Charitable Remainder Trust: How It Works and Tax Benefits

A charitable remainder trust is an irrevocable trust you fund with cash, securities, or other appreciated assets; it pays income to you or another beneficiary for life or a set number of years, and whatever remains at the end goes to a charity you choose. In exchange for giving up ownership of the assets, you get an immediate income tax deduction, the trust can sell your appreciated property without paying capital gains tax at the time of sale, and the eventual gift to charity is guaranteed. The structure has to satisfy two hard rules: the charity’s projected remainder must be worth at least 10% of what you contribute, and the annual payout to income beneficiaries must fall between 5% and 50% of the trust’s value.¹

How the Trust Works

You contribute assets and permanently give up ownership. A trustee manages the investments and distributes income under the terms of the trust document. Income beneficiaries can be you, your spouse, or any other individual living when the trust is created. When the payout period ends, the remaining assets go to the designated charity.

The trust can last for the lifetime of the income beneficiaries or for a fixed term of no more than 20 years.¹ The 10% remainder floor is calculated using the IRS’s Section 7520 interest rate, which changes monthly and has run between 4.6% and 4.8% in early 2026.² A higher 7520 rate raises the projected value of the charity’s remainder, which makes both the 10% test easier to pass and your upfront charitable deduction larger.

Annuity Trust or Unitrust

Every charitable remainder trust is either a CRAT or a CRUT, and the choice governs how much income you receive and whether it changes over time.

Charitable Remainder Annuity Trust

A CRAT pays a fixed dollar amount every year, locked in at funding as a percentage between 5% and 50% of the initial trust value.³ Fund a CRAT with $500,000 at a 6% payout and you receive $30,000 every year, regardless of what the investments do. Two limits come with that predictability. You cannot add more assets to a CRAT after it is funded. And under Revenue Ruling 77-374, a lifetime CRAT must have less than a 5% probability of exhausting its assets before the charitable remainder is paid; if the payout rate and rate assumptions make exhaustion too likely, the trust fails to qualify.

Charitable Remainder Unitrust

A CRUT pays a fixed percentage of assets revalued each year, again between 5% and 50%.¹ Your income rises when the trust does well and falls when it does not. A CRUT can accept additional contributions after funding, and the exhaustion probability test does not apply because a percentage-based payout naturally shrinks with the trust rather than draining a fixed dollar amount.

Unitrust Variations for Illiquid Assets

Standard CRUTs pay the fixed percentage every year whether the trust generated that much income or not, which is a problem if the trust holds real estate or other assets with irregular cash flow. Three variations exist. A net income CRUT (NICRUT) pays the lesser of the stated percentage or the trust’s actual net income for the year, with no catch-up.⁴ A net income with makeup CRUT (NIMCRUT) does the same but tracks the shortfall, so later years with surplus income fill in past deficiencies before flowing to the charitable remainder. A flip CRUT starts as a net income or NIMCRUT and converts to a standard CRUT after a triggering event named in the trust document, typically the sale of the contributed property.

The Tax Benefits

No Capital Gains Tax When the Trust Sells

The trust is itself exempt from federal income tax under Section 664(c), so it can sell appreciated property without triggering capital gains tax at the time of sale.⁵ Donate stock you bought for $50,000 that is now worth $300,000, and the trust can sell it for the full $300,000 and reinvest every dollar. Sell it yourself first and you owe tax on the $250,000 gain before anything gets reinvested. The gain is not erased; it enters the trust’s four-tier accounting and is taxed as distributions flow out to you. But the deferral lets the full sale price compound in the meantime, which is where most of the financial advantage of a CRT lives.

Upfront Income Tax Deduction

When you fund the trust, you get an income tax deduction equal to the present value of the charity’s projected remainder interest. Adjusted gross income caps the deduction: up to 60% of AGI for cash contributions, up to 30% for appreciated property.⁶ Any unused deduction carries forward up to five additional tax years.

The size of the deduction depends on the 7520 rate at the time of funding, the payout rate you choose, and the trust’s duration. Lower payout rate to you means larger projected remainder for the charity, which means larger deduction. The higher 7520 environment of 2026 generally produces more favorable deductions than the low-rate years of the 2010s.²

Estate and Gift Tax

If you keep an income interest, the portion of the trust needed to produce your payments is included in your gross estate at death. For a CRAT, that inclusion is the annual annuity divided by the 7520 rate at death. For a CRUT, it depends on how the payout rate compares to the 7520 rate; if the payout rate is higher, the entire trust corpus can be included. The remainder passing to charity qualifies for the estate tax charitable deduction, which usually offsets the inclusion.

Where your spouse is the only non-charitable beneficiary besides you, the trust qualifies for the gift tax marital deduction, and the remainder qualifies for a charitable deduction under Section 2522.⁷ Naming a non-spouse income beneficiary creates a taxable gift equal to the present value of that person’s interest.

