How Rising Rates Have Charitable Remainder Trusts Back on the Radar

The Wealth Transition Challenge

For high-net-worth clients sitting on concentrated positions in low-basis assets—whether business interests, stocks, or real estate—finding a tax-efficient exit strategy represents one of wealth management's most significant challenges. While 1031 exchanges and qualified opportunity zones (QOZs) offer deferral options, they typically require reinvesting in similar assets that may also be overvalued, constraining diversification opportunities and financial flexibility.

But what if there were a strategy that allowed clients to simultaneously diversify their portfolio, generate reliable lifetime income, and create meaningful charitable impact—all while significantly reducing their tax burden? That's why Charitable Remainder Trusts (CRTs) deserve renewed consideration in today's economic environment.

How Interest Rate Shifts Transform the CRT Landscape

Just a few years ago, when the Section 7520 rate fell below 1%, establishing a viable CRT presented substantial challenges. These historically low discount rates made satisfying the IRS's required 10% charitable remainder test difficult, forcing payout rates so low that the strategy lost practical appeal for most clients.

Today's landscape looks remarkably different. With the 7520 rate now at 5.4%, the mathematics of CRTs have dramatically improved. These higher rates enable larger annual distributions to beneficiaries while still satisfying regulatory requirements. For clients, this translates into a more attractive, pension-like income stream that maintains purchasing power while simultaneously reducing tax drag on their accumulated wealth.

The CRT Mechanism: Simplifying the Complex

A Charitable Remainder Unitrust (CRUT) provides a sophisticated yet accessible structure for managing appreciated assets. Here's how it functions:

1. The client contributes an appreciated asset—such as a business interest, concentrated stock position, or investment real estate—to the CRT.
2. The trust can then sell the contributed asset without triggering immediate capital gains tax, allowing for full reinvestment of the proceeds.
3. The client receives annual distributions, typically between 5-10% of the trust's value, providing a lifetime income stream or income for a predetermined period.
4. Upon trust termination (either at death or after the specified term), the remaining assets transfer to the client's designated charitable organizations.
5. The client receives an immediate charitable deduction based on the present value of the future gift to charity, providing current-year tax benefits.

The Numbers in Action: Today's CRT Advantage

To illustrate just how dramatically the interest rate environment has changed the CRT landscape, consider this example of a joint-life CRUT for a 65-year-old couple with a $10 million contribution:

When the Section 7520 rate was at 1%, the maximum allowable payout rate while still meeting the IRS's 10% minimum charitable remainder requirement was approximately 5.3%. This meant the couple would receive about $530,000 in their first year (based on the $10 million initial contribution).

Fast forward to today's 5.4% Section 7520 rate, and the maximum allowable payout rate—while still maintaining that same 10% charitable remainder—jumps dramatically to approximately 9.6%. This allows for a first-year distribution of $960,000.

This represents an 81% increase in potential distributions with no change in the charitable remainder requirement. The difference—an additional $430,000 annually at the outset—compounds significantly over the joint lives of the couple, creating substantially greater lifetime income while fulfilling identical charitable objectives.

The Triple-Win Proposition: Income Enhancement, Tax Mitigation, Philanthropic Impact

With today's elevated 7520 rates, CRUTs can distribute substantively higher payments than during the low-rate environment of recent years. This fundamental shift makes them considerably more attractive for comprehensive wealth planning. For advisors guiding clients with concentrated, highly appreciated assets, CRTs now offer multiple compelling advantages:

• They provide a pathway to diversification without triggering the substantial immediate capital gains tax liability that would otherwise occur upon liquidation.
• They establish a reliable, potentially inflation-adjusted income stream while maintaining investment flexibility and professional management.
• They create a meaningful charitable legacy aligned with the client's values and philanthropic vision, often with greater impact than would be possible through other giving vehicles.

The Renewed Opportunity

For clients with significant appreciated assets seeking a sophisticated, tax-efficient approach to diversification, income generation, and legacy planning, Charitable Remainder Trusts represent a strategy whose time has returned. The current interest rate environment has transformed what was previously an overlooked planning technique into a powerful tool that can simultaneously enhance financial flexibility, provide lifetime security, and create lasting charitable impact.

As advisors navigate an increasingly complex planning landscape, CRTs offer a distinctive solution that aligns financial objectives with deeper client values—a rare combination in wealth management that deserves serious consideration.