An investor with highly appreciated real estate has more than one way to address the embedded capital-gains tax while planning for income and legacy. A 1031 exchange into a Delaware Statutory Trust (DST) defers the gain, keeps the asset in the investor's estate, and can lead to a step-up in basis at death. A Charitable Remainder Trust (CRT) takes a very different path: it's an irrevocable trust into which you contribute appreciated property, which the trust can then sell without immediate capital-gains tax (because the trust is tax-exempt), paying you or your beneficiaries an income stream for a term or life, giving you a partial charitable income-tax deduction, and ultimately leaving the remainder to charity. These tools serve different goals — keeping versus giving the asset — and can sometimes be considered together within a broader plan. This guide explains how CRTs work, how DSTs and CRTs compare and combine, the income and tax benefits, and charitable legacy goals. Because this area is genuinely complex and CRTs are irrevocable, this is educational information only, not tax, legal, or investment advice — and the single most important step is coordinating closely with your estate-planning attorney and CPA before doing anything.
How CRTs Work
A Charitable Remainder Trust (CRT) is an irrevocable trust into which you contribute appreciated property. Once the property is in the trust, the CRT can sell it without paying immediate capital-gains tax, because the trust is tax-exempt — a key feature that distinguishes it from selling the property yourself. The trust then pays an income stream to you (or to other named beneficiaries) for a set term of years or for life, and when that term ends, whatever remains in the trust — the 'remainder' — passes to one or more charities you've designated.
In addition to deferring or avoiding the immediate gain on the sale and providing an income stream, contributing to a CRT generally produces a partial charitable income-tax deduction in the year of the gift, based on the present value of the charity's future remainder interest. The income paid to you is taxable under specific rules as it's distributed. CRTs come in forms that pay a fixed dollar amount (a charitable remainder annuity trust) or a fixed percentage of the trust's value recalculated annually (a charitable remainder unitrust), each with its own characteristics. Because a CRT is irrevocable, the decision to use one is permanent and consequential.
So a CRT is an irrevocable trust that sells appreciated property tax-free at the trust level, pays you income for a term or life, gives a partial deduction, and leaves the remainder to charity. How CRTs work — an irrevocable trust receiving appreciated property, selling it without immediate capital-gains tax because the trust is tax-exempt, paying an income stream to you or your beneficiaries for a term or life, generating a partial charitable income-tax deduction based on the remainder's value, and ultimately passing the remainder to charity — is the foundation for comparing CRTs with DSTs. The structure is powerful but irrevocable and complex. Understanding how CRTs work frames the comparison. A CRT is an irrevocable, tax-exempt trust that sells contributed appreciated property without immediate capital-gains tax, pays you income for a term or life, gives a partial charitable deduction, and leaves the remainder to charity.
Combining DSTs and CRTs
DSTs and CRTs are often considered side by side because both address appreciated real estate, but they lead in different directions. A 1031 exchange into a DST defers the capital-gains tax, keeps the asset in your ownership and estate (so it can pass to heirs, potentially with a step-up in basis at death that erases the deferred gain), and provides passive real estate income over a defined hold. A CRT, by contrast, has you give the asset to an irrevocable charitable trust: you avoid the immediate gain at the trust level, receive an income stream and a partial deduction, but the asset ultimately goes to charity rather than to your heirs.
So the choice often comes down to your goals: a DST suits an investor who wants to keep the asset (and its value) for themselves and their heirs while deferring tax, whereas a CRT suits an investor whose goals include a charitable legacy and who is willing to give the asset to charity in exchange for income, a deduction, and avoiding the gain. They can also be considered together within a broader plan — for instance, directing some appreciated real estate into a 1031/DST path for heirs and other assets into a CRT for charitable and income goals, or using a DST as one component of an estate plan that also involves charitable giving. Any combination is highly fact-specific and complex.
So DSTs keep the asset for you and your heirs while deferring tax, while CRTs give the asset to charity in exchange for income, a deduction, and avoiding the gain — and the two can be weighed or combined within a broader plan. Combining DSTs and CRTs — a 1031-into-DST keeping the asset in your estate for heirs (with deferral and a potential step-up) versus a CRT giving the asset to a charitable trust (avoiding the gain, providing income and a deduction, leaving the remainder to charity), and the possibility of using both within one plan for different assets or goals — is a decision driven by whether you want to keep or give the asset. The paths diverge on legacy. Understanding the comparison frames the income and tax analysis. DSTs keep the appreciated asset for you and your heirs with tax deferral, while CRTs give it to charity for income, a deduction, and avoiding the gain — different paths that can be weighed against each other or combined in a broader plan.
