In general, this new patent pending method splits a traditional CRT into two CRT's with the objective of managing one of the trusts to maximize higher yield fixed income investments (which is subject to higher taxes), and managing the second trust to maximize long-term capital gain (lower taxes).

The need for the CRT Split Advantage™ arises from the potential tax disadvantage that exists because of the Code’s prescribed four-tier treatment of income distributions to the income beneficiary; first – ordinary income; second – capital gain income; third – other; and fourth – return of principal.
This four-tier income distribution order creates a potential conflict between the individual “lifetime interest” beneficiary, and the “charitable remainder interest” beneficiary.

The lifetime income beneficiary wants his income treated at the lower capital gains rate (especially if he/she believes that growth or equity investments will do as well or better than fixed income investments). Under this scenario, the income beneficiary wants the charity or trustee to invest only in growth or equity investments. The downside to this approach is higher risk that could result in a significant reduction of principal. The charity does not want this to happen.
The charity remainderman, on the other hand, wants to see safer investments which would insure the preservation of principal. They would prefer investments in low-risk fixed income investments such as CD’s, bonds, government securities, etc. For this reason, many charities only offer CRT’s with lower-income payout rates.
A Trustee of a CRT has a fiduciary responsibility to both parties. He has to be fair and equitable. Usually the Trustee will choose some form of a balanced portfolio between fixed income and equity investments, with the emphasis on the fixed investments. Because of the four-tier treatment, the traditional approach almost always results in more income taxed at the higher ordinary income tax rate - not the most tax advantageous strategy.

The CRT Split Advantage divides the trust funds of the traditional CRT into two CRT’s that are managed to maximize the capital gains tax advantage. One trust, investing in fixed income investments, produces ordinary income distributions. The other trust, investing in growth or equity investments, produces capital gains distributions.

By the very nature of this new design, the grantor will be able to maximize his/her receipt of capital gain treated income taxed at the lower 15% rather than 35%. The donor can also strategically allocate assets between the two trusts in a more diversified and properly balanced manner.