Charitable Remainder Trust Disadvantages: What You Should Know First

If you're reading up on charitable remainder trusts (CRTs), you're probably hoping to do a little good and maybe trim your tax bill at the same time. Sounds fair, right? But before you call your lawyer or start moving your investments, it pays to slow down. CRTs look glossy on the surface, but there are some disadvantages people only discover after signing the dotted line.

For starters, putting assets into a CRT means saying goodbye to a lot of control. Once those stocks or that property leave your hands, there's no real going back—and that's a big deal for families who want the option to change their minds. The IRS also brings its own flavor of complicated, with tax rules that aren't exactly dinner-table conversation. You'll need to track income, payouts, and future taxes in ways that can make your head spin if you're not well prepared.

• What Is a Charitable Remainder Trust?
• The Loss of Control Over Your Assets
• Tax Complications and Surprises
• The Costs Most People Miss
• Family Inheritance Issues
• Who Should (and Shouldn't) Consider a CRT?

What Is a Charitable Remainder Trust?

A charitable remainder trust (CRT) is a tool people use to give money or property to a charity, but not all at once. You transfer assets into the trust, you (or someone you choose) get an income stream for a set period—usually for life or up to 20 years—and whatever’s left goes to the charity when the period ends. This setup is popular with folks who have a big tax bill coming from selling a business, stocks, or other investments and want to make their giving count both for the cause and their finances.

There are actually two main flavors of CRT: charitable remainder annuity trusts (CRATs) pay you (or your chosen income beneficiary) a fixed amount each year, while charitable remainder unitrusts (CRUTs) pay a percentage of the trust’s value, so the payout can change each year. Either way, you can’t pull assets back out for personal use once they’re in—a point that sometimes shocks donors down the road.

"A charitable remainder trust can be a great way to give back, but it’s not a fit for everyone. Understand the limits before you commit your assets." — American Bar Association

Here’s a basic rundown of how CRTs usually work:

• You irrevocably transfer assets into the trust (that means no take-backs).
• You (or someone you name) get income, either for a set number of years or for life.
• When the period ends, what’s left in the trust goes to a designated charity or charities.

People like CRTs because they can:

• Lower their taxable income right away through a big charitable deduction.
• Defer capital gains taxes, since the trust (not you personally) sells any investments.
• Support a favorite charity in a big way when all’s said and done.

Still, just because these perks look great on paper doesn’t mean a CRT is the best money move for everyone.

The Loss of Control Over Your Assets

Setting up a charitable remainder trust feels pretty official because, well, it is. From the moment you transfer your assets—be it stocks, rental property, or a chunk of land—into the trust, those things officially belong to the trust, not you. That means you can't just sell them whenever you want or decide to pull them out in a pinch.

The trustee—you, a family member, or a pro—manages everything based on rules set when the trust is created. But even if you're the trustee, you still have a legal duty to follow the trust's terms. So, you can't just change your mind and take money out early for a last-minute family vacation or unexpected expense.

Here's what that looks like in real life:

• No more direct say over how your donated assets are invested or spent once they're in the CRT.
• You can't use or sell the property for personal reasons—it’s tied up for good.
• At the end of the trust's life (usually after you or another beneficiary passes away), what’s left automatically goes to the charity you chose at the start. No last-minute changes allowed.

Let’s see a quick breakdown on what control you actually give up versus what you keep after setting up a CRT:

If flexibility or having a backup plan is important to you, handing assets over to a CRT might lead to regret down the line. Once those assets are locked up, they’re pretty much gone for personal use, no matter what changes in your life or your family's needs.

Tax Complications and Surprises

On paper, a charitable remainder trust looks like a clever way to sidestep capital gains taxes. You give away the asset, avoid the big tax hit, and get a partial tax deduction to boot. But if you think it's a get-out-of-tax-free card, here's where things get tricky.

The IRS treats money from CRTs by sorting it into "buckets." These buckets include ordinary income, capital gains, tax-exempt income, and principal. When you pull money out, it comes out of the taxable buckets first, which means your yearly payments can end up being taxed as regular income (often at higher rates) instead of the sweet, lower long-term capital gains rates you expected.

Another catch: The deduction you get when setting up the trust isn't for the whole value you donate. The IRS uses complicated formulas and interest rates to figure out the deduction amount—which changes monthly and can drop without much warning. If you set one up in a low-interest-rate month, your deduction can shrink more than you’d expect.

If you're not careful, the trust’s tax reporting rules can lead to headaches. Filing a CRT tax return (Form 5227) isn’t simple, and mistakes can cause problems not just for you but for your chosen charity, too. If you own assets that aren’t easy to value, like business interests, figuring out taxes gets even tougher and might trigger long letters from the IRS you’d rather not receive.

Before jumping in, sit down with a tax pro who really knows CRTs—otherwise, these surprises can cost way more than any upfront tax benefit you get.