- A CRT is an irrevocable, tax-exempt trust that sells contributed appreciated property without immediate capital-gains tax, pays you income, gives a partial deduction, and leaves the remainder to charity.
- A DST keeps the asset in your estate for heirs while deferring the gain; a CRT gives the asset to charity in exchange for income, a deduction, and avoiding the gain.
- The choice turns on whether you want to keep the asset for your heirs (favoring a DST) or pursue a charitable legacy with income (favoring a CRT) — and the two can be combined.
- CRTs are complex and irrevocable — coordinating closely with your estate-planning attorney and CPA is essential, and this is educational information only, not advice.
Income and Tax Benefits
Both paths can deliver income and tax benefits, but in different forms. A DST provides passive real estate income — your share of the rental income from the trust's property — over a defined hold, while deferring the capital-gains tax on the property you exchanged in. If held until death, the DST interest may pass to heirs with a step-up in basis, potentially eliminating the deferred gain. So the DST's benefits center on deferral, current income, and a possible step-up that benefits your heirs.
A CRT delivers a different mix. By selling the appreciated property inside the tax-exempt trust, it avoids the immediate capital-gains tax at the trust level, allowing the full value to be reinvested for income. It pays you (or your beneficiaries) an income stream for the term or life, and the income is taxed under specific ordering rules as distributed. The contribution also generally produces a partial charitable income-tax deduction in the year of the gift, based on the present value of the charity's remainder interest. So the CRT's benefits center on avoiding the immediate gain, an income stream, a current charitable deduction, and the satisfaction of a charitable legacy — at the cost of giving the asset away.
So the DST emphasizes deferral, current income, and a step-up for heirs, while the CRT emphasizes avoiding the gain, an income stream, a charitable deduction, and a charitable legacy. Income and tax benefits — the DST offering passive income, capital-gains deferral, and a potential step-up for heirs, versus the CRT offering avoidance of the immediate gain at the trust level, an income stream taxed under ordering rules, a partial charitable deduction, and a charitable legacy (in exchange for giving the asset away) — distinguish the two on the dimensions investors care about most. The benefits overlap in providing income but diverge sharply on legacy and the deduction. Understanding the benefits clarifies the trade-offs, all of which are technical. The DST offers deferral, income, and a possible step-up for heirs; the CRT offers avoidance of the immediate gain, income, a charitable deduction, and a charitable legacy in exchange for giving the asset to charity — both technical and fact-specific.
The DST and the CRT both pay you income — but one keeps the asset for your heirs while deferring the tax, and the other gives the asset to charity while avoiding the tax and adding a current deduction. The legacy difference is the whole decision.
Charitable Legacy Goals
For investors whose goals include charitable giving, the CRT is distinctive because it builds a charitable legacy directly into the structure. The entire premise of a CRT is that, after paying you an income stream for the term or life, the remainder passes to one or more charities you designate. So if leaving a meaningful gift to charity is among your objectives, a CRT accomplishes that while also providing you income and tax benefits along the way — a way to align your financial planning with your philanthropic intentions.
A DST, by contrast, is oriented toward keeping the asset and its value within your family — it defers tax and can pass to heirs with a step-up, but it doesn't inherently involve charity. An investor focused on maximizing what passes to heirs would generally favor the DST path; an investor who wants to give to charity (while still receiving income and tax benefits) might favor the CRT, or use a CRT for part of their wealth. Some plans combine both — preserving certain assets for heirs through 1031/DST strategies while dedicating others to charity through a CRT — but this requires careful design. Because the CRT is irrevocable and the asset ultimately leaves your estate, the charitable commitment is permanent.
