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Charitable Remainder Trusts

A Charitable Remainder Trust is an irrevocable trust that distributes an income stream to one or more non-charitable beneficiaries for life or a term of up to 20 years, with the remaining principal transferring to a qualified charity at the end of the term. For most donors who simply want a deduction and to give appreciated stock, a donor-advised fund (section “Use Donor Advised Funds (DAF)”) is far simpler and cheaper; a CRT earns its administrative complexity only when you also need the lifetime income stream or want to defer a large embedded capital gain.

Under IRC §664, CRTs must meet the following rules:

There are two primary types of CRTs:

Charitable Remainder Annuity Trust (CRATs)

Pays a fixed dollar amount annually based on the initial funding value. Payouts do not adjust for inflation, and no additional contributions can be made after funding. A CRAT must also clear the 5% probability of exhaustion test of Rev. Rul. 77-374: if the actuarial odds that the trust runs dry before the term ends exceed 5%, it fails outright. When IRC §7520 rates are low this test kills lifetime CRATs for younger beneficiaries, and the standard escape is the sample qualified-contingency provision of Rev. Proc. 2016-42, which the IRS treats as a qualified contingency under IRC §664(f): the trustee applies a 10% test before each annuity payment, and the trust terminates the day before a payment it would fail instead of running itself dry. Refer to Rev. Proc. 2003-53 through 2003-60 for IRS-approved sample documents.

Charitable Remainder Unitrust (CRUTs)

Pays a variable amount recalculated annually based on a fixed percentage of the trust’s current valuation. Additional contributions are permitted, and there is no exhaustion test—the payout shrinks with the corpus instead of draining it. Refer to Rev. Proc. 2005-52 through 2005-59 for IRS-approved sample documents.

One CRAT structure is now a listed transaction. Before anyone sells you an annuity CRAT, know what T.D. 10051 did in 2026. The targeted arrangement runs: fund a purported IRC §664(d)(1) CRAT with appreciated property, have the trustee sell it, use the proceeds to buy a commercial annuity, and then report the annuity amount received as if it were an IRC §72 annuity payment — mostly a tax-free return of investment — instead of running it through the four-tier ordering rules of IRC §664(b), which push ordinary income and capital gain out first. The promoters’ pitch is that appreciated property enters the trust with a stepped-up basis so the sale produces little gain. It does not, and that is the whole of the theory.

Effective for transactions on or after 9 July 2026 this is a listed transaction. Participants file Form 8886 and material advisors file Form 8918, and failing to disclose triggers the IRC §6707A penalty, which is charged per year and bears no relation to the size of the benefit you were promised. The ordinary CRAT and CRUT described above are unaffected — what is listed is the combination of a CRAT, a sale of appreciated property, an annuity purchase, and IRC §72 treatment of the payout. If a proposal contains all four elements, the correct response is not better documentation.

Default to the unitrust. It accepts later contributions, dodges the exhaustion test, and gives the income beneficiary inflation protection that a fixed annuity cannot. Two variants matter when the funding asset is illiquid. A net-income CRUT (NIMCRUT) pays the lesser of the stated percentage or the trust’s actual income, with a make-up account that repays any shortfall in later years—useful when you fund with raw land or private stock that produces no cash. A flip CRUT starts as a net-income trust and converts to a standard percentage payout on a defined triggering event, typically the sale of the contributed asset. The flip CRUT is the right structure for funding with a business interest or a concentrated position you intend to sell: it does not promise payments the trust cannot make before the sale, then switches to a real income stream after.

Upfront Charitable Deduction A CRT delivers three benefits at once, and the deduction is the one people forget. When you fund the trust, you claim a partial charitable income tax deduction equal to the present value of the charitable remainder interest—the contributed value minus the present value of the income stream you keep, computed under IRC §7520 actuarial tables ( Treas. Reg. §1.664-2(c) for a CRAT, Treas. Reg. §1.664-4 for a CRUT). The deduction is then capped by the usual IRC §170, “Charitable, etc., contributions and gifts” adjusted-gross-income limits, and the cap depends on both what you contribute and who the remainder beneficiary is:

Excess deductions carry forward five years. Three further refinements matter. First, the remainder must clear the 10% present-value floor, so a young beneficiary or a high payout rate can shrink—or disqualify—the deduction. Second, under IRC §170(e) a contribution of ordinary-income property (inventory, short-term holdings) is deductible only at cost basis, not fair market value. Third, the 2026 OBBBA rules apply on top of all of it: a 0.5%-of-AGI floor before any charitable deduction counts, and a cap that limits the benefit to 35 cents on the dollar for taxpayers in the 37% bracket (section “Charity And Taxes”). A CRT deduction is precisely the large itemized gift that cap was written for, so discount the headline number by roughly a twentieth before comparing it against the alternatives. The combination that pays is a high marginal bracket meeting genuine charitable intent: you take the deduction now, the appreciated asset sells inside the tax-exempt trust without triggering capital-gains tax, and the income stream funds your retirement.

Taxation of CRT Distributions CRTs are tax-exempt entities; they pay no tax on capital gains when assets are sold within the trust. Payouts to beneficiaries are taxed under a “four-tier” distribution system on Schedule K-1 (Form 1041):

1.
Ordinary Income: Taxed first, to the extent the trust has current or accumulated ordinary income.
2.
Capital Gains: Taxed second, to the extent the trust has current or accumulated capital gains.
3.
Tax-Exempt Income: Taxed third, such as municipal bond interest.
4.
Return of Corpus (Principal): Tax-free distributions of the original principal.

The UBTI Landmine The tax exemption has one catastrophic exception, and it is how most CRTs get destroyed. Under IRC §664(c)(2), a CRT that earns Unrelated Business Taxable Income (UBTI) in a year pays a 100% excise tax on that income. Not 37%—all of it. The trust stays exempt on everything else, but the offending dollars are confiscated, and the tax comes out of corpus, so your income beneficiary and the charity both lose.

What generates UBTI is exactly what wealthy donors like to contribute:

Fund a CRT with publicly traded appreciated stock, unleveraged real estate, or C corporation shares and this never comes up. Fund it with your leveraged real estate portfolio or your fund interests and you will hand the IRS the entire year’s income.

Tax Filings and Compliance CRTs must file Form 5227, “Split-Interest Trust Information Return” annually to report transactions, income, and beneficiary distributions. Non-charitable beneficiaries must report Schedule K-1 allocations on Form 1040.

Prohibited Transactions A CRT is a split-interest trust, and IRC §4947(a)(2), “Application of taxes to certain nonexempt trusts” subjects it to the private foundation rules—most importantly the self-dealing excise tax of IRC §4941, “Taxes on self-dealing”. Treat the trust as a stranger:

Separately—as a matter of tax mechanics, not an outright prohibition—the trust takes your carryover basis in contributed property, which is precisely why funding a CRT with a low-basis asset and letting the tax-exempt trust sell it is the whole point.

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