A charitable remainder unitrust, or CRUT, works like this: you irrevocably transfer assets into a trust, the trust pays you (or another named beneficiary) a fixed percentage of its value every year for a set term or for life, and whatever is left when the term ends goes to a charity you chose at the start. The trust itself pays no federal income tax, so it can sell appreciated stock or real estate and reinvest the full proceeds.1Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts You get an upfront charitable income tax deduction for the projected value of what the charity will eventually receive, and the gain on the sold assets gets spread across your future payouts instead of hitting you all at once.
What Makes a Trust Qualify as a CRUT
The structural rules come from Internal Revenue Code Section 664, and missing any of them disqualifies the trust. It must be irrevocable. It must pay a fixed percentage of its net asset value, revalued each year, to at least one non-charitable beneficiary. The remainder must pass to a qualified charity. The payout rate has to fall between 5% and 50% of the annually revalued net fair market value.2Internal Revenue Service. Charitable Remainder Trusts
There is also a 10% remainder test. At the time of each contribution, the present value of the charity’s expected remainder interest must be at least 10% of the net fair market value of the property contributed.1Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts Fail that test at inception and the trust never qualifies as a CRUT at all. The term can run up to 20 years or for the lifetime of named beneficiaries, whichever the trust document specifies.2Internal Revenue Service. Charitable Remainder Trusts
The Four Payout Variants
The trust document picks one payout method, and that choice is permanent (with a narrow exception for flip trusts). The variant you select changes how much the beneficiary actually receives in any given year.
Standard CRUT
A standard CRUT pays the fixed percentage every year no matter what the trust earned. If investment income falls short, the trustee invades principal to make the payment. Predictable cash flow for the beneficiary, but a down market can erode the charitable remainder.
Net Income CRUT (NICRUT)
A NICRUT caps the yearly distribution at the lesser of the fixed percentage or the trust’s actual net accounting income. If the trust earned less than the stated rate, the beneficiary gets less. The shortfall disappears.
Net Income With Makeup CRUT (NIMCRUT)
A NIMCRUT follows the same net-income cap but tracks every shortfall. In years when the trust earns more than the fixed percentage, the excess is paid out to cover deficits from prior lean years. Planners often choose this structure when the trust is funded with low-income assets like undeveloped land or growth stock, since the trustee can invest for appreciation and push income to later years.
Flip CRUT
A flip CRUT begins as a net income trust and converts to a standard CRUT when a specified triggering event occurs. Permissible triggers include the sale of an unmarketable asset, the beneficiary reaching a certain age, or a life event such as marriage or the birth of a child. The conversion takes effect at the beginning of the tax year following the trigger. This design is common when the initial contribution is illiquid: the trust operates on a net income basis while the property is being sold, then flips to standard percentage payouts once the proceeds are invested in income-producing assets.
Why Appreciated Assets Are the Classic Funding Choice
Under IRC 664(c), a qualified CRUT is exempt from federal income tax at the trust level.1Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts That exemption is the engine of the whole arrangement.
Imagine selling a $1 million stock position with a $100,000 cost basis in your own account. You owe capital gains tax on $900,000 immediately. Contribute that same stock to a CRUT instead, and the trust sells it tax-free and reinvests the full $1 million.1Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts The $900,000 gain doesn’t vanish. It gets tracked in the trust’s income records and comes out to you gradually through the four-tier system as part of your annual distributions.
Publicly traded securities are valued at market prices on the transfer date. Real estate, closely held business interests, and other non-marketable assets need a qualified independent appraisal.
How Your Annual Payout Is Taxed: The Four-Tier System
The trust pays no income tax, but you do on each distribution. The IRS requires every payout to be characterized under a strict ordering rule that pushes the highest-taxed income out first.2Internal Revenue Service. Charitable Remainder Trusts The trust tracks cumulative income by category across every year of its existence, and your yearly check is sourced in this sequence:
Tier 1: Ordinary Income
Your distribution is first treated as ordinary income — interest, non-qualified dividends, anything taxed at ordinary rates. You have to exhaust the trust’s accumulated ordinary income from the current year and all prior years before anything moves to the next tier. That income lands at your marginal rate, which can hit 37% at the top federal bracket.
Tier 2: Capital Gains
Once all accumulated ordinary income has been distributed, the payout draws from capital gains. Short-term gains come out before long-term gains, so you work through the ordinary-rate gains first and then reach the preferential 0%, 15%, or 20% long-term rates. This is where the gain from selling your contributed appreciated assets lives: the trust paid no tax when it sold the stock, but the gain sits in Tier 2 waiting to be distributed to you over time.2Internal Revenue Service. Charitable Remainder Trusts Spreading those gains across many years of payouts is one of the main reasons people use a CRUT.
Tier 3: Tax-Exempt Income
The third tier is tax-exempt income the trust earned, such as municipal bond interest. Distributions sourced here are generally free from federal income tax. A payout only reaches this tier after you have received the full accumulated balance of ordinary income and capital gains from every prior year combined.
Tier 4: Return of Principal
Last is a return of the trust’s corpus, the original principal not classified as income or gain in the first three tiers. These distributions are not taxable. In practice, a well-funded trust with active investments rarely reaches Tier 4 in its early years.
