Most trusts are formed to provide for individual people. A CRT, however, is a trust you would form that eventually pays a charity and therefore pays no taxes. Until the final distribution is made, the CRT would typically pay you a quarterly distribution of either a fixed dollar amount or a fixed percentage of the trust’s value.
The tax-free nature of the trust offers advantages: You can contribute property with a low tax-basis, then the CRT can sell it without paying capital gains taxes and its distributions to you would be computed on the full pre-tax value of the property. You would pay taxes, using special rules, on the distributions as you receive them.
The IRS publishes tables regulating the size of distributions you can receive from a CRT. In our example, you might use your $1 million to establish a ten-year trust that pays you $97,000 each year. You would receive a deduction of about $100,000 in the year that you establish the trust, and you would pay income taxes on a portion of each quarterly distribution you’d receive. Assuming a seven percent growth rate in the trust, the remainder of $584,000 would go to your charitable beneficiary at the end of the ten-year term.