CRT Pitfalls: What Goes Wrong and How to Fix It

If you’re thinking about a charitable remainder trust (CRT), you probably picture a smooth tax break and a lasting legacy. In reality, a few simple slip‑ups can turn that plan into a headache. Below we break down the most common CRT pitfalls and give you clear steps to dodge them.

Common CRT Mistakes

1. Ignoring the 5% payout rule. The IRS says a CRT must pay at least 5% of the trust’s net assets each year. Many people set the payout too low, thinking they’ll keep more for themselves. The result? The trust fails the rule, the IRS imposes penalties, and the charitable intent collapses.

2. Wrong asset type. Not every asset works well in a CRT. Highly illiquid property, like a family farm with no market, can make it hard to meet the annual payout. Using a low‑yielding stock or a cash‑only trust can also limit the charitable payout and reduce tax benefits.

3. Bad valuation. Over‑valuing the donated asset inflates the charitable deduction you claim on your tax return. If the IRS later disagrees, you could face back taxes, interest, and even a denial of the deduction.

4. Forgetting the charitable remainder period. A CRT can last for a term of years or the donor’s lifetime. Setting the term too short means the charity gets a tiny share, and you lose the long‑term impact you wanted.

5. Skipping professional help. CRTs involve tax law, trust law, and investment strategy. Trying to DIY without a qualified attorney or tax adviser often leads to errors that cost money and time.

How to Avoid Those Mistakes

Start with a clear purpose. Ask yourself whether you want a charitable remainder annuity trust (CRAT) with fixed payments or a charitable remainder unitrust (CRUT) that varies with market performance. Knowing the goal guides the asset choice and payout rate.

Next, run the numbers. Use a trusted CRT calculator or have your accountant model the trust’s assets, expected growth, and the 5% minimum payout. Make sure the projected payout meets the rule without draining the trust.

Pick the right assets. Liquid, well‑valued assets like publicly traded stocks, mutual funds, or cash work best. If you want to include real estate, consider a partial conversion—sell the property first, then fund the CRT with the proceeds.

Get an accurate, third‑party appraisal. A qualified appraiser will give you a defensible value that the IRS is unlikely to challenge. Keep the appraisal report for your records.

Set a realistic remainder period. Lifetime trusts usually provide a larger charitable share, while term trusts may be appropriate for short‑term goals. Match the period to your charitable vision.

Finally, team up with experts. A trust attorney can draft the trust document correctly, while a CPA ensures the tax deduction and annual reporting are spot‑on. Their combined knowledge saves you from costly fixes later.

By watching out for these pitfalls and taking practical steps early, you can build a CRT that delivers tax benefits, supports your favorite cause, and avoids headaches down the road.