How to Form a Charitable Trust: Steps, Form 5227, and Costs

To form a charitable trust, you choose between a charitable remainder trust and a charitable lead trust, have an attorney draft an irrevocable trust agreement that satisfies the IRS payout and remainder rules, transfer assets into the trust, obtain a separate tax ID, and then keep up with annual federal and state filings. The reward for doing it correctly is real. A charitable remainder trust is exempt from income tax in any year it has no unrelated business taxable income, which means it can sell appreciated stock or real estate without an immediate capital gains bill, and the grantor claims a charitable deduction in the year the trust is funded.¹ Everything below walks the steps in order.

Step 1: Choose the Structure

The first decision is whether you want income now and a gift to charity later, or a gift to charity now and an inheritance to family later. That question decides whether you form a Charitable Remainder Trust (CRT) or a Charitable Lead Trust (CLT).

A CRT pays income to you or other individual beneficiaries for a set number of years, up to 20, or for the lifetime of one or more beneficiaries. When the term ends, whatever remains goes to the designated charity.² This is the structure most people think of when they hear “charitable trust,” and it suits someone holding appreciated assets who wants an income stream without triggering a big tax hit on sale.

A CLT runs in reverse. The charity receives annual payments during the trust term, and when the term expires, the remaining assets pass to family or other non-charitable beneficiaries. CLTs are primarily estate-planning tools: the present value of the charitable payments reduces the taxable gift or estate transfer to your heirs, and if the trust investments outperform the IRS assumed rate of return, the excess growth passes to heirs free of transfer tax.

CRAT or CRUT

Within the CRT category, you pick a payout method. A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount every year, locked in when the trust is created. That amount must be at least 5% and no more than 50% of the initial value of the assets placed in the trust.¹ Because the annuity is fixed, a CRAT cannot accept additional contributions after it is funded.

A Charitable Remainder Unitrust (CRUT) pays a fixed percentage of the trust’s value, recalculated each year. The same 5% to 50% range applies, but because the payout tracks current asset values, your income rises when investments do well and falls when they don’t.² Unlike a CRAT, a CRUT accepts additional contributions over time, which helps if you plan to fund the trust in stages.

The choice usually comes down to temperament. Predictable income points to a CRAT. Comfort with variability and the option to add assets later points to a CRUT.

Step 2: Build the Trust to Meet IRS Rules

Federal law imposes structural requirements that must be written into the trust agreement from the start. Missing one of these does not just shrink the deduction; it can disqualify the trust.

10% remainder test: the present value of the charitable remainder must be at least 10% of the initial net fair market value of the property placed in the trust. A payout that is too high or a term that is too long fails this test.¹
Payout range: annual distributions to income beneficiaries must be at least 5% and no more than 50% of the relevant value, initial for a CRAT and annually revalued for a CRUT.²
Maximum term: if the trust is not measured by the lifetime of a beneficiary, it can last no more than 20 years.²
Irrevocability: once funded, the trust cannot be revoked or modified in ways that would divert the charitable remainder. The assets you transfer are permanently outside your control.

These rules interact. A high payout over a long term often fails the 10% remainder test because too little is projected to be left for charity. Your attorney or financial advisor runs actuarial calculations to confirm the numbers work before the agreement is finalized.

Step 3: Pick a Trustee and Confirm the Charity

The trustee manages investments, makes distributions, and handles tax filings. You can serve as your own trustee, appoint a family member or advisor, or hire a corporate trustee such as a bank or trust company. Serving as your own trustee keeps costs down but adds administrative work. A corporate trustee handles everything but charges annual fees, typically 1% to 2% of trust assets.

The charitable beneficiary must be an organization recognized by the IRS under Section 501(c)(3).³ Verify status using the IRS Tax Exempt Organization Search tool at irs.gov. For a CRT, the charitable beneficiary must be irrevocably designated if you want the option to terminate the trust early by donating the income interest to the charity.

Step 4: Gather Documents and Assets

Before drafting begins, assemble the pieces the attorney needs:

Full legal names and current addresses of the grantor, all trustees, and every individual income beneficiary.
The charity’s official legal name and Employer Identification Number.
An inventory of every asset going into the trust: cash, securities, real estate, business interests. For securities, include cost basis and acquisition dates.

Appraisals for Non-Cash Assets

If you are contributing non-cash property other than publicly traded securities and the claimed value is more than $5,000, you need a qualified appraisal from a certified appraiser. You also file Form 8283 (Noncash Charitable Contributions) with your tax return to support the deduction.⁴ Real estate, art, and closely held business interests almost always require an appraisal. Start early. Finding a qualified appraiser and getting a formal report can take weeks.