Distributions in Tiers 1 through 3 can also be subject to the 3.8% Net Investment Income Tax under IRC 1411 if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), since the payouts count as investment income. The trustee reports the character and amount of your distribution on a Schedule K-1, which you use to file your personal return.3Internal Revenue Service. Instructions for Form 5227
Your Upfront Charitable Deduction
Funding a CRUT earns you an immediate charitable income tax deduction, but not for the full value of what you put in. The deduction equals the present value of the remainder interest the charity is projected to receive when the trust ends. Three variables drive it: the unitrust payout rate, the trust term or beneficiary’s life expectancy, and the Section 7520 rate the IRS publishes monthly.4Internal Revenue Service. Section 7520 Interest Rates
A higher 7520 rate produces a larger deduction, because the IRS assumes the trust assets will grow faster and leave more for charity. You may elect the rate from the month of contribution or either of the two preceding months, whichever gives the better result.5GovInfo. 26 CFR 20.7520-2 – Valuation of Annuities, Unitrust Interests, and Remainder Interests For context, the Section 7520 rate has hovered between 4.6% and 4.8% in early 2026.4Internal Revenue Service. Section 7520 Interest Rates
AGI Limits and Carryforward
Standard AGI caps on charitable giving apply. Contributions of appreciated capital gain property to a public charity are deductible up to 30% of your adjusted gross income for the year. Cash contributions to a public charity carry a 60% cap. If the remainder passes to a private non-operating foundation instead, the cap drops to 20%.6Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts Since most CRUTs are funded with appreciated stock or real estate, the 30% limit is the one that usually governs.
Any deduction over the AGI cap carries forward for up to five additional tax years.7eCFR. 26 CFR 1.170A-10 – Charitable Contributions Carryovers of Individuals That carryforward often matters: a $600,000 deduction simply doesn’t fit on a return with $500,000 of AGI, so you use what you can this year and roll the rest forward.
Estate and Gift Tax Treatment
Funding a CRUT generally doesn’t trigger federal gift tax on the charitable portion, because the transfer of the remainder interest qualifies for the unlimited charitable gift tax deduction. If you name someone other than yourself or your spouse as the income beneficiary, though, the value of that income interest is a taxable gift, which you can offset against your lifetime gift and estate tax exemption.
If you keep a life income interest in the CRUT, the full fair market value of the trust assets is included in your gross estate at death under IRC 2036.8eCFR. 26 CFR 20.2036-1 – Transfers With Retained Life Estate That sounds worse than it plays out: an offsetting estate tax charitable deduction is allowed for the present value of the remainder interest passing to charity, so only the value of any income interest still owed to other beneficiaries is subject to estate tax. If you aren’t an income beneficiary at all, the trust assets are excluded from your taxable estate entirely.
Traps That Can Blow Up the Tax Treatment
Unrelated Business Taxable Income
The trust-level tax exemption has one hard exception. If a CRUT has any unrelated business taxable income in a year, the trust owes an excise tax equal to 100% of that UBTI.1Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts Every dollar is taxed away. The most common source is debt-financed income: income from property acquired with debt is generally treated as UBTI under IRC 514.9Internal Revenue Service. Unrelated Business Income From Debt-Financed Property Under IRC Section 514 Contributing mortgaged property or using leverage inside the trust needs careful review.
Self-Dealing
CRUTs are subject to the private foundation self-dealing rules under IRC 4941, applied through IRC 4947(a)(2).10Internal Revenue Service. Self-Dealing and Other Tax Issues Involving Charitable Remainder Trusts Excise taxes apply to prohibited transactions between the trust and “disqualified persons,” meaning you, your family, and entities you control. Prohibited transactions include sales or exchanges of property between the trust and a disqualified person, loans in either direction, and furnishing goods or services, with only narrow exceptions.11Internal Revenue Service. Private Foundations – Self-Dealing IRC 4941(d)(1)(c) A common trap: if you serve as trustee and rent trust-owned property to yourself, that is self-dealing. The penalties apply even when the price was fair market value. Many estate planners recommend an independent trustee for that reason.
Annual Compliance and What It Costs to Run
The trustee files Form 5227 (Split-Interest Trust Information Return) with the IRS each year. For a calendar-year trust, the deadline is April 15 of the following year. The trustee also sends each income beneficiary a Schedule K-1 breaking down the distribution across the four tiers so the beneficiary can report it correctly.3Internal Revenue Service. Instructions for Form 5227 Mistakes in the tier allocation or in tracking cumulative income across years are the most common compliance failure.
Legal fees for drafting and funding a qualified CRUT typically run from $3,000 to $25,000, depending on the complexity of the assets and the attorney’s market. A straightforward CRUT holding publicly traded stock sits at the low end; a trust involving real estate appraisals, multiple beneficiaries, or flip provisions costs more. A corporate fiduciary managing the trust generally charges annual fees of 0.5% to 2% of trust assets. Those costs reduce the charitable remainder, which feeds back into whether the 10% remainder test can be met. For smaller asset pools, the arithmetic often doesn’t work.