s what makes them powerful: once you transfer assets into the CRT, the trustee can sell them without immediate capital gains tax at the trust level. This allows the full proceeds to be invested into a diversified portfolio designed for income and growth—rather than losing a significant portion to taxes upfront.

Every CRT has two types of beneficiaries:

CRTs align especially well with donors who want to live off their wealth in retirement while creating a meaningful charitable legacy consistent with their Christian or values-based priorities.

How Charitable Remainder Trusts Work Step-by-Step

Understanding the mechanics helps you see how a CRT transforms appreciated assets into secure income. Here’s the chronological walkthrough from initial decision to final distribution.

Step 1 – Identify the Asset

Start with assets that would trigger large capital gains if sold outright. Common examples include:

• $3 million of low-cost basis stock from a 2010 tech IPO

• A $2 million rental property purchased in 2008

• A business sold in 2025 for several million dollars

These assets have appreciated significantly, meaning the gain between your original cost basis and current fair market value would create substantial taxes if sold directly.

Step 2 – Draft and Establish the Trust

An estate-planning attorney drafts the CRT document, naming:

• The income beneficiaries (you, spouse, others)

• The charitable organizations to receive the remainder interest

• The payout rate (typically 5%–7%)

• The term (your lifetime or up to 20 years)

The trust obtains its own tax ID (EIN) and becomes a separate legal entity.

Step 3 – Fund the CRT

You transfer the appreciated assets into the CRT before any sale occurs. This timing matters. Once inside the trust, the trustee can sell the assets and reinvest the proceeds without immediate capital gains tax at the CRT level.

Step 4 – Invest for Income and Growth

The CRT typically holds a diversified portfolio—stocks, bonds, funds—designed to support the chosen payout rate while preserving value for the eventual charitable distribution. The trustee manages these investments according to the trust’s objectives.

Step 5 – Receive Income

Non charitable beneficiaries receive annual distributions (often paid monthly or quarterly) for life or for the set term of up to 20 years. Each year, beneficiaries receive IRS Schedule K-1 (Form 1041) reporting the taxable portion of their distributions.

Step 6 – Final Charitable Distribution

Once the term ends or the last life beneficiary dies, the remaining assets pass to the designated charitable organizations or donor-advised fund. This completes the legacy plan you designed years earlier.

Types of Charitable Remainder Trusts and How They Affect Income

There are two primary CRT structures—charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs)—and the choice directly affects how “secure” and predictable the income feels.

Both types must:

• Pay out at least 5% and no more than 50% of trust assets annually

• Pass IRS tests ensuring the projected remainder to charity equals at least 10% of the initial funding amount (the “10% remainder test”)

The right type depends on your age, health, asset type, desire for inflation protection, and charitable goals. At Third Act Retirement Planning, we help model both options side by side for specific funding amounts and dates before you make a decision.

Charitable Remainder Annuity Trusts (CRATs)

A CRAT pays a fixed dollar amount each year, calculated as a set percentage (for example, 5% or 6%) of the trust’s initial value on the date it’s funded.

Once the annuity amount is set, it does not change—even if the trust’s underlying investments go up or down. This can feel like a “pension-style” income stream in retirement.

Example: If you fund a CRAT with $1,000,000 in appreciated stock in 2026 and choose a 5% payout, the trust pays $50,000 every year for your life (or for 20 years), regardless of market volatility.

CRATs appeal to retirees who value predictable cash over potential inflation adjustments. A couple entering retirement at age 65 wanting guaranteed income to cover baseline living and healthcare costs might find this structure reassuring.

The trade-off: because the payment is fixed, inflation may erode the real purchasing power of your income over a 15–25 year retirement horizon. What buys groceries and healthcare today may stretch less in 2045.

Charitable Remainder Unitrusts (CRUTs)

A CRUT pays a fixed percentage (for example, 5%–7%) of the trust’s fair market value recalculated each year. Your payment fluctuates with investment performance.

Example: If a CRUT funded with $2,000,000 in 2025 uses a 6% payout and the portfolio grows to $2,300,000 by 2028, the annual payment that year would be 6% of $2,300,000, or $138,000.

CRUTs offer a built-in hedge against inflation because payments can grow over time if the portfolio appreciates. However, payments can also fall in years with poor performance—introducing some variability to your income.

