Hey everyone, it’s Tony Leonardi, your Certified Financial Planner professional and author of A Smarter Way to Retire.
Over the past few weeks, we’ve been discussing how to be more intentional with your retirement assets — specifically the difference between Live On assets (the money you’ll spend during your lifetime) and Leave On assets (the money you intend to leave to your children and grandchildren).
Today, I want to introduce an advanced planning strategy known as the Charitable Remainder Trust, or CRT.
A Charitable Remainder Trust allows you to transfer appreciated assets — such as stocks, real estate, or a business interest — into a trust. You (and/or your spouse) receive income from the trust for the rest of your life or for a set number of years. At the end of that period, the remaining assets go to the charity or charities you choose.
Why Consider a Charitable Remainder Trust?
This strategy can offer several meaningful benefits, including:
- An immediate charitable income tax deduction.
- The potential to avoid or defer capital gains taxes on the sale of highly appreciated assets.
- The creation of a steady income stream for yourself during retirement.
- The ability to make a significant gift to charity at some point in the future.
Four potential benefits in one strategy!
While Charitable Remainder Trusts can be very powerful, with those 4 benefits in one, they’re not right for everyone. Before we get into who they may work well for, it’s important to understand some of the key considerations and potential drawbacks.
Things to consider:
- Irrevocability (Loss of Control): Once assets are placed into a CRT, you generally cannot take them back. If your financial situation changes, you’re locked in.
- Investment Risk: The trust assets are typically invested in the markets to generate income. If investments perform poorly, your income payments may decline.
- Complexity & Administrative Costs: Professional fees for attorneys, trustees, and investment managers can be substantial and may erode returns, especially for smaller trusts.
So, three important considerations! Irrevocable, investment risk and cost.
That said, there are certain situations where a Charitable Remainder Trust is often a strong fit. Here are a few examples:
- If you are Selling a privately held business — Business owners with a low cost basis can potentially avoid a large capital gains tax bill while creating lifetime income.
- if you have Expiring or vesting stock options or RSUs — Executives with concentrated equity compensation can avoid a large taxable event.
- Someone with Concentrated positions in employer stock — Long-time employees who want to diversify without triggering immediate capital gains taxes.
- How about Highly appreciated investment real estate — Owners of rental or commercial properties who want to simplify their holdings and generate income.
- Or, Pre-IPO or private company stock — Early investors or employees expecting a future liquidity event.
In general, people who have highly appreciated assets, want to create additional retirement income, and have some level of charitable intent tend to benefit most from this strategy.
On the other hand, there are situations where a Charitable Remainder Trust might not be a good fit. These include:
- People who may need access to their principal later (remember a CRT is irrevocable).
- Smaller estates, where administrative costs can outweigh the benefits. This strategy is generally for larger estates or businesses.
- Individuals who do not have genuine charitable intent.
- People in lower tax brackets, where the tax benefits are less meaningful.
- Those who need predictable, growing income (since payments can fluctuate based on investment performance).
What Happens to the Money at the End?
One of the most common concerns I hear is: “If a Charitable Remainder Trust means that the remaining balance goes to charity, doesn’t that mean my kids get less?”
The short answer is: not necessarily.
With a Charitable Remainder Trust, you’re converting an appreciated asset into lifetime income for yourself while also receiving two valuable tax benefits: avoiding capital gains tax and receiving a charitable income tax deduction. In many cases, the combination of higher income and tax savings could actually leave you (and indirectly your family) in a stronger financial position than if you had sold the asset and paid the taxes upfront.
That said, a CRT does involve a commitment that the remainder will go to charity. This is why it’s important to model different scenarios to ensure the strategy aligns with your goals for both income and legacy.
Real-World Example: Selling a $5 Million Business
Let’s look at a real example. John is 65 and is selling his business for $5 million. His cost basis is only $500,000, so he would owe roughly $1 million in capital gains taxes if he sold it outright. After paying the tax, he would be left with about $4 million to invest. Using the 4% rule, he could comfortably withdraw around $160,000 per year.
Now let’s compare that to putting the business into a Charitable Remainder Trust. John avoids the $1 million capital gains tax entirely, so the full $5 million goes to work inside the trust. Assuming the trust earns a reasonable average annual return of around 7%, it could pay John 5% per year, or $250,000 annually, for the rest of his life. That’s roughly $90,000 more per year than he would likely generate from the outright sale scenario.
In addition, John receives an immediate charitable income tax deduction, which can help offset other taxable income for up to 5 years.
Of course this is a hypothetical example that may not be indicative of everyone’s experiences.
Here’s where it gets interesting. John has three good options with that extra $90,000 per year:
- Option 1: Keep the extra income for himself and his spouse.
- Option 2: Reinvest the extra $90,000 every year into a separate investment account for his kids. Assuming a reasonable long-term average return of around 6% to 6.5%, that account could grow to approximately $7 to $8 million over 30 years — money his children would eventually receive.
- Option 3: Option 3: He can use the extra $90,000 per year to buy a permanent life insurance policy. For a healthy 65-year-old who qualifies for good rates, this level of annual premium has the potential to create a tax-free death benefit in the range of $5 to $6 million or more, assuming the policy is properly designed, premiums are paid for many years, and the policy performs reasonably well over time. This can be a powerful way to create a significant tax-free legacy for his children — especially if he wants to solve the ‘die too soon’ scenario.
In all three cases, John could get significantly more income during his lifetime while still creating a meaningful legacy for his family.
These are advanced planning tools that require careful coordination with your attorney, tax advisor, and financial planner. They are not right for everyone, but for the right client — especially those with appreciated assets — they can be very effective.
If you’re considering more advanced planning strategies like Charitable Remainder Trusts, I can help you model how they might fit into your overall plan. Feel free to reach out and book a quick call.
Ready to explore what’s possible for your situation?
Book a quick 15-minute call on my calendar at [LeonardiFamilyWealthcare.com](https://www.leonardifamilywealthcare.com).
Next week we will delve into the Charitable Lead Trust, almost the opposite of the remainder trust. That should make for an interesting discussion. So stay tuned for next week.
And remember, There really is a smarter way to retire.