Charitable Remainder Trust California

What Is a Charitable Remainder Trust?

A Charitable Remainder Trust (CRT) is an irrevocable trust that provides income to the grantor (or other non-charitable beneficiaries) for a period of time, with the remainder passing to charity at the end of the trust term. The CRT is a powerful planning tool for California taxpayers with highly appreciated assets — it allows you to sell the asset without immediate capital gains tax, receive income for life, and make a meaningful charitable gift.

CRAT vs. CRUT

Charitable Remainder Annuity Trust (CRAT): Pays a fixed dollar amount each year (at least 5% of the initial fair market value of the trust assets). The payment does not change regardless of how the trust assets perform.

Charitable Remainder Unitrust (CRUT): Pays a fixed percentage (at least 5%) of the trust's fair market value, recalculated annually. Payments increase if the trust grows and decrease if it declines. The CRUT is more flexible and generally more popular than the CRAT.

Tax Benefits of a CRT

A CRT provides three tax benefits: (1) Capital gains deferral — when the CRT sells appreciated assets, it does not pay capital gains tax immediately. The gain is spread over the income payments using the "four-tier" income ordering rules. (2) Charitable deduction — you receive an immediate income tax deduction for the present value of the charitable remainder interest (typically 20–50% of the assets transferred). (3) Estate tax reduction — assets transferred to the CRT are removed from your taxable estate.

How a CRT Works

Example: You own stock purchased for $100,000 that is now worth $1 million. If you sell directly, you owe approximately $180,000 in federal and California capital gains tax, leaving $820,000 to invest. Instead, you transfer the stock to a CRUT. The CRUT sells the stock for $1 million — no immediate capital gains tax. The CRUT invests the $1 million and pays you 6% per year ($60,000) for life. You receive an immediate charitable deduction of approximately $300,000. At your death, the remaining trust assets pass to your chosen charity.

California CRT Considerations

California follows federal rules for CRTs, with one important difference: California does not allow a deduction for the charitable remainder interest on the California return in the same way as the federal return. California has its own calculation for the charitable deduction that may differ from the federal calculation. KDA calculates the California-specific charitable deduction for every CRT client.

When a CRT Makes Sense

A CRT is most valuable when: (1) You have highly appreciated assets (low basis relative to current value). (2) You want income for life or a term of years. (3) You have charitable intent — the remainder must go to charity. (4) You are in a high income tax bracket — the charitable deduction is most valuable at high rates. (5) Your estate may be subject to estate tax — the CRT removes assets from your taxable estate. KDA models the financial outcomes of a CRT for clients considering this strategy.