So charitable legacy goals are where the CRT shines and the DST does not — the CRT bakes a charitable gift into the structure, while the DST keeps the asset for heirs. Charitable legacy goals — the CRT building a permanent charitable gift into its structure (the remainder passing to designated charities after the income term, aligning financial and philanthropic objectives) versus the DST keeping the asset and its value for heirs without inherently involving charity — are the dimension on which the two diverge most clearly. The CRT serves philanthropy; the DST serves heirs. Some plans use both for different assets. Understanding this clarifies which fits your legacy intentions. The CRT builds a permanent charitable gift into its structure, serving philanthropic goals, while the DST keeps the asset for heirs — so charitable legacy intentions point toward the CRT, family legacy toward the DST, and some plans combine both.
Complexity, Risks, and Trade-offs
It's essential to be clear-eyed about how complex and consequential these tools are, especially the CRT. A CRT is irrevocable — once you contribute the property and establish the trust, you generally cannot undo it or reclaim the asset, so the decision is permanent. The asset ultimately leaves your estate and goes to charity, which means it does not pass to your heirs; for some families that's the goal, for others it's a significant trade-off. The income, deduction, and tax rules governing CRTs are intricate, with specific requirements (such as minimum and maximum payout rates and a minimum remainder value) that must be satisfied for the trust to qualify.
DSTs carry their own complexities and risks too — illiquidity, sponsor risk, concentration, fees, and the technical requirements of a valid 1031 exchange — and they don't address charitable goals. Comparing or combining DSTs and CRTs multiplies the complexity, touching income-tax, estate-tax, capital-gains, and charitable rules at once, all of which are fact-specific and subject to change. Mistakes can be costly and, in the case of a CRT, irreversible. This is precisely the kind of decision that should never be made on the basis of a general article. The right structure depends on your specific assets, family situation, charitable intentions, income needs, and tax picture, which only your own professional advisors can properly assess.
So these tools are complex, consequential, and in the CRT's case irrevocable, demanding professional guidance rather than self-directed decisions. Complexity, risks, and trade-offs — the CRT's irrevocability and permanent transfer of the asset to charity (away from heirs), its intricate qualification and income-tax rules, alongside the DST's illiquidity, sponsor risk, concentration, fees, and 1031 technicalities, with comparing or combining them multiplying the complexity across income, estate, capital-gains, and charitable rules — make this an area where mistakes can be costly and, for CRTs, irreversible. The stakes demand professional guidance. Understanding the complexity underscores why coordination with advisors is essential. CRTs are irrevocable and intricate, DSTs carry illiquidity and sponsor risk, and combining them multiplies the complexity across multiple tax regimes — so these consequential, sometimes irreversible decisions require professional guidance, never a self-directed choice from an article.
A CRT is irrevocable and the asset goes to charity, not your heirs — this is exactly the kind of decision that should never be made from a general article, but only with your estate-planning attorney and CPA at the table.
Coordinating Advisors
Given the complexity, irrevocability, and high stakes, the single most important step in considering DSTs, CRTs, or any combination is to coordinate closely with your estate-planning attorney and CPA. These structures sit at the intersection of income-tax, estate-tax, capital-gains, and charitable-giving rules, and the right design depends on the specifics of your assets, family, charitable intentions, income needs, and overall tax situation. Only qualified professionals who know your full picture can properly evaluate which path — or combination — fits, and can implement it correctly.
Your estate-planning attorney handles the legal design and drafting — whether a CRT is appropriate, what type and payout, how it fits your overall estate plan, and how it interacts with your heirs and other planning. Your CPA evaluates the tax consequences — the capital-gains treatment, the charitable deduction, the income taxation of distributions, and how it all fits your tax picture over time. A financial professional can help with the investment components, such as a suitable DST when a 1031 path is chosen. These advisors should work together, because the decisions are interdependent. Starting with this coordination — before contributing any property or signing anything — is essential, because a CRT in particular generally cannot be undone once established.
So coordinating your estate-planning attorney and CPA (and a financial professional for the investment side) from the outset is the essential first step for any DST/CRT decision. Coordinating advisors — engaging your estate-planning attorney for the legal design and drafting, your CPA for the tax consequences across capital-gains, charitable, and income rules, and a financial professional for the investment components, all working together before any property is contributed or documents signed, because a CRT is generally irreversible once established — is the indispensable first step in this complex, high-stakes area. The decisions are interdependent and consequential. Understanding the need for coordination is the practical takeaway above all others. The essential first step for any DST/CRT decision is coordinating your estate-planning attorney (legal design), CPA (tax consequences), and a financial professional (investment side) from the outset — before contributing property or signing anything — because a CRT generally cannot be undone.
