# Charitable Remainder Trusts: What Reddit Gets Right and Wrong Source: https://ridleylawoffices.com/guides/charitable-remainder-trust-reddit/ Charitable remainder trusts get discussed on Reddit more often than almost any other advanced planning tool, mostly in the context of a large concentrated position with a large embedded gain. Some of that discussion is unusually good. Some of it badly overstates the benefit. A charitable remainder trust under IRC § 664 is an irrevocable split-interest trust. You transfer assets in, an income stream is paid out to you or another named beneficiary for life or a term of years, and whatever remains at the end goes to charity. That structure is what produces every advantage and every drawback below. ## What people online get wrong ### “You avoid capital gains tax” Deferred and spread, not erased. The trust itself is generally tax exempt, so it can sell an appreciated asset without an immediate tax hit at the trust level. But distributions to you carry out income under a tiering system that pushes the most heavily taxed categories out first. The gain surfaces over time in your hands. Framing a CRT as a way to make capital gains disappear is the most common error in these threads, and one poster in a tax discussion put the accurate version well by describing the arrangement as primarily a deferral and wealth-transfer tool that happens to involve charity. ### “You get a deduction for the full value of what you contribute” No. The deduction is the present value of the charity’s remainder interest, not the value of the asset. That is why posters report deductions in the range of ten to fifteen percent of the contributed value, which surprises people who expected something close to a full charitable deduction. The number depends on the payout rate, the term or life expectancy, and the applicable federal rate. ### Constraints that get skipped The remainder interest must be worth at least ten percent of the value contributed at funding, and the annual payout must fall between five and fifty percent. Those two rules together eliminate a lot of what people propose in these threads. A CRAT pays a fixed dollar amount set at funding; a CRUT pays a percentage of the annually revalued trust. The difference matters a great deal in a bad market and is rarely explained. ### “It is basically a better donor advised fund” They solve different problems. A donor advised fund is a giving vehicle with an immediate deduction and no income stream back to you. A CRT pays you. If you do not need the income, the CRT’s complexity and cost are usually not worth it. ## The realistic assessment One commenter’s blunt summary is close to right: a CRT can work well when you intended to leave the money to charity anyway, and it is often not a large tax savings otherwise. Setup and ongoing administration are real costs. The decision is irrevocable. If charitable intent is genuine and there is a concentrated low-basis position, it deserves a serious look. If the charity is an afterthought bolted onto a tax idea, the numbers usually do not hold up. Ridley Law is a California estate planning practice. A CRT is a federal tax structure with California income tax consequences, so this is work to coordinate with your CPA rather than to decide from a forum thread. General information, not legal or tax advice. For the full legal treatment rather than the forum version, see our page on [charitable remainder trust planning in California](https://ridleylawoffices.com/charitable-remainder-trust-attorney-california/), which covers the 5% to 50% payout band, the 10% remainder test, and who a CRT genuinely fits. ## Frequently Asked Questions ### Does a charitable remainder trust actually avoid capital gains tax? It defers and spreads the tax rather than erasing it. The trust itself is tax-exempt, so it can sell the appreciated asset without paying gain at the moment of sale, which is the part people latch onto. The gain then comes back to you inside your annual payments, under tiering rules that push the least favorable character out first. Over a twenty-year term you often pay a good deal of that tax, just later and in smaller pieces. ### How large is the charitable deduction? Only the present value of what charity is projected to receive at the end, not the full amount you contribute. That remainder interest has to be at least 10% of the initial value for the trust to qualify at all. On a typical two-life trust funded in your sixties, the deduction commonly lands somewhere in the range of a fifth to a third of what you put in, and it’s subject to the usual AGI percentage limits with a five-year carryforward. ### Can I change my mind later? No. The transfer is irrevocable and the asset is gone. You can retain the right to change the charitable beneficiary if the trust is drafted that way, but you can’t unwind the trust, get the principal back, or redirect the income stream to yourself in a different form. This is the constraint that gets skipped most often in online discussions. ### Is it just a better donor advised fund? They solve different problems. A [donor advised fund](https://ridleylawoffices.com/guides/wills-and-trusts/) gives you a deduction and grantmaking flexibility and pays you nothing back. A charitable remainder trust pays you an income stream for life or a term of years and gives you a smaller deduction. If you need cash flow from the asset, the fund can’t do it. If you don’t, the fund is far cheaper and simpler to run. ### What does it cost to operate? More than people budget for. A CRT is a separate taxpayer with its own annual return, Form 5227, plus K-1s to the income beneficiaries and an annual valuation if it’s a unitrust. Add trustee fees if you use a corporate trustee, which many do because the accounting is unforgiving. For a trust funded below roughly $500,000 the ongoing cost often outweighs the benefit. ### Does California tax any of this differently? California has no state [estate tax](https://ridleylawoffices.com/estate-tax-calculator/), so the estate side is federal only. The income you receive from the trust is taxable to you for California purposes like any other income, and California doesn’t recognize a separate charitable deduction scheme that changes the analysis. The state layer mostly affects how much the deferred gain eventually costs when it does come through.