Charitable Remainder Trusts: "Test-Drive" Charitable Giving

Takeaways

• Americans are among the most generous people in the world, but trust in charities is declining amid concerns about transparency and accountability.
• Charitable remainder trusts (CRTs) allow donors to provide for themselves and their loved ones while supporting a charity, offering the opportunity to “test-drive” a charity before making a long-term commitment.

Americans are among the most giving people in the world. This may come as a surprise in a country that prizes individualism and the pursuit of personal goals. But there are ways to give — and receive — at the same time.

One way to provide for you and your loved ones while giving something back is with a charitable remainder trust (CRT). For the discerning donor, a CRT also allows you to “test-drive” a charity and decide whether you want to double down on your gift or divert resources to causes you deem more worthy — a consideration that may have added importance amid a time of declining trust in charities.

Americans Losing Faith in Philanthropy

Year after year, the United States appears near the top of global generosity rankings, such as the World Giving Index by Charities Aid Foundation (CAF), which ranks the U.S. the world’s sixth-most generous country.

A report on CAF data found that, in 2022, more than 60 percent of Americans donated money. In 2023, they collectively gave $557 billion to charities. Most of this (67 percent) came from individuals, and much of the giving was by bequest (i.e., gifts made as part of an estate plan).

The U.S. also consistently ranks among the most individualistic countries in the world. Far from being mutually exclusive, as might be expected, evidence suggests that individualism and altruism are intertwined.

Psychologists say prosocial spending and happiness may create a virtuous cycle of greater giving. The American giving tradition is also shaped by ideals like building a more equitable society and a robust nonprofit sector that provides tax incentives for charitable donations.

But cracks are appearing in the American philanthropic spirit. Some Americans have lost faith in charities and are donating less over time.

This decline in trust mirrors an overall loss of trust in U.S. institutions. A lack of transparency about how donations are used and news stories about charities — such as the Red Cross raising half a billion dollars for Haiti and building just six homes — have contributed to this erosion of trust.

Recent controversies surrounding USAID have further intensified concerns about accountability and political neutrality in the philanthropic sector.

Some Americans are giving less simply because they have less to give. Half of Americans said in a 2024 poll that they reduced their charitable contributions because of the current economy. Most remain motivated to give out of the conviction that it’s the right thing to do. At the same time, 57 percent want to be more strategic in their charitable giving.

How CRTs Let You Support Causes Before Committing Long-Term

With more than 1.8 million recognized 501(c) organizations in the U.S., choosing a charity to donate to can be a difficult decision.

Should you fund clean water projects, local arts, or scholarships? Give money to rare disease research? Protect endangered species? The list of causes seems virtually endless.

In 2024, U.S. donors gave the most to health-related causes, followed by poverty, young people, religious organizations, disaster relief, and animal welfare, according to CAF America.

Most donors focus their giving on a few issues. The typical donor supports two to three different causes and prioritizes domestic efforts in their local communities.

Keeping donations close to home might allow donors to see the impact of their donation more directly. But even after choosing a charity to support, donors may question how effectively the charity is fulfilling its mission.

Donors are right to ask questions about charities and should do so before donating. They can also track dozens of key metrics — including expenses, the number of people served, and more — to measure a charity’s impact and success.

It’s not unusual to have regrets about donating to a charity, particularly when donors feel a lack of transparency from the organization, doubt their donation’s effectiveness, or worry about mismanagement of funds and other wrongdoings. However, it might take an actual scandal — like the revelation that a charity is disbursing only a fraction of funds to beneficiaries — to trigger donation regret, an outcome that research shows reduces future donation willingness.

Initial indecision about choosing a charity, the chances for regret about a chosen cause, and the fact that the causes most important to us change over time can lead to what might be characterized as “philanthropic commitment anxiety.”

You may be eager to give and don’t want to keep putting it off, but also hesitant to commit to a cause. With a charitable remainder trust as a vehicle for philanthropic exploration, you can “test-drive” your giving. You not only get income now, but you also can observe your chosen charity (or charities) in action and decide whether there’s a good long-term fit — or if your money should go elsewhere.