How Baker 1031 Helps You Explore These Options
Baker 1031 Investments helps investors understand the estate-planning landscape around appreciated real estate — how CRTs work, how DSTs and CRTs compare and might combine, the income and tax benefits of each, and charitable legacy goals — so you can explore these options knowledgeably and bring well-framed questions to your professional advisors. We help on the DST and 1031 side of the picture, and we are emphatic that this is educational information only, not tax, legal, or investment advice.
DST interests are securities offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), to accredited investors after a suitability review — so where a 1031-into-DST path fits your plan, we can help you evaluate and access suitable offerings. But CRTs, and any combination of DSTs and CRTs, are complex, fact-specific, and in the CRT's case irrevocable, touching income-tax, estate-tax, capital-gains, and charitable rules at once. Baker 1031 does not provide tax or legal advice, and we strongly emphasize coordinating with your estate-planning attorney and CPA, who design and evaluate these structures for your specific situation — that coordination is essential and should come before any property is contributed or documents signed. We're candid that DSTs are illiquid, accredited-only securities carrying real risks, that hold periods and returns are never promised, and that a CRT permanently transfers your asset to charity. Our role is to help you understand the options and the DST component, while your attorney and CPA make and implement the consequential decisions.
Frequently Asked Questions
What is a Charitable Remainder Trust (CRT)?
A Charitable Remainder Trust (CRT) is an irrevocable trust into which you contribute appreciated property. Once the property is in the trust, the CRT can sell it without paying immediate capital-gains tax, because the trust is tax-exempt — a key feature distinguishing it from selling the property yourself. The trust then pays an income stream to you (or to other named beneficiaries) for a set term of years or for life, and when that term ends, whatever remains — the 'remainder' — passes to one or more charities you've designated. In addition to deferring or avoiding the immediate gain and providing income, contributing to a CRT generally produces a partial charitable income-tax deduction in the year of the gift, based on the present value of the charity's future remainder interest. CRTs come in forms that pay a fixed dollar amount (a charitable remainder annuity trust) or a fixed percentage recalculated annually (a charitable remainder unitrust). Because a CRT is irrevocable, the decision is permanent and consequential. This is complex; consult your estate-planning attorney and CPA, and treat this as educational information only, not advice.
How is a CRT different from a DST?
A CRT and a DST address appreciated real estate in fundamentally different ways. A 1031 exchange into a DST defers the capital-gains tax, keeps the asset in your ownership and estate (so it can pass to heirs, potentially with a step-up in basis at death that erases the deferred gain), and provides passive real estate income over a defined hold. A CRT, by contrast, has you give the asset to an irrevocable charitable trust: the trust sells it without immediate capital-gains tax at the trust level, pays you an income stream and gives a partial deduction, but the asset ultimately goes to charity rather than to your heirs. So the core difference is keeping versus giving the asset. A DST suits an investor who wants to keep the value for themselves and their heirs while deferring tax; a CRT suits an investor whose goals include a charitable legacy and who is willing to give the asset to charity in exchange for income, a deduction, and avoiding the gain. Both are complex and fact-specific. This is educational information only — your estate-planning attorney and CPA should evaluate which, if either, fits your situation.
Can I avoid capital-gains tax with a CRT?
A CRT can avoid the immediate capital-gains tax on the sale of appreciated property, because the trust that sells the property is tax-exempt — but the picture is more nuanced than simple 'avoidance,' and the rules are intricate. When you contribute appreciated property to a CRT and the trust sells it, the trust doesn't pay capital-gains tax at the time of sale, so the full value can be reinvested to produce income. However, the income distributed to you from the trust is taxable under specific ordering rules, and a portion of those distributions can carry out the capital gain to you over time as you receive income. So the gain isn't necessarily eliminated forever; rather, the immediate tax at sale is avoided at the trust level, and the tax treatment of what you receive follows detailed rules. By comparison, a DST defers (rather than avoids) the gain via a 1031 exchange, with a potential step-up at death. The CRT's tax treatment is genuinely complex and depends on the trust type, payout, and your situation. This is educational information only — your CPA must analyze the actual tax consequences for you before you act.
What income does a CRT pay?