There are sub-types of CRUTs (such as net-income and “flip” CRUTs) sometimes used for illiquid assets like raw land or other assets that may not generate immediate cash flow. These require careful drafting and professional coordination.

For many of our clients in their 50s and early 60s who expect longer retirements, a well-designed CRUT may better align with long-term income and legacy goals than a CRAT—especially when they have time to ride out market fluctuations.

How CRTs Secure Income in Retirement

This is where charitable remainder trusts prove their value for retirement planning: they can serve as part of a retirement paycheck strategy, especially after sudden wealth events like inheritance, business sale, NIL contracts, or major stock options exercises.

CRT income is typically layered alongside other income sources to create a diversified, reliable retirement plan:

• Social Security benefits

• Pensions or traditional IRA withdrawals

• Annuity payments

• Taxable account distributions

• CRT distributions

Funding a CRT before selling a concentrated position allows the trust to diversify into a balanced portfolio (perhaps 60/40 or 50/50 stocks and bonds) designed specifically to support the chosen payout rate.

Because the CRT itself generally does not pay income tax, the trustee can reinvest 100% of realized gains. This may support more stable trust income over time compared with a taxable account that must pay taxes on distributions immediately.

Case Example: A 62-year-old sells a $4 million business in 2026. She funds a CRT with $2 million and receives a 5.5% lifetime payout—about $110,000 per year. She uses the remaining $2 million from the sale for liquidity and Roth conversions. Her CRT remainder is directed to her church and a donor-advised fund supporting global health initiatives.

At Third Act Retirement Planning, we build CRT income into holistic retirement cash flow projections, stress-testing it under different market scenarios to determine how much income clients can reasonably expect each calendar year.

Tax Benefits of Charitable Remainder Trusts

CRTs are often used as tax-efficient tools for selling appreciated assets in high-tax years—such as business exits or large stock sales—while also advancing charitable goals.

Here’s how the tax benefit works:

Immediate Charitable Deduction

Contributing assets to a CRT generates an immediate income tax charitable deduction equal to the present value of the charity’s remainder interest. This deduction is subject to AGI limits (generally 30-50% depending on asset type) and can be carried forward for up to five years if not fully used.

Capital Gains Deferral

When the CRT sells appreciated assets, it typically pays no capital gains tax at the trust level. This allows the full sales proceeds to be invested for income and growth—a significant advantage over selling directly and losing a portion to taxes.

Taxation of Distributions

Beneficiaries still pay tax on distributions they receive, reported via Schedule K-1 (Form 1041). The IRS uses a tiered system for taxing CRT distributions:

1. Ordinary income (interest, nonqualified dividends) — taxed first

2. Capital gains (short-term, then long-term)

3. Tax-exempt income

4. Return of principal (tax-free)

This structure means your distributions carry varying tax character depending on what the trust has earned.

Estate Tax Implications

Because the CRT is an irrevocable trust, assets placed into it are generally removed from your taxable estate. Under current law, the federal estate tax exemption sits at $13.99 million per individual in 2025, rising to $15 million in 2026 under the One Big Beautiful Bill Act. For families nearing or above these thresholds, CRTs help reduce estate tax exposure.

It’s important to note that Charitable Remainder Trusts can have potential tax consequences depending on your individual circumstances, including how distributions are taxed and how the trust interacts with your overall estate plan. Professional guidance is essential to navigate these complexities and ensure your CRT strategy aligns with your broader financial and legacy goals.

CRTs can work alongside other strategies—donor-advised funds, charitable lead trusts, family trusts—to create a comprehensive, tax-wise legacy plan.

Keep in mind that tax laws around charitable donations and estate tax exemptions may change. This increases the importance of planning ahead with a qualified tax advisor and fiduciary advisor who can help you avoid penalties and maximize benefits under current and future law.

Filing Requirements for Charitable Trusts

When you establish a charitable remainder trust—whether a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT)—meeting the IRS’s filing requirements is essential for preserving your tax benefits and ensuring your legacy reaches the charitable organizations you care about. Proper compliance not only helps you avoid penalties but also maximizes the tax deduction and income stream you receive from your charitable donations.

