If you’re a CPA practice owner and a regular reader of our blog, you’ve likely considered long-term tax planning—especially with the upcoming expiration of the Tax Cuts and Jobs Act (TCJA) in 2026. Reduced lifetime exemption limits could mean a larger share of your wealth ends up with the IRS if you don’t plan ahead. For those with a passion for charity and an eye on creating a legacy, there are smarter ways to give than simply writing a check to your local soup kitchen. If you’re going to donate, why not maximize the impact for both your charity and your tax strategy?
Fortunately for you, certain trusts exist that allow you to donate to charity, reduce your taxable estate, and potentially continue to benefit from your assets. Maybe you’ve heard about trusts like CRTs and CLTs, or maybe they’re completely new to you. Either way, these trusts offer a unique way to reduce taxes, support the causes you care about, and still provide benefits for you or your family.
In this article, we’ll explain how Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs) work, what makes them different, and when it might make sense to use one (or both). Let’s break them down so you can decide if they’re worth exploring further. Keep in mind, though, that both CRTs and CLTs involve intricate IRS rules, calculations, and legal requirements.
What Is a Charitable Remainder Trust (CRT)?
A Charitable Remainder Trust (CRT) is a trust that allows you to set aside assets like real estate, stocks, or cash to benefit both you and a charity.
Here’s how it works: You transfer assets into the CRT, which is an irrevocable trust. (That means you can’t change your mind later and take the assets back.) The trust then sells the assets, avoids paying capital gains taxes on the sale, and reinvests the money to generate income. The beneficiary (which can be you) can receive a stream of income for a specific period—either for a set number of years (up to 20 years) or a lifetime. In either case, this income is taxable. After the income period ends (usually when the last remaining beneficiary passes away), the remaining assets in the trust go to a charity of your choice.
The Benefits of CRTs
When you create the trust, you get an immediate income tax deduction for the value of the assets that will eventually go to charity. For example, if you transfer $1 million worth of appreciated stock into a Charitable Remainder Trust and the charity is expected to receive $400,000 at the end of the trust’s term, you can claim an immediate income tax deduction for that $400,000. If you fund the CRT with appreciated assets, the trust can sell them without triggering a capital gains tax bill. This can be a big deal if you’re sitting on highly appreciated property or stocks.
In our example above, it doesn’t matter if the stock had appreciated by 20, 30, or even 100%. The trust is now the legal owner of the asset, and as a tax-exempt entity, it can sell that asset without triggering taxable capital gains, leaving more for income and charitable purposes. Additionally, by moving assets into the trust, they’re no longer part of your taxable estate. This could be especially valuable if the estate tax exemption drops after 2026.
What Is a Charitable Lead Trust (CLT)?
A Charitable Lead Trust (CLT) works in almost the opposite way of a CRT. With a CLT, the charity gets the income first, and your family (or other non-charitable beneficiaries) gets what’s left when the trust ends. Here’s how it works: You transfer assets into the CLT. Again, this is an irrevocable trust. The trust generates income (from interest, dividends, etc.), and that income goes to the charity of your choice for a set number of years. After the income period ends, whatever is left in the trust goes to your non-charitable beneficiaries, such as your children, potentially free of estate or gift taxes.
The Benefits of CLTs
A Charitable Lead Trust (CLT) can provide significant tax and estate planning benefits, but careful structuring is essential. Here’s how it works: Potential Income Tax Deduction (Grantor CLT Only): If you set up a grantor CLT, you may qualify for an immediate income tax deduction for the present value of the charitable income stream. The longer the charity receives payments, the larger the deduction. For example, funding a CLT with $1 million that pays $50,000 annually to a charity for 20 years could yield a deduction of approximately $700,000, depending on IRS discount rates and assumptions. However, as the donor, you would be responsible for paying taxes on the trust’s income each year.
Whether you establish a grantor or non-grantor CLT, assets transferred into the trust are removed from your taxable estate. The value of the gift to your heirs is reduced by the present value of the charitable income stream, potentially resulting in lower estate or gift tax exposure. After the trust’s term, any remaining assets pass to your heirs, possibly at a reduced or eliminated tax cost.
Since the charity receives income first, there is no guarantee that your heirs will receive any remaining assets. However, if the trust’s assets perform well, they could generate enough to fulfill the charitable payments and leave a sizeable remainder for your heirs. Conversely, if the assets underperform and the trust cannot meet its charitable obligations, the IRS may recapture some or all of the upfront income tax deduction in the case of a grantor CLT, and additional penalties may apply.
Example: If you fund a CLT with $1 million in stocks and receive a $700,000 upfront deduction based on 20 years of $50,000 annual payments to a charity: If the stocks outperform expectations, the trust generates enough to meet the charitable payments and leaves a tax-efficient inheritance for your heirs. If the stocks underperform and the trustee cannot make the required payments, the IRS could claw back the deduction, creating unexpected tax consequences. In either case, working with a professional to structure the trust appropriately ensures it aligns with your charitable, tax, and estate planning goals.
CRTs vs. CLTs: How to Choose?
Now that you know how CRTs and CLTs work, how do you decide which one (or both) makes sense for you? Let’s compare them side by side:
| Factor | CRTs | CLTs |
|---|---|---|
| Who gets the income first? | You (or someone you name) | The charity of your choice |
| When does the charity benefit? | After the income period ends (e.g., at your death) | During the trust’s income period (e.g., for 10-20 years) |
| Who gets the remaining assets? | The charity | Your heirs or other beneficiaries |
| Potentially useful for... | Generating retirement income while reducing estate and capital gains taxes | Supporting a charity now while leaving a tax-efficient inheritance |
Can You Use Both CRTs and CLTs?
Absolutely, and for some CPA practice owners, pairing CRTs and CLTs can create a powerful financial strategy. Let’s consider an example: Imagine you set up a Charitable Remainder Unitrust (CRUT) with some appreciated stock. This trust could provide you and your spouse with retirement income. After both of you pass away, whatever is left in the trust goes to your favorite charity. At the same time, you could establish a Charitable Lead Trust (CLT) funded with cash or bonds. This trust would make annual payments to the charity for, say, 15 years. Once that period ends, the remaining assets in the trust would go to your children, potentially tax-free.
By using both types of trusts, you can reduce your current income taxes, avoid capital gains taxes, support your charity both now and in the future, and pass wealth on to your family in a tax-efficient manner. However, combining trusts may simply introduce unnecessary complexity without providing sufficient benefits to justify the effort.
In Conclusion
As a CPA practice owner, you’ve worked hard to build your financial future, and it’s natural to want to protect and grow your wealth, especially with changing tax laws on the horizon. CRTs and CLTs offer unique opportunities to reduce your tax burden, support the causes you care about, and provide for your loved ones. But let’s face it—trusts can be complex and may not be the right fit for everyone. That’s why it’s crucial to have a team of experts who can help you navigate these waters. They can help you understand whether these trusts align with your goals and, if so, how to set them up correctly. So, if you’re considering how to optimize your taxes, support charity, and secure your family’s future, it’s worth taking a closer look at CRTs and CLTs. Click the button below to explore how these strategies could fit into your bigger financial picture, both personally and for your business.
