Charitable Remainder Trust Attorneys
A charitable remainder trust turns a highly appreciated asset into a stream of income for you or your family, a current income tax deduction, and a meaningful gift to a charity you choose, all without paying capital gains tax on the sale of the asset up front. It is the tool for the client who owns appreciated stock, a building, or a business interest, wants income rather than a lump sum, and has a charitable intention that a lifetime of writing checks has not fully satisfied.
The trust works because it is tax-exempt. You transfer the asset to the trust, the trustee sells it without an immediate tax on the gain, and the full proceeds are reinvested to pay you an annual amount for life or for a term of years. When the trust ends, what remains goes to charity. You receive an income tax deduction when the trust is funded for the present value of the charity’s future interest.
Milvidskiy Law Group P.C. designs charitable remainder trusts, coordinates the valuation and the transfer of the asset, and integrates the trust with the rest of your estate plan, including insurance to replace for your children the value passing to charity.
Key Takeaways:
- A charitable remainder trust lets you sell an appreciated asset inside a tax-exempt trust, reinvest the full proceeds, and receive income for life or a term, with the remainder passing to charity.
- You receive an income tax deduction at funding for the value of the charity’s remainder interest, and the asset is out of your taxable estate. The income you receive is taxable as you receive it under ordering rules that track the trust’s own income.
- The gift to charity is real and irrevocable. A charitable remainder trust is for clients who want to give; for clients who do not, the same asset is better handled with other tools.
Two Forms: The Annuity Trust and the Unitrust
Charitable remainder annuity trust (CRAT)
A CRAT pays you a fixed dollar amount each year, set when the trust is created and never changed. It offers certainty of income and simplicity. Because the payment does not adjust, it does not keep pace with inflation, and no additional contributions can be made after funding. A CRAT suits an older beneficiary who values a predictable check.
Charitable remainder unitrust (CRUT)
A CRUT pays a fixed percentage of the trust’s value as revalued each year. If the investments grow, the payment grows; if they fall, it falls. Additional contributions are permitted. Most charitable remainder trusts we draft are unitrusts, and the unitrust form has variations that solve specific problems:
- Net income unitrust (NICRUT). Pays the lesser of the fixed percentage or the trust’s actual income, which protects principal in years of low return.
- Net income with make-up unitrust (NIMCRUT). Adds a make-up account so that shortfalls in low-income years are paid later when income allows, which can function as a retirement income deferral tool.
- Flip unitrust. Starts as a net income trust while it holds an illiquid asset such as real estate or a closely held business, then “flips” to a standard unitrust once the asset is sold. This is the usual design for a contributed building or company interest.
Federal law sets limits on the payout rate and requires that the charity’s remainder interest be worth at least a minimum share of the initial value. We run those tests before the trust is signed so that the design qualifies.
The Tax Mechanics
No tax on the sale inside the trust
A charitable remainder trust does not pay income tax. When the trustee sells the contributed asset, no capital gains tax is due at that time, and the entire proceeds are available to reinvest. Suppose you contribute stock worth $2 million with a basis of $200,000. Sold personally, a substantial share of the $1.8 million gain would go to federal and state tax. Sold by the trust, the full $2 million is reinvested to produce your annual payment. The figures are illustrative.
How your payments are taxed
The gain is not forgiven; it is deferred and spread out. Each payment you receive is characterized under a four-tier system: first as ordinary income the trust has earned, then as capital gain, then as tax-exempt income, and last as a return of principal. Over time, the payments carry out the deferred gain, but at your marginal rate in each year and only as you receive them.
The deduction and the estate
When you fund the trust, you receive an income tax charitable deduction for the present value of the remainder that will pass to charity, calculated under Internal Revenue Service tables using the interest rate the IRS publishes for the month, the payout rate, and your age or the term. The deduction is subject to the annual percentage limits on charitable giving and can be carried forward. The contributed asset is also removed from your taxable estate. If your spouse is a beneficiary, the spouse’s interest generally qualifies for the marital deduction; if a child or other person receives payments, that interest is a taxable gift.
Replacing the Inheritance
The remainder goes to charity, not to your children. Families who want both often pair the charitable remainder trust with a life insurance policy owned by an irrevocable life insurance trust, funded with part of the income stream and the tax savings. The insurance replaces for the children the value that goes to charity, outside the taxable estate. Whether that arrangement makes sense depends on insurability, cost, and the size of the gift, and we model it alongside the trust.
Assets That Work, and Assets That Do Not
Publicly traded securities with a low basis are the simplest asset to contribute. Real estate works well in a flip unitrust, provided the property is not mortgaged and no sale has been arranged before the transfer; a pre-arranged sale can cause the gain to be taxed to you anyway. Closely held business interests, including interests in real estate partnerships, can be contributed with care for valuation, unrelated business income, and self-dealing rules. Interests in S corporations, mortgaged property, and tangible personal property raise problems that usually rule them out. Retirement accounts are better left to charity by beneficiary designation than contributed during life.