Key Tax Forms and Deadlines

Each year, the trustee of a CRT must file specific tax returns to report the trust’s financial activity:

• Form 1041 (U.S. Income Tax Return for Estates and Trusts): This form reports the trust’s income, deductions, and credits. It’s crucial for tracking how the trust’s investments—such as appreciated stock or investment property—generate income and gains.

• Form 5227 (Split-Interest Trust Information Return): This form details the trust’s financial transactions, including distributions to beneficiaries and the charitable remainder. It provides transparency to the IRS about how the trust is fulfilling its charitable purpose.

• Schedule K-1 (Form 1041): Each beneficiary receives this form, which breaks down their share of the trust’s income, deductions, and credits. This information is needed to accurately report taxable income on individual tax returns.

The due date for these filings is typically April 15th following the close of the trust’s tax year, though it can vary depending on the trust’s structure and fiscal year. Filing on time is critical to avoid penalties and maintain the trust’s favorable tax status.

Calculating Deductions and Reporting Value

The charitable deduction you receive for funding a CRT is based on the present value of the remainder interest that will eventually go to charity. This calculation uses the fair market value of the assets you contribute—whether it’s highly appreciated stock, real estate, or other assets—and factors in the trust’s payout terms. Because these calculations are subject to IRS rules and can affect your tax bill for the current and future tax years, it’s wise to work closely with a tax advisor or other professional advisors to ensure accuracy.

Record-Keeping and Compliance

Who a Charitable Remainder Trust Is Right For (and When It Isn’t)

CRTs are not just for ultra-wealthy families. They’re often appropriate when someone has at least $500,000–$1,000,000 of highly appreciated assets and clear charitable intentions.

Common profiles include:

• A widow in 2026 inheriting low-basis stock from a deceased spouse

• A couple selling a rental property held since 2009 with substantial gains

• A business owner exiting a company in the late 2020s

• An athlete with NIL income and equity stakes looking to fund a long-term income stream

• Individual taxpayers who want to donate appreciated property and save lives through charitable giving

CRTs suit people who:

When a CRT may not be appropriate:

• You need complete liquidity or access to cash on short notice

• You have minimal charitable intent

• You have very short-term money needs

• You want full control over principal for unexpected spending

For some, simpler strategies—outright gifting, donor-advised funds, harvesting losses, or holding assets in a taxable account—may be better fits. Part of Third Act Retirement Planning’s role is to help clients evaluate all options objectively based on two factors: their financial situation and their values.

How Third Act Retirement Planning Helps You Design and Manage a CRT

CRTs work best as part of an integrated retirement, tax, and legacy plan—not as a one-off tactic. This is especially true for clients experiencing sudden wealth who need to determine the best path forward.

Our Discovery Process

We begin with a conversation about:

• Your assets and their cost basis

• Tax exposure (for example, a pending 2025–2027 sale)

• Charitable passions and preferred charitable organizations

• Desired retirement income and fund requirements

• Biblical stewardship convictions and community impact goals

Coordination with Professional Advisors

We work alongside your estate-planning attorney and CPA to:

1. Test different payout rates and terms

2. Estimate your charitable deduction and its profit to your tax returns

3. Model tax outcomes under current and potential future law

4. Ensure the CRT document aligns with your broader estate plan

Ongoing Investment Management

Our ongoing role includes designing and managing the CRT’s investment portfolio on a fee-only, fiduciary basis. We aim to support both stable income distributions and a meaningful remainder for your chosen ministries and charities.

As a Qualified Kingdom Advisor, Thomas Cloud, Jr. helps clients create a strategy that aligns their CRT with biblical principles of generosity, stewardship, and legacy—rather than purely tax minimization. So many people want their wealth to reflect their faith. A CRT makes that possible while also providing the financial security retirement demands.

Ready to Explore Whether a CRT Could Work for You?

A charitable remainder trust can be a win win: you receive secure income throughout retirement, and your chosen charities receive a meaningful gift that can save lives and strengthen your community for future generations.

If you’ve recently sold a business, inherited appreciated assets, or are planning a major financial transition, schedule a discovery call with Third Act Retirement Planning in Marietta, Georgia. We’ll help you determine whether a charitable remainder trust—or another strategy—fits your situation, your values, and your vision for a purposeful third act.