Charitable Remainder Trusts: What Reddit Gets Right and Wrong

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, which covers the 5% to 50% payout band, the 10% remainder test, and who a CRT genuinely fits.