State Considerations
The federal rules govern the trust’s qualification and the deduction. State income tax treatment of the charitable deduction and of the trust’s distributions varies among New York, New Jersey, and Connecticut, and it changes, so the state-level benefit is confirmed with your CPA rather than assumed. For estate tax purposes, the asset leaves your New York or Connecticut taxable estate as well as your federal estate, which matters given New York’s exclusion of $7,350,000 for 2026 and its cliff. New Jersey’s inheritance tax does not reach the charitable remainder, and transfers to charities are exempt.
When a Charitable Remainder Trust Is Not the Right Tool
It is the wrong tool for someone without a genuine charitable intention, because the remainder is an actual gift and the income stream is worth less than the asset. It is the wrong tool if you need access to principal, if the asset has a high basis so that the capital gains deferral is worth little, or if the asset is mortgaged or subject to a binding sale agreement. Clients whose goal is simply to reduce estate tax without giving to charity should look at the techniques on our tax planning and irrevocable trusts pages. A donor-advised fund or an outright bequest may serve a modest charitable goal with far less structure.
What Our Charitable Remainder Trust Service Includes
- Modeling the trust with your CPA and financial adviser: the form, the payout rate, the term, the deduction, the projected income, and the comparison with selling the asset outright.
- Drafting the trust to qualify under federal law, including the flip trigger, the make-up provisions, trustee succession, and the designation of the charitable remainder beneficiaries with the flexibility to change charities if you wish.
- Coordinating the qualified appraisal and the transfer of the asset before any sale is arranged.
- Advising on who should serve as trustee, including the option of our professional trustee services, and on the trust’s annual filing obligations.
- Designing the wealth replacement plan and integrating the trust with your will, revocable trust, and estate plan.
Schedule a Consultation About Charitable Planning
If you hold an appreciated asset you would like to convert to income, and there is a cause you want to support, a charitable remainder trust can do both with real tax efficiency. Our attorneys practice in New York, New Jersey, and Connecticut. Contact Milvidskiy Law Group P.C. to schedule a consultation.
This page is provided for general informational purposes only and does not constitute legal advice. Laws differ by state and change over time. Tax figures are as of the date stated and change annually. For advice about your situation, consult a qualified attorney.
Frequently Asked Questions
What is a charitable remainder trust?
It is an irrevocable, tax-exempt trust that pays you or others an annual amount for life or a term of years and then distributes what remains to charity. You receive an income tax deduction when the trust is funded, the contributed asset leaves your taxable estate, and the trust can sell appreciated property without an immediate capital gains tax.
What is the difference between a CRAT and a CRUT?
A charitable remainder annuity trust pays a fixed dollar amount each year that never changes, and no additional contributions are allowed. A charitable remainder unitrust pays a fixed percentage of the trust’s value as revalued annually, so payments rise and fall with the investments, and additional contributions are permitted. Most trusts we draft are unitrusts.
Do I avoid capital gains tax with a charitable remainder trust?
You avoid the immediate tax. The trust sells the asset without paying capital gains tax and reinvests the full proceeds. The gain is then carried out to you over time as part of your annual payments, taxed under ordering rules that treat distributions first as ordinary income, then capital gain, then tax-exempt income, then principal. The result is deferral and spreading rather than forgiveness.
How large is the charitable deduction?
The deduction equals the present value of the remainder interest that will pass to charity, calculated under IRS tables using the payout rate, the term or your life expectancy, and the interest rate the IRS publishes for the month of funding. A lower payout rate and a shorter expected term produce a larger deduction. The deduction is subject to the annual limits on charitable gifts and any excess can be carried forward.
Can my children receive income from the trust?
Yes. The income beneficiaries can be you, your spouse, your children, or others, for their lives or for a term of years. Naming a child or another non-spouse beneficiary creates a taxable gift of the value of that person’s interest, and a long payout stream to a young beneficiary reduces the charitable deduction and can cause the trust to fail the minimum remainder test.
What is a flip unitrust?
It is a unitrust that pays only the trust’s actual income until a triggering event, usually the sale of an illiquid asset such as real estate or a business interest, and then converts to a standard unitrust paying a fixed percentage of value. It is the usual design when the contributed asset cannot be sold immediately.
Can I put real estate into a charitable remainder trust?
Often, yes, using a flip unitrust. The property should be unmortgaged, and there should be no binding agreement to sell before it is transferred, or the gain may be taxed to you personally. Valuation requires a qualified appraisal, and the trustee, not you, negotiates the sale after the transfer.
What happens to my children's inheritance?
The remainder passes to charity, not to your children. Many families replace that value with life insurance held in an irrevocable life insurance trust, funded from the income stream and the tax savings, so that the children receive a comparable amount outside the taxable estate. We model whether that replacement makes sense in your case.
Can I change the charity later?
Yes, if the trust is drafted to allow it. You can reserve the right to change the charitable remainder beneficiary among qualified charities, or give that power to the trustee. What cannot change is that the remainder must go to charity.
Does a charitable remainder trust reduce New York or Connecticut estate tax?
Yes. The contributed asset is removed from your taxable estate for federal, New York, and Connecticut purposes. That can matter for a New York resident, where the estate tax exclusion is $7,350,000 for 2026 and an estate that exceeds it by a small margin can lose the exclusion entirely. State income tax treatment of the deduction and the payments varies and is confirmed with your CPA.
