At Copper State Planning, we design charitable remainder trusts for Arizona families who want to support chosen causes while securing predictable income payments for themselves or loved ones. If you are exploring trust-based giving, start by reading about our broader trust planning services and the advantages of an irrevocable trust. This article explains how a charitable remainder trust works, covers the types of charitable remainder arrangements available, and shows you how the income tax charitable deduction and other tax benefits can fit into your plan.
What is a Charitable Remainder Trust?
A charitable remainder trust is an irrevocable trust recognized under both federal tax law and Arizona’s version of the Uniform Trust Code. See Ariz. Rev. Stat. Title 14. It is one of several charitable trusts permitted in Arizona. When properly drafted, the trust pays an income stream to a named income beneficiary for life or a term of years, then distributes the remaining trust assets to charitable beneficiaries such as public charities, private foundations, or donor advised funds. Because the CRT itself is tax exempt, it can sell highly appreciated assets—including real estate or private company stock—without incurring immediate capital gains tax. This preserves the full fair market value to use for investment inside the trust.
Types of Charitable Remainder Trusts
Arizona recognizes two primary varieties of remainder trusts:
Charitable Remainder Annuity Trust (CRAT)
A charitable remainder annuity trust is a type of remainder trust that pays the same fixed annuity—no less than 5 percent of the initial trust assets—to the income beneficiary every year. Because the dollar amount never changes, a CRAT creates a predictable income stream and reliable income payments for retirees who need stability.
- Tax profile: You receive an income tax charitable deduction up front, calculated on the present value of the charity’s remainder interest. Each year, the named income beneficiary will pay income tax on distributions under the IRS’s four-tier rules.
- Asset choice: Funding a CRAT with highly appreciated assets (e.g., real estate or stock) defers capital gains tax inside the trust and preserves more of the asset’s fair market value for you and the charity.
- Drawbacks: After creation, the donor cannot make additional contributions. If inflation rises sharply, the fixed annuity may lose purchasing power.
Charitable Remainder Unitrust (CRUT)
A charitable remainder unitrust pays a fixed percentage—again, at least 5 percent—of the trust assets as revalued each year. Because the annual payout is based on asset performance, a CRUT can offer rising projected income payments when investments grow, helping to offset inflation.
- Flexibility: Donors may make additional contributions to a CRUT over time, making it attractive for business owners planning staged liquidity events or for those who will inherit private business interests later.
- Tax efficiency: Like a CRAT, a CRUT generates an immediate charitable deduction for the donor and allows the trustee to sell donated assets without current capital gains tax—all while the trust remains tax exempt.
- Planning note: Because payments fluctuate, a CRUT is better suited for income beneficiaries who can accommodate some variability from year to year.
By tying payouts to asset growth, a charitable remainder unitrust can be a dynamic way to balance charitable giving, tax management, and long-term income management.
Benefits and Tax Implications
Creating a CRT generates an immediate charitable deduction—formally a partial income tax deduction—calculated under I.R.C. § 170 using the present value of the charity’s remainder interest. You may also receive a separate income tax deduction that can offset current income for up to five years. Because the trust’s investment income is not taxed as it accrues, the corpus may grow faster than it would in a taxed environment, generating income for the beneficiaries and larger gifts for the designated charitable beneficiaries. When the trustee pays the annual unitrust or annuity amount, the recipients must pay income tax based on the CRT’s tiered ordering rules; a knowledgeable tax advisor or financial planner can forecast those projected income payments.
Evaluating Suitability
A CRT may be the right tool when you wish to:
(i) convert donated assets that produce little or no cash flow into a reliable annual income,
(ii) avoid up‑front capital gains, and
(iii) benefit one or more charitable organizations at death.
However, if you expect to leave sizable gifts outright to family, you must weigh whether the charitable gift diverts too much wealth from your heirs. Discuss these trade‑offs with experienced legal and financial advisors.
Creating and Funding the CRT
Under Ariz. Rev. Stat. Ann. § 14‑10801, the trustee must administer a CRT “in good faith, in accordance with its terms and purposes.” Funding is typically accomplished with appreciated securities, real estate, or an interest in an operating business. Transferring private business interests requires special valuation work, and the charitable entity must be able to accept the asset. Because a CRT is irrevocable, be sure the transferred assets are not needed by the grantor.
Managing the Trust
Each year the trustee calculates the payout amount, files Form 5227, and issues K‑1s to non charitable beneficiaries. Keeping complete records is essential: mistakes can endanger the CRT’s tax-exempt status. Professional administration ensures the capital gains tax savings are preserved and that the CRT’s charitable purpose is honored throughout its life.
Common Mistakes to Avoid
- Failing to respect the 5 % minimum payout—known as the 5 percent rule for charitable remainder trusts.
- Ignoring how a charitable remainder trust works with other estate vehicles; for example, placing trust assets that you might later need for liquidity.
- Omitting language required by the IRS sample forms, which can invalidate your tax deduction.
- Neglecting to update successor trustee provisions; if no qualified trustee is available, court appointment can be costly.
Frequently Asked Questions
What are the disadvantages of a charitable remainder trust?
A CRT is irrevocable, involves annual administrative costs, and may reduce inheritances.
How much does it cost to set up a CRT?
Legal fees in Arizona often start around $4,000 and rise with complexity.
What is the difference between a charitable trust and a charitable remainder trust?
Many charitable trusts benefit charity immediately; a CRT first provides income to private parties, then charity.
How can I be sure my named income beneficiary is protected?
Proper drafting ensures the trustee follows the payout formula and conserves remaining assets for the ultimate gift.
Conclusion
A charitable remainder trust offers more than just a way to give to the causes you care about—it can provide real, practical financial benefits. Whether you’re looking to reduce your tax burden, create a reliable stream of income for retirement, or make the most of highly appreciated assets, a CRT is a powerful and flexible strategy. It can support your philanthropic goals while ensuring your loved ones are also taken care of.
But like all sophisticated legal tools, a CRT must be thoughtfully drafted, funded, and managed. That’s where we come in. At Copper State Planning, we don’t just create documents—we build plans that reflect your values, protect your assets, and make life easier for your family down the road.
If you’re even just starting to explore how charitable giving might play into your broader estate or financial strategy, we’d love to help. A simple conversation can clarify whether a charitable remainder annuity trust or charitable remainder unitrust fits your unique goals—and what steps you’d need to take to move forward confidently.
Don’t leave your legacy to chance. Contact us to arrange a personal strategy session and take the first step toward creating a lasting impact—for your family and your community.
