Estate / charitable vehicles

Charitable remainder and lead trusts

A split-interest trust divides one asset into an income stream and a remainder. Give the income to yourself and the remainder to charity (CRT), or the income to charity and the remainder to your family (CLAT). Both are valued at the §7520 rate, and the gap between that rate and the trust’s real return is where the planning lives.

VehicleCRUTTerm20 years§7520 rate4.50%

Income to the donor

$100,000/yr

119% of the contribution returned over 20 years

Income tax deduction

$716,972

Present value of the charitable remainder

To charity at the end

$2,526,354

Trust grows at 6.5%

Family vs outright sale

-$2,170,338

The gap is the charitable remainder

The three routes side by side

Sell outright, give the remainder to charity, or lead with charity and leave the remainder to family.

$716,972

The three routes side by side
Measure	Outright sale	CRUT	CLAT
Capital gains tax at transfer	$380,800	$0.00	$0.00
Paid to the donor	$0.00	$2,385,393	$0.00
Paid to charity	$0.00	$2,526,354	$2,000,000
To family at the end	$5,705,486	$3,535,148	$2,912,395
Tax deduction / taxable gift	—	$716,972	$699,206
Tax on the distributions	—	$641,189	—
Transfer tax at the end	—	$0.00	$279,683

The CRUT keeps the family in the income stream; the CLAT hands the income to charity and the growth to the family.

Trust against an outright portfolio

The trust sells without a capital gains bill, so it starts ahead and pays the donor along the way.

Where the contribution ends up

Donor, charity and the tax saving, at the end of the term.

Canonical equations

The exact relationships implemented by this engine.

V · (1 − payout · a(n, r)) · Fixed annuity, valued at the §7520 rate.

V · (1 − payout)ⁿ · Unitrust, revalued every year.

V − annuity · a(n, r) · What the family receives, valued today.

ordinary → gain → exempt → corpus · Each distribution is taxed in that order.

Show model notation and computationOpen the symbolic form, the variable definitions, and the step-by-step derivation when you need the detail.

A clear path from inputs to results.

A split-interest trust divides one asset into two: an income stream and a remainder. Give the income to yourself and the remainder to charity and you have a charitable remainder trust. Give the income to charity and the remainder to your family and you have a charitable lead trust. Both are valued at the §7520 rate, and the gap between that rate and the trust's real return is where the planning lives.

Step-by-step methodWorked exampleAssumptions explained

How to use

Choose the vehicle: a remainder trust for income, or a lead trust for the family remainder.

Enter the contribution and its cost basis.

Set the payout rate, the term and the §7520 rate.

Set the return you expect the trust to earn.

Compare the split against selling outright and investing the proceeds.

The formula

\mathrm{CRUT}: V(1-p)^n \;;\; \mathrm{CRAT}: V\left(1-p\,a(n,r)\right) \;;\; \mathrm{CLAT}: V - A\,a(n,r)

Reference: IRC §664 (charitable remainder trusts), §7520 (valuation of annuities and split interests), §170(f)(2) (charitable lead trusts).

Worked example

$2m of appreciated stock, 5% for 20 years

Inputs

Contribution $2,000,000, basis $400,000.
Payout 5% for 20 years, §7520 rate 4.5%, trust return 6.5%.
Capital gains 23.8%, ordinary tax on the income 32%.

Calculation path

1
CRUT remainder factor (1 − 0.05)²⁰ = 0.3585, so the deduction is $716,972.
2
The trust pays $100,000 in year one and grows the payout with the corpus.
3
At 6.5% the trust is worth $2.53m after twenty years, all of it to charity.
4
Selling outright would cost $380,800 of capital gains but leave $5.71m invested.
5
A CLAT paying the same 5% carries a $699,206 taxable gift and leaves $2.91m for the family — 4.17× the gift.

Result

CRUT deduction $716,972 · $100,000 a year · $2.53m to charity. CLAT gift $699,206 · $2.91m to family.

Interpreting the result

The deduction is the present value of what charity eventually receives, so a higher payout or a longer term cuts it. The CRUT deduction is lower than the CRAT's because the unitrust payout grows with the corpus. On the lead side the logic reverses: the taxable gift is what the family gets, so the same payout that shrinks a CRUT deduction also shrinks a CLAT gift.

Assumptions & limitations

One contribution, a fixed term, and a trust that earns a constant total return.

The §7520 rate is the valuation rate, not the trust's return.

Ordinary income tax on the payments, at a single flat rate; the four-tier ordering of distributions is not modelled.

Federal only. AGI limits on the deduction and state tax are not applied.

Frequently asked questions

What is the §7520 rate?

The IRS discount rate published monthly under §7520, used to value the income and remainder interests. A higher rate raises a CRAT deduction and lowers a CLAT gift.

Can the trust really sell without capital gains?

Yes. A charitable remainder trust is tax-exempt, so it can sell appreciated property without an immediate gain. The donor's gain is recognised as the payments come back, under the four-tier rules.

Why is the CRUT deduction lower than the CRAT's?

The unitrust payment grows with the trust, so more of the value goes to the donor and less to charity. The annuity trust pays a fixed dollar amount.

What is a zeroed-out CLAT?

One where the charity annuity is set so the remainder has no value at the §7520 rate, so the gift is zero. Any return above that rate passes to the family free of transfer tax.