• Since the trust is a tax-exempt organization, the CRT can sell the asset and reinvest the proceeds without paying capital gains taxes. Selling the asset yourself would result in a significant capital gains tax bill.

• You get a current income tax deduction equal to the value of the remainder interest that will eventually go to the charity. That value is based on your life expectancy, the payout percentage, and an interest rate designated by the Internal Revenue Service. Higher tax deductions result as you get older, the interest rate increases, and the payout percentage decreases. This deduction is subject to limitations on charitable contributions, but any excess deduction can be carried forward five years.

• The asset is removed from your estate when it is transferred to the CRT, so it will not be subject to estate taxes after your death.

• You receive an income stream for life or for a designated period.

• You make a substantial gift to a charity you select.

There are two basic types of Charitable Remainder Trusts:

• A Charitable Remainder Annuity Trust (CRAT) pays the donor a fixed annual amount based on the trust’s initial value.

• A Charitable Remainder Unitrust (CRUT) pays the donor a percentage of the assets’ value, which is calculated every year.

Amounts paid out by the CRT must be greater than 5% and less than 50% of the property’s initial value. Also, the present value of the charity’s remainder interest must be at least 10% of the property’s value. The IRS will disqualify a CRT with more than a 5% probability that the trust funds will be completely used before the trust’s termination date. Thus, carefully assess all factors before setting up a CRT.

Keep in mind that the gifted asset is removed from your estate and will not be available to your heirs after your death. Thus, many individuals purchase life insurance to replace the value of the gifted assets. If the insurance policy is properly structured, your heirs can receive the proceeds both income- and estate-tax free.