Charitable Remainder Trusts: Income Now, Legacy Later

A widow in Paradise Valley came to me sitting on a problem that, frankly, a lot of people would love to have. Decades earlier she and her late husband had bought a block of stock that had grown into a low-six-figure-cost position now worth well into seven figures. She wanted to sell it to generate retirement income, she cared deeply about a local Tucson charity, and she was horrified at the capital gains tax she’d owe if she simply sold. She felt stuck between three goals: income, taxes, and giving. A charitable remainder trust turned out to let her pursue all three at once, and her reaction when she understood how it worked was the best part of my month.

Charitable remainder trusts, or CRTs, are one of the more elegant tools in legacy planning, and one of the more misunderstood. Let’s demystify how they work and, just as importantly, who they’re actually right for.

How a Charitable Remainder Trust Works

A CRT is an irrevocable trust you fund with appreciated assets, often highly appreciated stock, real estate, or a business interest. Here’s the mechanics, in plain English:

You transfer the appreciated asset into the trust.
The trust can sell that asset without triggering an immediate capital gains tax, because the trust itself is tax-exempt. That means the full value gets reinvested and put to work, not just the after-tax remainder.
The trust pays you (or you and your spouse) an income stream, either for a set number of years or for the rest of your life.
When the trust term ends, whatever remains goes to the charity or charities you’ve named.

So a single asset accomplishes three things: it deferred a big capital gains hit, it produces income you can live on, and it ultimately funds a cause you care about. That’s why people call a CRT a way to enjoy income now, legacy later.

The Three Tax Advantages

A properly structured CRT can deliver a powerful combination of benefits:

Capital gains deferral. Because the trust sells the appreciated asset rather than you, the immediate capital gains tax that would have shrunk your reinvestable principal is avoided at the point of sale. Your income payments are then taxed over time as you receive them.
An upfront income tax deduction. When you fund the trust, you generally get a partial charitable income tax deduction in that year, based on the estimated value that will eventually pass to charity. It won’t be the full amount, since you’re keeping the income stream, but it can be meaningful.
Estate reduction. The assets you move into the CRT generally leave your taxable estate, which can matter for larger Arizona estates.

For someone holding a concentrated, low-basis position they’re reluctant to sell precisely because of the tax bill, a CRT can break the logjam, letting them diversify inside the trust and turn a stagnant asset into a lifetime income stream while doing good.

Two Flavors: Annuity vs. Unitrust

CRTs generally come in two forms, and the difference is how your payout is calculated:

A charitable remainder annuity trust (CRAT) pays a fixed dollar amount each year, set when the trust is created. Predictable, but it doesn’t adjust for inflation or grow with the portfolio.
A charitable remainder unitrust (CRUT) pays a fixed percentage of the trust’s value, recalculated annually. If the trust grows, your income can rise with it; if it falls, your income dips. Most people seeking inflation protection lean toward a unitrust.

The right choice depends on whether you value certainty or growth potential, and on your age and income needs. This is a detail to work through with your advisor and attorney, not a coin flip.

Who a CRT Is, and Isn’t, Right For

A CRT is a wonderful tool in the right hands, but it is not for everyone. It tends to make sense if you:

Hold a highly appreciated asset you want to sell but dread the capital gains tax on.
Have genuine charitable intent, you actually want a charity to receive the remainder, not just chase a tax break.
Want or need a reliable income stream in retirement.
Have an estate large enough that the planning complexity is worth it.

It’s probably not right if you might need full access to that principal later, if you have no charitable goals, or if your estate is modest enough that simpler tools do the job. Remember, a CRT is irrevocable, once funded, you generally can’t undo it or get the principal back. And because it’s a legal trust with strict IRS rules, it must be drafted by a qualified estate attorney and modeled carefully before you commit.

This is exactly where coordinated, conflict-free planning pays off. My job as a fee-only fiduciary isn’t to draft the trust or sell you anything, it’s to model whether a CRT actually improves your picture versus alternatives, and to weigh it against simpler giving strategies. Our legacy distribution planner can help you visualize how income to you and a gift to charity balance out over time, and the broader planning calculators can stress-test the income side. If your current advisor earns commissions, be aware they may steer you toward a product instead, which is why understanding fee-only versus fee-based advice matters here.

The Bottom Line

A charitable remainder trust can be a beautiful solution to a genuine dilemma: how to unlock a highly appreciated asset, defer the capital gains tax, generate lifetime income, and leave a meaningful legacy to a cause you love, all at once. But it’s irrevocable, complex, and only right for the right person, so the analysis has to come before the action. To find out whether a CRT, or a simpler strategy, fits your goals, and to coordinate it with a qualified estate attorney, connect with a fee-only fiduciary advisor in Arizona.

Important Disclosures

This material is intended for informational and educational purposes only and should not be construed as individualized investment, tax, or legal advice. Consult your own qualified advisor before acting on anything discussed here.

Investing involves risk, including possible loss of principal. Tax rules change and outcomes vary by individual circumstances. Arizona Fee Only is a directory and does not provide investment, tax, or legal advice.