A CRT pays an income stream to you (or to other named beneficiaries) for a set term of years or for life, with the specific amount depending on the type of CRT. A charitable remainder annuity trust (CRAT) pays a fixed dollar amount each year, determined at the outset. A charitable remainder unitrust (CRUT) pays a fixed percentage of the trust's value, recalculated annually, so the dollar amount varies with the trust's value over time. In both cases, the payout must satisfy specific requirements (such as minimum and maximum payout rates and a minimum value left for charity) for the trust to qualify. The income you receive is taxable under detailed ordering rules that characterize the distributions based on the trust's income and gains. So a CRT provides a structured income stream — fixed or variable depending on the type — for the term or life, after which the remainder goes to charity. The right type and payout depend on your income needs, the asset, and your tax situation, which are complex to evaluate. This is educational information only; your estate-planning attorney and CPA should determine the appropriate structure for you.
Do I get a tax deduction for a CRT?
Yes — contributing appreciated property to a CRT generally produces a partial charitable income-tax deduction in the year of the gift. The deduction is based on the present value of the charity's future remainder interest — essentially, an estimate of how much the charity is expected to ultimately receive, calculated using IRS factors that account for the payout rate, the term or life expectancy, and prevailing interest rates. Because you retain an income interest for the term or life, the deduction is partial rather than for the full value of the contributed property. The deduction is also subject to the usual limits on charitable deductions (based on your income and the type of property and charity), with carryforward rules if it exceeds the annual limit. So a CRT can provide a meaningful current deduction alongside its other benefits, but the exact amount depends on intricate calculations and your tax situation. This is educational information only, and the deduction rules are technical and subject to change — your CPA must calculate the actual deduction and confirm how it applies to you before you rely on it. Don't act on a general description.
Can I use both a DST and a CRT?
It's sometimes possible to use both a DST and a CRT within a broader plan, but only with careful, professional design, because they serve different goals and the interactions are complex. For example, an investor with multiple appreciated assets might direct some real estate into a 1031/DST path to defer tax and preserve value for heirs, while contributing other assets to a CRT to pursue charitable goals with income and a deduction. Or a DST might be one investment component within an overall estate plan that also includes charitable giving through a CRT. What you generally cannot do is casually mix the two on the same asset without understanding the tax consequences — the rules governing 1031 exchanges and CRTs are separate and intricate, and combining them touches income-tax, estate-tax, capital-gains, and charitable rules at once. So using both is feasible in the right circumstances but highly fact-specific and consequential, and a CRT is irrevocable. This is educational information only, not advice. Any plan involving both a DST and a CRT must be designed and evaluated by your estate-planning attorney and CPA for your specific situation before you act.
Is a CRT irrevocable?
Yes — a CRT is irrevocable, and this is one of the most important things to understand before considering one. Once you contribute the property and establish the trust, you generally cannot undo it or reclaim the asset; the decision is permanent. The asset ultimately leaves your estate and goes to charity at the end of the income term, which means it does not pass to your heirs. For an investor whose goal is a charitable legacy, that's exactly the intended outcome; for one who wants to preserve the asset for family, it's a significant trade-off that may make a CRT inappropriate. The irrevocability also means mistakes can't easily be fixed — if the trust is poorly designed or no longer fits your situation, your options to change course are limited. By contrast, a DST keeps the asset in your estate and doesn't involve giving it away. Because of this permanence, a CRT decision should never be made hastily or from a general article. This is educational information only — coordinate closely with your estate-planning attorney and CPA, who can assess whether the irrevocable commitment is right for your situation before anything is signed.
Which is better for my heirs, a DST or a CRT?
For maximizing what passes to your heirs, a DST is generally the more direct path, because a CRT by design directs the asset to charity rather than to your family. A DST defers the capital-gains tax through a 1031 exchange and keeps the asset in your estate; if held until death, the interest may pass to heirs with a step-up in basis that can eliminate the deferred gain, so your heirs can receive the value efficiently. A CRT, by contrast, pays you (or beneficiaries) income for a term or life, but the remainder goes to charity — so the contributed asset itself does not pass to your heirs (though some plans use other assets, such as life insurance, to replace the value for heirs). So if your primary goal is family legacy, the DST path generally favors your heirs; if your goals include charitable giving alongside income, the CRT serves that purpose at the cost of the asset to your family. Many investors blend approaches. This is educational information only and the trade-offs are complex — your estate-planning attorney and CPA should evaluate which structure best fits your family and charitable goals before you decide.
