A Charitable Remainder Trust is a tax-exempt account designed to reduce taxable capital gains income. It is recognized under I.R.S. Code 664, and not a Federal or State specific Statute. In exchange for a promise to donate some of the trust’s assets to charity at the end of the trust’s term, you receive a huge tax benefit: You may defer the taxes you would otherwise pay when selling your assets.

In the meantime, the Charitable Remainder Trusts distribute income to you annually for a specified period and, when that period is over, donate the remainder — everything that hasn’t been distributed yet — to your chosen charity.

And, why is a CRT valuable? What are the benefits of tax deferral if you’re just going to have to pay those taxes in the future? The logic is actually pretty intuitive. Today, with a Charitable Remainder Trust, you get to pay zero taxes, reinvest those savings, and let them grow for many years. This can be used as a Private Retirement Program to supplement your IRS, 401K and other Qualified Plans.

Charitable Remainder Trust: Benefits
By deferring your taxes and reinvesting the savings, you can increase your returns by 50% or more. But how does a CRT trust make benefits happen?

1. Tax Deferral And Tax-Free Compounding (Also Known As “More Money”)
Charitable Remainder Trusts protect your gains from taxes when you sell, and the money you save is reinvested and continues to grow. For example, if you are a California resident and you have capital gains of $1 million, you would typically pay about $360,000, or 36%, in taxes, and you would be left with about $640,000 to invest (or spend!) going forward. If your shares were in a Charitable Remainder Trust, by contrast, the trust would keep the whole $1 million to reinvest.

In the meantime, you get to reinvest those savings. That’s an extra $360,000 reinvested, and, assuming average historical returns, that that extra investment could turn into more than $7 million over 40 years! Those are the tax implications of a charitable remainder trust, and the magic of the one-two punch of federal-tax-advantaged trusts and compounding.

2. Lower Effective Tax Rates
Another benefit of Charitable Remainder Trusts is that you can keep more of the proceeds from your sale through “tax smoothing,” or spreading out your income over time to lower the effective tax rate you pay on your big gain. Instead of realizing all of the income from your sale in one year, you can use them to spread that income out over many years and effectively smooth out your income and, therefore, your tax rate.

3. An Up-Front Tax Deduction
In addition, in exchange for the charitable gift you’ll make at the end of your trust, you get an immediate tax deduction in the year you fund your trust, usually equal to around 10% of the value of your assets.

Why Are CRTs Allowed?
When we explain the magic of Charitable Remainder Trusts, most people ask: Why does this work? In short, the government has decided that it’s willing to allow people to get tax-free growth in exchange for a promise that they’ll give some money to charity in the future. Since the assets that are left in a Charitable Remainder Trust at the end will go to a tax-exempt entity, the trust doesn’t pay taxes on its capital gains (and you won’t pay taxes until you withdraw your money).