How Your Distributions Are Taxed

Even though the trust is tax-exempt, you owe tax on what it pays you. The character of each distribution follows a four-tier ordering system, drawing from the most heavily taxed income first.¹

Tier 1, ordinary income: interest, dividends, rents, current-year or accumulated, until exhausted.
Tier 2, capital gains: including subcategories like unrecaptured depreciation and collectibles gains at their higher rates.
Tier 3, tax-exempt income: from municipal bonds or similar holdings.
Tier 4, return of principal: tax-free, but only after every income category above is used up.

Practitioners call it worst-in, first-out. In practice, most CRT distributions in the early years are taxed as ordinary income or capital gains; the return-of-principal tier rarely appears until well into the trust’s life.

What You Can Fund It With

Cash and publicly traded securities are the simplest contributions and can be liquidated immediately. Real estate works, especially highly appreciated property, but it must be free of debt. Closely held business interests and tangible personal property can also fund a CRT under certain conditions, but they require qualified appraisals and legal counsel.

Debt-encumbered property is where donors get burned. Transferring mortgaged real estate can generate unrelated business taxable income. Since 2006, UBTI no longer strips a CRT of its tax-exempt status, but it triggers a 100% excise tax on the UBTI amount.¹ A 100% tax wipes out the income entirely, so putting mortgaged property into a CRT is almost never worthwhile.

Funding From an IRA

Under the SECURE 2.0 Act, donors age 70½ or older can make a one-time qualified charitable distribution from an IRA to fund a charitable remainder trust. The 2026 cap is $55,000. The QCD counts toward your required minimum distribution but is not included in taxable income. Only a CRAT, CRUT, or charitable gift annuity qualifies for the election, and the one-time rule is strict.

Self-Dealing Rules You Cannot Ignore

A CRT is subject to the same self-dealing prohibitions that govern private foundations. Under Section 4947(a)(2), the rules of Section 4941 apply as though the trust were a private foundation.⁸ You, your family members, controlled businesses, and other disqualified persons cannot sell property to the trust, buy property from it, lease space from it, borrow from it, or use its assets personally. The initial excise tax is 10% of the amount involved for each year the transaction is uncorrected, jumping to 200% if never unwound. This most often catches donors in informal arrangements, like using a trust-owned vacation property or paying personal expenses from trust funds.

Setting Up the Trust

The remainder beneficiary must be a qualified charitable organization eligible to receive tax-deductible contributions.⁶ You can name multiple charities and split the remainder. If the trust document reserves the power, you can also change the charitable beneficiary later, which matters for a trust that may run for decades. Income beneficiaries must be individuals living when the trust is created, or the donor.

The IRS publishes safe-harbor trust documents through Revenue Procedures covering every common configuration: lifetime and term-of-years CRUTs, one-life and two-life CRATs, and testamentary versions of each.³ Using this language protects against challenges to the trust’s validity. An attorney customizes the template with your payout rate, beneficiaries, trustee, and distribution schedule. Drafting fees typically run from about $1,000 to $5,000 or more depending on complexity.

Any competent adult or corporate fiduciary can serve as trustee, including you. Serving as trustee of your own CRT with hard-to-value assets like real estate or closely held stock invites scrutiny of the annual valuation. Corporate trustees typically charge annual fees of about 0.5% to 3% of assets, with the rate falling as the trust grows.

Annual Filings

Once the trust is signed and funded, the trustee applies for an Employer Identification Number using Form SS-4.⁹ Every year after that, the trustee files Form 5227, the Split-Interest Trust Information Return, reporting income, distributions, and asset values.¹⁰ Penalties for late or incomplete returns start at $25 per day up to $13,000 per return, and rise to $130 per day and $65,000 for trusts with gross income above $327,000. A written IRS demand that goes unanswered adds a separate $10-per-day penalty up to $6,500.¹¹

Ending the Trust Early

A CRT does not have to run its full course. If all parties agree, the trust can be terminated early by dividing assets between the income beneficiaries and the charity based on the present value of their respective interests at that point. Early termination typically requires consent from the income beneficiaries, the charitable remainder beneficiary, and often the state attorney general or a court with jurisdiction. An income beneficiary who simply relinquishes their interest and assigns it to the charity can claim an income tax deduction for the present value of what they gave up. Changed circumstances do not trap you, but unwinding a CRT is a formal legal process, not a phone call.

1
Office of the Law Revision Counsel. 26 U.S.C. 664 – Charitable Remainder Trusts
2
Internal Revenue Service. Section 7520 Interest Rates
3
Internal Revenue Service. Charitable Remainder Trusts
4
Internal Revenue Service. Charitable Remainder Trusts – The Income Deferral Abuse
5
Internal Revenue Service. Self-Dealing and Other Tax Issues Involving Charitable Remainder Unitrusts
6
Office of the Law Revision Counsel. 26 U.S.C. 170 – Charitable, Etc., Contributions and Gifts
7
eCFR. 26 CFR 25.2523(g)-1 – Special Rule for Charitable Remainder Trusts
8
Office of the Law Revision Counsel. 26 U.S.C. 4947 – Application of Taxes to Certain Nonexempt Trusts
9
Internal Revenue Service. Instructions for Form SS-4
10
Internal Revenue Service. Instructions for Form 5227 – Split-Interest Trust Information Return
11
Internal Revenue Service. Instructions for Form 5227