Why is coordinating with advisors so important here?
Coordinating with your estate-planning attorney and CPA is essential because DSTs, CRTs, and any combination sit at the intersection of income-tax, estate-tax, capital-gains, and charitable-giving rules — and the decisions are complex, consequential, and in the CRT's case irrevocable. The right structure depends on the specifics of your assets, family situation, charitable intentions, income needs, and overall tax picture, which only qualified professionals who know your full situation can properly evaluate and implement. Your estate-planning attorney handles the legal design and drafting; your CPA evaluates the tax consequences across capital-gains, charitable, and income rules; and a financial professional can help with the investment components, such as a suitable DST when a 1031 path is chosen. These advisors should work together, because the decisions are interdependent. Starting with this coordination — before contributing any property or signing anything — is critical, because a CRT generally cannot be undone once established, and mistakes can be costly or irreversible. So this is precisely the kind of decision that should never be made from a general article. This is educational information only; your professional advisors make and implement the actual decisions.
What are the estate-planning benefits of DSTs?
The estate-planning benefits of DSTs center on combining capital-gains deferral with a potential step-up in basis for heirs. When you 1031 exchange appreciated real estate into a DST, you defer the capital-gains tax you'd otherwise owe, and you shift from active landlording to passive ownership while staying invested in real estate. If you hold the DST interest until death, your heirs generally receive a step-up in basis to fair market value, which can eliminate the deferred capital-gains tax entirely — the basis for the 'swap till you drop' strategy. DSTs also allow fractional interests, which can make it easier to divide an estate among multiple heirs than a single physical property, and they relieve heirs of management responsibilities. So DSTs can be a powerful tool for passing real estate wealth to heirs tax-efficiently while providing passive income during your lifetime. Unlike a CRT, a DST keeps the asset in your estate rather than directing it to charity. The tax and estate details are technical and fact-specific, however. This is educational information only — your estate-planning attorney and CPA should confirm how these benefits apply to your specific situation before you rely on them.
Does the income from a CRT get taxed?
Yes — the income you receive from a CRT is taxable, under specific and detailed ordering rules, even though the trust itself avoided immediate capital-gains tax when it sold the contributed property. CRTs use a tiered system that characterizes distributions to you based on the trust's income and gains: distributions are generally treated first as ordinary income, then as capital gains, then as other income, and finally as tax-free return of principal, to the extent the trust has each type. This means a portion of your distributions can carry out the capital gain over time as you receive income, so the gain that was avoided at sale isn't necessarily eliminated — it can be recognized gradually through your distributions. The exact characterization depends on the trust's investments and performance and is genuinely complex. So while the CRT avoids the immediate tax at the trust level, the income you receive is taxable under rules that require careful accounting. This is educational information only and the rules are intricate and subject to change — your CPA must analyze how your CRT distributions would actually be taxed in your situation. Don't rely on a general summary for a decision this consequential.
Can a CRT hold real estate or a DST?
The mechanics of what a CRT can hold, including how it handles real estate or interests like DSTs, are technical and must be evaluated by qualified professionals — this is not something to assume from a general article. Typically, an investor contributes appreciated real estate to the CRT, and the trust then sells that property (tax-free at the trust level) and reinvests the proceeds to generate the income stream it pays you; the reinvested assets are chosen to suit the trust's income and growth objectives. Whether and how a CRT might hold a particular type of asset, and how that interacts with the 1031 rules that govern DSTs, involves complex tax and trust-law questions, and structures that combine charitable trusts with specific investments require careful, professional design to avoid pitfalls. There are also rules about CRTs and certain kinds of assets and debt that can create complications. So rather than assume a CRT can simply hold real estate or a DST in a particular way, treat this as a question for your estate-planning attorney and CPA to answer for your specific situation. This is educational information only — the interaction of CRTs, real estate, and DSTs is intricate, and professional design is essential before any property is contributed.
Who should consider a CRT?