To give a prospective charity a trial run using a CRT, consider the following potential strategies:

“Multiple Beneficiary” Approach

• How it works: When setting up the CRT, designate several charities as beneficiaries to receive a portion of the remainder assets upon the trust’s termination.
• Benefits: Support multiple organizations simultaneously, receive a firsthand look at how each charity operates and uses funds, and compare their effectiveness and impact over time.

“Phased Distribution” Strategy:

• How it works: If using a Charitable Remainder Unitrust (CRUT), structure it to distribute varying percentages of the trust assets to different charities at different times.
• Benefits: This more dynamic approach allows you to adjust distributions based on your evolving assessment of each charity. You can increase support for high-performing organizations and decrease support for those that don’t meet expectations.

“DAF as Beneficiary” Method:

• How it works: Name a Donor-Advised Fund (DAF) as the sole beneficiary of the CRT. You can then make grants from the DAF to various charities over time, even after the CRT term ends.
• Benefits: The added flexibility of a DAF means you can continue to evaluate charities even after the trust term ends and adjust your giving strategy as needed from a centralized platform.

“Trustee Discretion” Option:

• How it works: The CRT document can explicitly grant the trustee discretion to change charitable beneficiaries under certain circumstances, such as when a charity’s work no longer aligns with the donor’s original intent or demonstrates ineffectiveness. It can alternately define a broader charitable purpose (e.g., environmental conservation) and give the trustee discretion to select specific organizations that align with that purpose.
• Benefits: The donor is giving up some control by empowering a trustee to choose charitable beneficiaries, but a CRT set up in this way has more flexibility to ensure the trust’s funds support relevant and impactful causes as circumstances change and charities come and go.

These are just a few of the ways to give charities a trial run prior to including them permanently in your legacy. Because CRTs are so versatile, there are other ways to use them as well.

By adding different provisions, for example, you can:

• use a shorter fixed term (say, five to 10 years) to limit your commitment and fast-track insights;
• use a fixed payout versus a variable payout to evaluate growth potential;
• make your heirs income beneficiaries to educate them about giving;
• select diverse causes with equal or varied shares to uncover where your true passion lies; or
• use a CRT as an alternative to a “stretch” IRA for inherited retirement accounts.

Other CRT Benefits and Considerations

The benefits of the above strategies can be seen as a complement to the many other potential benefits of a CRT. These benefits include preserving the value of highly appreciated assets (e.g., business interests, appreciated securities, and appreciated real estate), asset diversification, and tax breaks.

Although highly versatile, the more customized a CRT, the more complex it can be to set up and run. Here are some additional points to keep in mind as you consider CRTs for your charitable giving:

• Trust Structure. The type of CRT and its terms will affect your flexibility in “test-driving” charities.
• IRS Rules. The IRS allows CRTs to distribute remainder funds to organizations that are recognized as charitable under section 501(c)(3) of the Internal Revenue Code. This includes public charities, private foundations, and DAFs. Income beneficiaries can receive annual payments between 5 percent and 50 percent.
• Time Horizon. The length of the trust term will determine how long you have to observe the performance of different organizations.
• Personal Involvement. Consider the level of involvement you want in the grantmaking process and choose a strategy that aligns with your preferences.
• Limitations. Depending on the trust, you can usually file an amendment to change the charitable beneficiaries of a CRT, but not the noncharitable beneficiaries (the people receiving trust income). In addition, certain assets are not allowed in a CRT, including S-corporation stock and certain types of personal property. And because contributions to a CRT are irrevocable, once assets are in, you won’t be able to get them back.

A final word of advice: CRTs generally work better with more assets due to a mix of higher generated income, more opportunities for investment growth, more significant tax breaks, and trust administration costs. These costs can increase if you end up making changes to charitable beneficiaries.

For more general information about CRTs, check out this list of FAQs from the American College of Trust and Estate Counsel.

To determine the best CRT structure and strategy for your philanthropic goals get in touch with a local estate planning attorney.