Who Should Consider a Charitable Remainder Trust?
A charitable remainder trust may suit someone who owns highly appreciated assets, wants a stream of payments for life or a set term, and intends to leave the remaining trust property to charity. It is an irrevocable split-interest trust: one or more noncharitable beneficiaries receive distributions first, and a qualified charitable organization receives what remains. Berardi and Associates helps individuals and families assess how charitable giving fits within a broader estate plan.
This arrangement is not limited to the very wealthy, but its costs generally make it more practical when the proposed contribution is substantial. The donor must also be comfortable giving up direct ownership of the property.
Before transferring stock, real estate, or a business interest, contact us to have our estate planning attorney review the projected payments, charitable deduction, costs, and effect on beneficiaries. This review matters because the trust ordinarily cannot be revoked.
People With Highly Appreciated Assets
A charitable remainder trust is often considered by owners of stock, investment property, farmland, or business interests that have risen considerably in value. A qualified trust is generally exempt from income tax, so it may sell contributed assets without an immediate capital gains cost at the trust level. If the trust earns unrelated business taxable income, that income is subject to a separate excise tax rather than causing the trust to lose its exempt status, which is one reason certain operating business interests require careful review before transfer.
The exemption does not erase the gain. Capital gain realized inside the trust is carried out to the recipient under ordering rules as payments are made, so the arrangement generally defers and spreads taxation rather than eliminating it.
Timing matters. Transferring an asset after the donor has become legally committed to a sale may create assignment-of-income concerns and put the anticipated tax result at risk. Our trust attorney can review the proposed transaction, transfer restrictions, trustee authority, and the status of any sale negotiations before the donor contributes the asset.
Donors Who Want Predictable or Variable Payments
Federal tax law recognizes two principal forms. A charitable remainder annuity trust pays a fixed dollar amount set from the initial value of its property, and it cannot accept additional contributions once funded. A charitable remainder unitrust pays a fixed percentage of assets valued each year, so payments may rise or fall with investment performance, and it can be drafted to accept later contributions.
Under IRS rules, the annual payout generally must be at least 5 percent and no more than 50 percent. Payments may continue for the life of one or more individuals living when the trust is created, or for a fixed term of no more than 20 years.
Someone approaching retirement may value this added payment stream, and a married couple may structure payments for both spouses. The choice requires careful modeling because a higher payout reduces the eventual charitable gift and may prevent the trust from satisfying federal qualification tests. An annuity trust must also show that its payments are unlikely to exhaust the trust, and the applicable federal interest rate in effect when the trust is funded affects both the deduction and whether these tests are met.
Individuals With Genuine Charitable Goals
Tax savings alone are not a sound reason to establish this trust. The remainder interest is irrevocably committed to charity, and federal rules generally require its actuarial value to equal at least 10 percent of the net fair market value of the property contributed, measured when the contribution is made. A donor should select a charitable beneficiary whose work reflects a lasting personal priority and decide whether the trust agreement permits a later change to another qualified organization.
The donor may claim an income-tax charitable deduction based on the calculated present value of the remainder interest. That deduction is limited by percentage-of-income ceilings that depend on the type of property given and the type of charity receiving it, with unused amounts generally carried forward for up to five years. Federal changes that take effect for 2026 add a floor on deductible charitable gifts for taxpayers who itemize and reduce the value of itemized deductions for those in the top bracket, so the projected benefit should be modeled under current law rather than assumed.
A charitable remainder trust is also sometimes named as the beneficiary of a retirement account, which is one response to the shortened payout period now imposed on many inherited accounts. Our estate planning lawyer can coordinate the governing document with tax and financial advisers while reviewing the donor’s other gifts, retirement accounts, insurance, and family inheritances. Readers can also learn about the firm’s broader services.
Situations That May Call for Another Approach
A charitable remainder trust may be unsuitable when the donor needs access to principal, wants heirs to receive the contributed asset, or is uncertain about making an irrevocable charitable gift. It may also be inefficient when the expected tax benefit and payment stream do not justify trustee fees, annual valuations, tax filings, and investment administration.
Alternatives may include a direct charitable gift, a donor-advised fund, a charitable gift annuity, or a bequest in a will or revocable trust. Each choice differs in control, timing, deductions, expenses, and beneficiary rights. One of the firm’s attorneys can help identify which questions require input from a certified public accountant, valuation professional, or financial adviser.
Planning for Real Estate and Business Interests
Illinois property owners and Chicago-area business owners may consider charitable remainder trusts when much of their wealth is concentrated in real estate or a closely held company. Mortgages, environmental obligations, partnership agreements, lender requirements, and transfer restrictions may all affect whether the trustee can accept the property. Transferring an asset subject to debt may also produce unintended tax consequences, making legal and tax review important before the transfer occurs.
State law deserves separate attention. Illinois imposes its own estate tax at a $4 million exclusion that is not indexed for inflation and is not portable between spouses, while the federal exemption sits far higher. An Illinois family may therefore face a state-level estate tax question even when no federal estate tax is expected, and charitable planning is one of the tools that can address it.
Our wills and trusts attorney can examine how the proposed gift affects the rest of the estate plan, including available funds for taxes and expenses, gifts to family members, and successor decision-makers. The review should also address trustee selection, required appraisals, and whether the proposed trustee can properly manage and sell an asset that lacks a ready market.
Put the Giving Plan Into Practical Terms
A charitable remainder trust works best when its payment structure, charitable purpose, and family provisions all support the same long-term intent. Berardi and Associates can review the proposed contribution, trust terms, beneficiary designations, and related estate documents before an irrevocable transfer occurs. Contact us today to schedule a consultation and determine whether this arrangement fits your assets and goals.
This article is general information about federal and Illinois law and is not legal or tax advice. Tax results depend on individual facts and on rules that change.