Charitable remainder trusts are a kind of irrevocable trust. Like any other irrevocable trust, it is an instrument you can fund, and once you put assets in it, you cannot take them back or change the terms of the trust (though you can change the trustee and the charity). However, unlike most other irrevocable trusts, a charitable remainder trust is set up to benefit you and your choice of charity(ies).

The first step in establishing a charitable remainder trust is to create the trust agreement, in which you establish the terms of the trust, including at least appointing a trustee and identifying the charity(ies) you want to pass money to after your death.

Once you've established your trust, you fund the trust with an appreciated asset (an asset that has a higher market value than book value or taxable value, which, if sold, will generate capital gains).

Once you fund an irrevocable trust, the assets you transfer no longer belong to you or your estate, which means there will be no estate taxes due when you die. And since it is a charitable remainder trust, you get an immediate tax deduction for a charitable contribution.

The trustee then takes the appreciated asset and sells it at full market value. Bonus: no capital gains taxes are due.

With the liquid assets the trust has acquired, the trustee re-invests the proceeds in income-producing assets. The trustee takes the income those assets produces and pays it back to you, the grantor. This could happen immediately, or you could set up the trust to have the payouts begin later, in which case the assets will have (hopefully) grown. Once they start, these payments continue for the rest of your life. Upon your death, the remaining assets are distributed to the charity(ies) you have chosen in the manner you established in the trust.

There are two ways to set up a charitable remainder trust. The first, called a charitable remainder unitrust, or CRUT, ties your annuity (the income produced and paid to you by the trust) to the a percentage of the fair market value of the donated assets. That means the annual income will fluctuate with the market and the annual value of the trust. Each year the CRUT is revalued to determine your income, though you can include a provision that allows for a bump in income in a good year to provide for lower income in an off year. And because the government wants there to be money left for the charity when you die (there must be at least 10% left), there are no taxes on the year-by-year gains in the CRUT.

The other option is a charitable remainder annuity trust, or CRAT. A CRAT is designed to provide a fixed-income rather than a fluctuating one. Regardless of how the assets perform, your income does not change.

If the assets in the CRUT or CRAT represent all or most of your assets, and you still want to leave something substantial behind for friends or family, you can still do so relatively inexpensively by taking the income tax savings of the charitable remainder trust to purchase life insurance and fund an irrevocable life insurance trust. It's a way to cheaply replace the gifted asset so you can get the benefit of a charitable remainder trust and still leave something to your kids.