United States
Hong KongCharitable trusts: remainder, lead, and which way the income flows
A charitable remainder trust pays income to a non-charitable beneficiary with the remainder to charity. A charitable lead trust pays charity first with the remainder to family. The direction of the income stream is the entire distinction.
Two structures, one distinction: who gets the income and who gets what is left.
The charitable remainder trust
Income to the donor or another non-charitable beneficiary for life or a term of up to twenty years. The remainder to charity.
- The donor receives an immediate income tax deduction for the present value of the charitable remainder.
- The trust is tax exempt, so it can sell an appreciated asset without immediate capital gains tax.
- The payout must be at least 5 per cent and no more than 50 per cent of the relevant value.
- The charitable remainder must be at least 10 per cent of the initial value.
- Distributions to the beneficiary are taxed under a four-tier ordering system.
The tax exemption is what makes it work. A client with a large low-basis holding can contribute it, have the trust sell without tax, and receive an income stream from the full proceeds rather than from what remained after tax.
Annuity or unitrust
| CRAT | CRUT | |
|---|---|---|
| Payout | Fixed dollar amount, set at the outset | Fixed percentage of the annually revalued assets |
| Additional contributions | Not permitted | Permitted |
| Payment varies with investment performance | No | Yes |
| Inflation protection | None | Some, if assets grow |
The annuity version gives certainty; the unitrust gives participation in growth and the ability to add assets later. Which suits depends on whether the beneficiary needs a predictable payment.
A client with a large, low-basis, concentrated position and charitable intent is the textbook CRT candidate. It diversifies without an immediate tax charge, produces income, and generates a deduction - three problems answered by one structure.
The charitable lead trust
The reverse. Charity receives the income stream for a term, and the remainder passes to family.
It is a transfer tax structure rather than an income tax one. The value of the taxable gift to the remainder beneficiaries is reduced by the present value of the charitable interest, so a lead trust can pass substantial appreciation to the next generation at a low transfer tax cost.
It works best when interest rates are low, because a lower section 7520 rate raises the value of the charitable lead interest and reduces the taxable gift.
Choosing between them
A client who needs income now and wants to benefit charity later: remainder trust. A client with enough income who wants to move appreciation to children at a reduced transfer tax cost: lead trust.
Both are irrevocable, both require ongoing administration, and neither suits a client whose charitable intent is uncertain. A donor-advised fund is the simpler answer where flexibility matters more than structure.
The transfer tax exclusion was changed by the 2025 reconciliation act and is indexed thereafter. Confirm the current figure before relying on it, and check state law separately.
Common questions
What is a charitable remainder trust?
A trust paying income to a non-charitable beneficiary for life or up to twenty years, with the remainder to charity. The donor receives a deduction for the present value of the charitable remainder.
What are the CRT payout limits?
At least 5 per cent and no more than 50 per cent of the relevant value, with the charitable remainder at least 10 per cent of the initial value.
What is the difference between a CRAT and a CRUT?
A CRAT pays a fixed dollar amount set at the outset and accepts no further contributions. A CRUT pays a fixed percentage of annually revalued assets and permits additions.
What is a charitable lead trust for?
Passing appreciation to family at a reduced transfer tax cost. Charity receives the income stream for a term, and the value of the gift to the remainder beneficiaries is reduced by the charitable interest.
When is a CRT the right recommendation?
For a client with a large low-basis concentrated position and genuine charitable intent. It diversifies without immediate tax, produces income and generates a deduction at once.