Plan Now, Benefit Later: How Charitable Trusts Can Reduce Future Tax Burdens

Plan Now, Benefit Later: How Charitable Trusts Can Reduce Future Tax Burdens

Tax planning and charitable giving might seem like separate conversations. One focuses on keeping more of what you earn, the other on giving money away. But for high-net-worth individuals, these two goals can work together in ways most people never consider. The right charitable structure reshapes your tax picture for years or even decades to come.

The timing matters more than usual right now. Tax laws changed significantly in 2025, and additional changes take effect in 2026 that will reduce the deduction value for many charitable givers. Starting in 2026, high-income itemizers will face a 0.5% AGI floor on charitable deductions and a 35% cap on the deduction value, effectively compressing the tax benefit of giving. Meanwhile, estate tax exemptions remain high but uncertain in the long term. All of this creates a window where strategic charitable planning can lock in benefits that compound over time. Charitable trusts offer some of the most powerful tools available for turning philanthropic intent into lasting financial advantage.

Understanding Charitable Remainder Trusts

A charitable remainder trust (CRT) lets you donate assets to charity while retaining an income stream for yourself or your beneficiaries. You transfer appreciated property, stocks, real estate, business interests, into an irrevocable trust. The trust sells those assets without paying capital gains tax, then reinvests the full proceeds to generate income for you over a set period or for your lifetime. When the trust term ends, whatever remains goes to charities you’ve chosen.

The tax benefits stack up in multiple ways. First, you receive an immediate partial income tax deduction based on the projected charitable remainder. Second, the trust avoids capital gains on the asset sale, meaning more money stays invested and working for you. Third, the assets leave your estate, potentially reducing future estate taxes. These three benefits together can transform how you manage a concentrated stock position, a business sale, or highly appreciated real estate.

Two Types to Consider

Charitable remainder annuity trusts (CRATs) pay you a fixed dollar amount each year. This works well if you value predictability and don’t plan to add more assets later. The payout stays constant regardless of how the trust investments perform.

Charitable remainder unitrusts (CRUTs) pay a fixed percentage of the trust’s value, recalculated annually. If investments grow, your income grows with them. If they shrink, so does your payment. This structure offers inflation protection over long time horizons and allows additional contributions.

The Charitable Lead Trust Alternative

Charitable lead trusts (CLTs) flip the structure. Instead of you receiving income first and charity receiving the remainder, the charity receives annual payments during the trust term, and your heirs receive whatever remains at the end. This approach serves families focused primarily on wealth transfer rather than current income.

The lead trust calculates its gift tax value at the moment of creation using IRS interest rate assumptions. If your trust investments outperform that assumed rate, the excess growth passes to your heirs gift-tax-free. In environments where the assumed rates are low and your investments perform well, a CLT can transfer substantial wealth to the next generation at minimal transfer tax cost.

When CLTs Make Sense

Lead trusts work best when you have assets you want to eventually pass to children or grandchildren, you’re committed to charitable giving anyway, and you’re concerned about estate or gift tax exposure. The charity gets supported throughout the trust term—which can last years or decades—while your family benefits from reduced transfer taxes on the assets that come back to them.

Family business owners often use CLTs when selling a company. The trust structure can defer and reduce capital gains while ensuring a portion supports charitable causes during the deferral period. At the end, heirs receive the remaining assets with a basis step-up that eliminates some of the embedded gains entirely.

Capital Gains Deferral Through Charitable Trusts

Selling highly appreciated assets creates large tax bills. A hypothetical stock you bought at $50,000 that’s now worth $500,000 would trigger $450,000 in capital gains, potentially costing you over $100,000 in federal taxes alone, depending on your bracket. That money disappears before you can reinvest it.

Charitable remainder trusts break this pattern. When you transfer appreciated assets to a CRT, the trust sells them without immediate capital gains tax. The full value goes back to work generating income. You still pay taxes on the income you receive from the trust each year, but those payments spread out over time instead of hitting all at once. Meanwhile, the larger investment base compounds for years longer than it would have if you’d paid taxes upfront.

Real Estate Owners Take Note

This strategy works particularly well with investment properties. Commercial buildings or land holdings often have substantial appreciation but generate modest current income. Selling triggers massive gains. Transferring to a CRT lets you diversify out of a single property, generate better income from a broader investment portfolio, and avoid the concentrated risk—all while supporting causes that matter to you.

Estate Tax Reduction Strategies

Assets placed in charitable trusts leave your taxable estate. For families approaching or exceeding the federal estate tax exemption, this matters enormously. The current exemption sits at roughly $14 million per individual, high by historical standards, but the exemption has varied wildly over the past two decades and could change again with future legislation.

Charitable remainder trusts remove the donated assets from your estate entirely. Your heirs won’t inherit those specific assets, but they won’t pay estate taxes on them either. If you’re concerned about leaving wealth to heirs, some families combine CRTs with life insurance trusts. The income tax savings and CRT income help fund insurance premiums, and the death benefit replaces the assets going to charity. Your heirs end up with similar wealth, your estate pays less tax, and charitable organizations receive substantial support.

Timing Your Trust Establishment

The benefit calculations for charitable trusts depend partly on IRS interest rates at the time you create them. These rates change monthly. Working with advisors who track these rates can help you time your trust establishment for maximum advantage. A few percentage points difference in the assumed rate can shift thousands of dollars in deduction value or transfer tax savings.

Choosing Between Trust Types

Your decision should align with your primary objectives. If you need current income and want to support charity eventually, a charitable remainder trust fits better. If you want to transfer wealth to heirs while supporting charity during a transition period, a charitable lead trust makes more sense.

Age matters too. Younger donors typically benefit more from unitrust structures that offer growth potential over longer time horizons. Older donors may prefer the predictability of annuity trusts. Family dynamics play a role—if heirs need immediate support, a CRT providing income to them during your lifetime might work better than a CLT that delays their inheritance.

Working With Qualified Advisors

Charitable trusts require careful drafting to meet IRS requirements. The rules specify minimum and maximum payout rates, duration limits, and charity qualification standards. Getting these details wrong can disqualify the trust entirely, eliminating the tax benefits you expected. Work with estate planning attorneys experienced in charitable trusts, coordinate with your tax advisor on deduction timing, and involve your financial advisor in investment decisions for the trust assets.

Work With Us

Charitable trusts offer a rare combination of tax efficiency, income generation, estate planning benefits, and philanthropic impact that few other strategies can match. Whether a charitable remainder trust makes sense for diversifying appreciated assets, or a charitable lead trust fits your wealth transfer goals, these structures reward careful planning with decades of compounding benefits. Given the changing tax landscape, with new limitations on charitable deductions arriving in 2026, now represents an opportune moment to evaluate whether these tools belong in your financial plan.

At Avior, we help clients integrate charitable planning into comprehensive wealth strategies that address taxes, income needs, estate goals, and philanthropic values together. We work alongside your estate planning attorney and tax advisor to ensure charitable trusts are structured correctly and coordinated with your overall financial picture. If you’re considering charitable giving strategies that provide lasting benefits, schedule a consultation with our team. Let’s explore how thoughtful planning today can reduce your tax burden while supporting the causes you care about most.