Can a CRT pay income to a donor for a set term

I recently spoke with a client, David, who was devastated to learn his meticulously drafted Charitable Remainder Trust (CRT) was failing – not due to legal flaws, but because a crucial codicil altering the income payout schedule was misplaced during a home renovation. The lost document, essential to extending David’s income stream, meant he faced a significant shortfall in retirement funds, costing him over $80,000 in lost income. This scenario, unfortunately, isn’t uncommon. Properly documenting and safeguarding trust amendments is paramount, but the underlying structure of the trust itself must also be sound.

What are the key differences between a CRT and a CLT?

Many clients initially approach me seeking a way to reduce estate taxes while also supporting causes they believe in. Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs) are two powerful tools to achieve this, but they operate in fundamentally different ways. A core distinction lies in who receives income first.

Charitable Remainder Trusts (CRTs), as the name suggests, prioritize the donor (or their heirs) by paying an income stream for a specified period—whether a set number of years or the donor’s lifetime. After that term, the remaining assets pass to the designated charity. This structure is particularly effective for bypassing capital gains tax on highly appreciated assets like stock or real estate. The donor avoids an immediate tax liability, and the charity ultimately benefits.

Charitable Lead Trusts (CLTs) function in reverse. They provide immediate income to the charity, with the remaining assets eventually passing to the donor’s beneficiaries. This is useful when a donor wants to support a charity now but preserve wealth for future generations. Understanding this difference is critical; choosing the wrong structure can have significant tax and financial implications.

How does a CRT help with capital gains taxes?

As both an Estate Planning Attorney and a CPA with over 35 years of experience, I often advise clients on minimizing tax burdens. One of the most significant benefits of a CRT is its ability to defer – and potentially eliminate – capital gains taxes. When you contribute appreciated assets, such as stock, to a CRT, you avoid paying capital gains tax on the difference between your original cost basis and the asset’s current market value. This can free up significant capital for reinvestment or income distribution.

This is where my CPA expertise comes into play. The ‘step-up in basis’—the ability to adjust the value of inherited assets to their fair market value at the time of inheritance—is essential. CRTs, when structured properly, can maximize the benefits of this step-up, reducing future capital gains liabilities for your heirs. Accurate valuation of the donated assets is also crucial; a qualified appraisal is often necessary.

What are the reporting requirements for charitable trusts in California?

Establishing a charitable trust isn’t a “set it and forget it” proposition. California law mandates ongoing oversight and reporting. Trustees of California charitable trusts are mandated to comply with annual reporting obligations via the Registry of Charitable Trusts under Government Code § 12585, subject to supervision by the Attorney General to prevent self-dealing or mismanagement. Failing to file these reports can result in penalties and jeopardize the trust’s tax-exempt status.

What happens if the charity named in my CRT ceases to exist?

It’s a valid concern, and one we address during the trust drafting process. If a named charity ceases to operate, California courts apply the Cy Pres Doctrine to redirect assets to a comparable charitable cause, provided the trust doesn’t name a specific successor charity. This prevents the donor’s intent from being frustrated simply because circumstances change. We typically include alternate beneficiaries to provide a safety net.

What about digital assets and accessing them for charitable distribution?

In today’s digital age, many charitable intentions extend to online accounts and cryptocurrency. However, accessing these digital assets requires careful planning. Without specific RUFADAA language (Probate Code § 870) in the Charitable Trust, service providers can legally block a trustee from accessing digital accounts or cryptocurrency intended for charitable distribution. We incorporate the necessary provisions to ensure seamless access and distribution, protecting your wishes.

How does the OBBBA impact high-net-worth donors?

The 2026 ‘Sunset’ of the increased federal estate tax exemption was a major concern for many high-net-worth individuals. Fortunately, that was averted by the OBBBA, ensuring a $15 million per person Federal Estate Tax Exemption effective Jan 1, 2026. This allows high-net-worth donors to leverage charitable trusts for excess value protection while benefiting the community. However, proper planning now is still crucial to maximize these benefits.

What determines whether a California trust settlement remains private or erupts into public litigation?

The advantage of a California trust is control and continuity, but this relies entirely on accurate funding and disciplined administration. Without clear asset titles and strict adherence to fiduciary standards, a private trust can quickly become a subject of public litigation over mismanagement, capacity, or undue influence.

• The Conflict: Prepare for potential contesting a trust if terms are vague.
• The Duty: Follow strict trustee duties to avoid liability.
• Philanthropy: Create charitable trusts for tax efficiency.

Ultimately, the success of a trust depends on the details—proper funding, clear terms, and a trustee willing to follow the rules. By anticipating friction points and documenting every step of the administration, fiduciaries can protect the estate and themselves from liability.

Verified Authority on California Charitable Trust Administration

• Business Interest Compliance (FinCEN): FinCEN – Beneficial Ownership Information (BOI)
  As of March 2025, domestic U.S. LLCs are exempt from mandatory BOI reporting under the Corporate Transparency Act; however, trustees managing foreign-registered entities within a Charitable Trust must still file updates within 30 days to avoid fines of $500/day.
• Charitable Trust Formation: California Probate Code § 15200 (Creation of Trust)
  This statute governs the legal creation of fiduciary relationships for charitable purposes. It enables donors to support causes—such as education or scientific research—that align with their values through structured giving, ensuring precision and continuity that casual donations lack.
• Digital Asset Access (RUFADAA): California Probate Code § 870 (RUFADAA)
  Without specific RUFADAA language (Probate Code § 870) in your Charitable Trust or Will, service providers like Coinbase and Google can legally deny your trustee access to digital assets, potentially stalling the funding of charitable causes.
• Federal Estate Tax (OBBBA): IRS Estate Tax Guidelines
  The 2026 “Sunset” was averted by the OBBBA (One Big Beautiful Bill Act), which permanently increased the Federal Estate Tax Exemption to $15 million per person effective Jan 1, 2026, directly impacting how charitable structures are used to shield high-value estates from taxation.
• Primary Residence Succession (AB 2016): California Probate Code § 13151 (Petition for Succession)
  When transferring property to a charity, you must distinguish between the Small Estate Affidavit (real property <$69,625) and AB 2016. For deaths on or after April 1, 2025, a residence up to $750,000 qualifies for a ‘Petition for Succession’. This is a “Petition” that requires a Judge’s Order, NOT an “Affidavit.” Note that other assets must remain below the $208,850 limit.
• Property Tax Reassessment (Prop 19): California State Board of Equalization (Prop 19)
  Under Prop 19, heirs (or charities in specific scenarios) can only keep a low tax base if requirements regarding primary residency and value limits are met within one year; this is vital to evaluate when gifting real estate through a Charitable Trust.
• Registry of Charitable Trusts: California Attorney General – Registry of Charitable Trusts
  Trustees of charitable trusts must comply with annual reporting obligations under California Government Code § 12585. This resource serves as the oversight portal to ensure proper use of assets and to avoid self-dealing or deviation from the donor’s original intent.
• Small Estate Threshold (Bank Accounts/Cash): California Probate Code § 13100 (Personal Property)
  If combined “probate assets” (excluding the AB 2016 residence) exceed $208,850 (as of April 1, 2025), they are subject to formal probate; a Will alone does not allow you to bypass this limit for the purpose of funding a Charitable Trust.