The Costs Most People Miss

People love talking about the money a charitable remainder trust (CRT) can save on taxes, but not enough folks mention what it actually costs to set one up and keep it running. Trust me, you don't want to get blindsided here. Unlike just opening a savings account or buying a simple investment, CRTs come with paperwork, legal hoops, and ongoing fees that eat into your giving (and your wallet).

Let’s break it down. When you start a CRT, you’re looking at two main expense buckets: one-time setup costs and ongoing fees. Here’s a behind-the-scenes look at what you might pay:

And these numbers are pretty typical—it's easy for wealthy families to hit the higher end, especially if you've got complicated investments. Appraisals are required if you’re throwing in things like real estate or stock, and you’ll need a lawyer who actually knows CRT law. Annual fees aren’t just for cutting checks, either. You’re paying people to manage investments, make correct payouts, and file tax returns for the trust. Miss a filing, and now you’re in trouble with the IRS.

There’s also a long-term angle people don’t talk about enough. Unless a CRT is worth over $250,000, the fees can end up eating a huge chunk of your annual payout. If you expect to generate $10,000 in yearly income from the trust, but admin fees run $4,000 a year, is it still worth it? If assets don’t grow, or get stuck in bad investments, your income (and your chosen charity’s gift) shrinks even more over time.

One tip: before sealing any deal, ask for a complete cost estimate over the expected lifetime of the trust. Factor in growth, but don’t assume steady returns. If it seems the costs don't leave enough for you and your charitable cause, another type of trust (or just donating directly) might be smarter.

Family Inheritance Issues

One of the biggest problems for families with a charitable remainder trust is how it turns normal inheritance rules upside down. The moment you place assets (stocks, real estate, a business) into a CRT, you're no longer the owner. After the trust pays you (or whoever you name) income for life or a set number of years, what's left goes straight to charity—not your kids, not your spouse, not your favorite cousin. This is set in stone when you sign those trust papers.

Here's why that can sting. Say you were banking on leaving a pile of shares to your kids. If those shares sit in a CRT, your kids can't inherit them. If your circumstances change, there's no redo, no last-minute will updates once the trust is funded. For people with blended families or changing family dynamics (like new grandchildren or marriages), CRTs offer no wiggle room to change who benefits from the assets later on.

Let's look at what actually happens compared to a regular setup:

This isn't just a paperwork issue—it's an emotional one. I've heard stories of families caught off guard, maybe after a parent passed away thinking the kids would get what was left, only to find out the assets had already been promised to a charity years ago. There's no legal way to get those funds back for the family. This is why estate lawyers often warn to double (and triple) check your family goals before starting a CRT. The trust is great if your priority is giving to charity, but if passing wealth to the next generation is high on your list, it falls short.

So, before setting up a CRT, have a real conversation with your family about expectations. Don’t assume 'they’ll understand later.' It's way better to be clear upfront—trust me, I’ve seen the headaches up close.

Who Should (and Shouldn't) Consider a CRT?

Charitable remainder trusts aren’t something you just set up on a whim. There are real trade-offs that make them a good fit for some people and not so much for others. So, who fits the bill?

First, if you’ve got a chunk of highly appreciated assets—like stocks or maybe real estate—that you want to sell without getting hammered by capital gains, a CRT is worth looking into. When you put those assets into the trust, it can sell them without paying capital gains tax up front. That’s pretty sweet if you’re dealing with big numbers or want the money to generate income for a while before benefiting your favorite charity.

But here’s a reality check: CRTs are usually best for folks who are comfortable locking away assets they don’t want or need for themselves or their heirs. If you’re hoping to leave everything to your kids, or you might need those assets in a pinch, pump the brakes. The money that goes in, mostly goes to the charity at the end—there’s no hit undo later.

“CRTs typically make the most sense for individuals and couples with non-liquid, appreciated assets valued at $250,000 or more, and who have a real drive to support charitable causes long-term,” says Fidelity Charitable.

Let’s break it down:

• High-net-worth donors wanting to reduce taxes and support a cause can get the most bang for their buck.
• People close to retirement often use CRTs to turn illiquid assets into lifelong income streams.
• Entrepreneurs who just sold a business sometimes use a CRT to shelter big gains and create steady payouts.

But look out for these red flags:

• If your assets are small (under $250,000), the cost and hassle probably isn’t worth it.
• Families that prioritize inheritance for their kids should be wary—CRTs cut into what’s left for the next generation.
• If you value flexibility or need quick cash, a CRT could tie your hands.

Here’s a handy look at when a CRT might or might not make sense:

Certainly, CRTs have a purpose, but they aren’t a one-size-fits-all move. If your goals line up—charity, tax benefits, and long-term planning—they’re worth the paperwork. If you value total flexibility or want every cent to go to family, there are probably better tools out there.