A CRT may be worth exploring for an investor who has highly appreciated property, wants an income stream, and has genuine charitable intentions — someone who is willing to ultimately give the asset to charity in exchange for avoiding the immediate gain at the trust level, receiving income for a term or life, and getting a partial charitable deduction. It can suit investors who want to align their financial planning with philanthropy, who don't need the contributed asset to pass to heirs, and who value the income and tax benefits along the way. A CRT is generally not appropriate for an investor whose primary goal is to maximize what passes to their family, since the asset goes to charity rather than to heirs, or for someone uncomfortable with an irrevocable commitment. Because a CRT is permanent and complex, it should only be considered as part of a carefully designed plan. So a CRT fits investors with appreciated assets, income needs, and charitable goals who accept the irrevocable transfer to charity. This is educational information only — whether a CRT fits your situation is a determination only your estate-planning attorney and CPA can properly make, after evaluating your full picture. Bring them your goals and let them assess the fit.
What are the risks and drawbacks of a CRT?
A CRT carries significant drawbacks and complexities that must be weighed against its benefits. The most fundamental is irrevocability: once established, a CRT generally cannot be undone, and the contributed asset permanently leaves your estate and goes to charity rather than to your heirs — for some that's the goal, but for others it's a major trade-off. The income and deduction the CRT provides come at the cost of giving up the asset itself. The rules are intricate: a CRT must satisfy specific qualification requirements (such as minimum and maximum payout rates and a minimum remainder value for charity), the income you receive is taxable under detailed ordering rules, and the charitable deduction depends on complex present-value calculations. There are also costs to establish and administer the trust, and the income stream is exposed to how the trust's reinvested assets perform. Mistakes in design or administration can be costly and, because the trust is irrevocable, hard or impossible to fix. So a CRT is powerful but unforgiving, demanding careful professional design. This is educational information only — your estate-planning attorney and CPA must evaluate the risks and drawbacks for your specific situation before you proceed.
How does Baker 1031 help me explore DSTs and CRTs?
We help investors understand the estate-planning landscape around appreciated real estate — how CRTs work, how DSTs and CRTs compare and might combine, the income and tax benefits of each, and charitable legacy goals — so you can explore these options knowledgeably and bring well-framed questions to your professional advisors. We help on the DST and 1031 side of the picture, and we are emphatic that this is educational information only, not tax, legal, or investment advice. DST interests are securities offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), to accredited investors after a suitability review, so where a 1031-into-DST path fits your plan, we can help you evaluate and access suitable offerings. But CRTs, and any combination of DSTs and CRTs, are complex, fact-specific, and in the CRT's case irrevocable, touching income-tax, estate-tax, capital-gains, and charitable rules at once. Baker 1031 does not provide tax or legal advice, and we strongly emphasize coordinating with your estate-planning attorney and CPA before any property is contributed or documents signed. We're candid that DSTs are illiquid, accredited-only securities carrying real risks, that returns are never promised, and that a CRT permanently transfers your asset to charity.
Glossary
- Charitable Remainder Trust (CRT)
- An irrevocable trust paying income to you, with the remainder to charity.
- Irrevocable Trust
- A trust that generally cannot be undone once established.
- Remainder Interest
- The portion of a CRT that passes to charity at the end of the term.
- Charitable Remainder Annuity Trust (CRAT)
- A CRT paying a fixed dollar amount annually.
- Charitable Remainder Unitrust (CRUT)
- A CRT paying a fixed percentage of value, recalculated annually.
- Charitable Deduction
- The partial income-tax deduction for the remainder's present value.
- Tax-Exempt Trust
- A CRT that can sell appreciated property without immediate gains tax.
- Income Stream
- The payments a CRT makes to you for a term or life.
- Delaware Statutory Trust (DST)
- 1031-eligible fractional real estate kept in your estate.
- 1031 Exchange
- A tax-deferred swap of like-kind investment real estate.
- Capital-Gains Deferral
- Postponing the tax on a property-sale gain via a DST/1031.
- Step-Up in Basis
- The basis reset at death that can erase deferred gain for heirs.
- Estate Planning
- Arranging assets for income, tax efficiency, and legacy.
- Charitable Legacy
- A planned gift to charity built into a structure like a CRT.
- Ordering Rules
- The tiered system characterizing taxable CRT distributions.
- Estate-Planning Attorney
- The professional who designs and drafts these structures.
Sources & References
- IRS. Charitable Remainder Trusts
- IRS. Revenue Ruling 2004-86
- Cornell Legal Information Institute. 26 U.S. Code § 1031 — Exchange of real property held for productive use or investment
- FINRA. Real Estate Investments
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