Step 5: Draft, Sign, and Fund

An attorney drafts the trust agreement, which specifies the trust type, payout rate, term, trustee powers, beneficiary designations, and distribution rules. Legal fees for drafting a CRT or CLT typically run between $1,000 and $10,000 depending on the complexity of the assets and the attorney’s market.

The trust is executed when the grantor signs. Notarization is not universally required to create a valid trust, but it is standard practice, some states do require it, and it will be required anyway if real estate is involved, because recorded deeds need notarized signatures. Notarization also protects against later challenges to the grantor’s identity or intent.

The trust does not exist in any meaningful sense until it is funded. Funding means transferring legal ownership of the designated assets from the grantor to the trust.

Cash: open a bank account in the trust’s name and deposit or wire the funds.
Securities: contact the brokerage to re-title the account or transfer shares into an account held in the trust’s name.
Real estate: prepare and record a new deed with the county to transfer title to the trust. The type of deed varies by state, but the deed must clearly convey ownership from the grantor to the trust.

Watch the timing. To claim a charitable deduction for a given tax year, the trust must be both executed and funded before December 31 of that year.

Step 6: Handle Post-Formation Requirements

Get an EIN

The trust is a separate tax entity and needs its own Employer Identification Number. You cannot use the grantor’s or trustee’s Social Security number. Apply online at irs.gov for an immediate EIN, by fax using Form SS-4 (about four business days), or by mail (about four weeks).⁵

File Form 5227 Every Year

Every CRT files IRS Form 5227 (Split-Interest Trust Information Return) each calendar year, and CLTs that qualify as split-interest trusts under Section 4947(a)(2) file it too.⁶ The form reports the trust’s income, distributions to beneficiaries, and charitable payments. For the 2025 calendar year, the filing deadline is April 15, 2026, with an automatic extension available through Form 8868.⁷

If the trust generates unrelated business taxable income of $1,000 or more, the trustee also files Form 990-T and pays any resulting tax. A trust expecting to owe $500 or more must make estimated payments.⁸

Register With the State

Many states require charitable trusts to register with the attorney general’s office or a similar regulator, and most require annual financial reporting after registration.⁹ Fees and requirements vary widely. Some states charge nothing; others use a sliding scale based on assets or revenue. Check with the attorney general’s office in the state where the trust will be administered before deadlines arrive.

Stay Clear of Self-Dealing

CLTs and certain other split-interest trusts are subject to the same self-dealing rules that govern private foundations. Those rules prohibit almost all financial transactions between the trust and “disqualified persons,” a category that includes the grantor, the grantor’s family members, and entities they control. Renting office space from the trust, borrowing trust funds, or having the trust provide personal services to the grantor all count as prohibited self-dealing.¹⁰

The penalties are steep. A disqualified person who participates in self-dealing owes an excise tax of 10% of the amount involved for each year the violation goes uncorrected. If the transaction still isn’t corrected, an additional tax of 200% of the amount involved applies. A trustee who knowingly participates faces a separate 5% tax, rising to 50% for refusing to correct the problem.¹¹

Keep every financial dealing between the trust and anyone connected to the grantor completely separate. If you serve as your own trustee, be especially careful that trust assets never provide personal benefit, even indirectly.

What It Costs

Forming and running a charitable trust involves several layers of professional fees worth budgeting for upfront.

Legal drafting: attorney fees for a CRT or CLT typically run $1,000 to $10,000, with complexity, asset types, and local market rates driving the spread.
Appraisals: required for non-cash contributions above $5,000, excluding publicly traded securities. Real estate appraisals alone can run several hundred to several thousand dollars.
Corporate trustee fees: annual management fees of roughly 1% to 2% of trust assets, sometimes with additional charges based on income or transaction volume.
State registration fees: vary by state and may scale with asset level. Some states charge nothing, others up to several hundred dollars annually.
Tax preparation: Form 5227 is not a simple return, and most trustees hire a CPA familiar with split-interest trusts.

For a trust funded with a modest amount, these costs can eat into the tax savings. Charitable trusts tend to make the most financial sense when funded with $100,000 or more in assets, though the right threshold depends on your specific tax situation and charitable goals.

1
Office of the Law Revision Counsel. 26 USC 664 Charitable Remainder Trusts
2
Internal Revenue Service. Charitable Remainder Trusts
3
Internal Revenue Service. Exemption Requirements – 501(c)(3) Organizations
4
Internal Revenue Service. Charitable Organizations Substantiating Noncash Contributions
5
Internal Revenue Service. Employer Identification Number
6
Internal Revenue Service. Instructions for Form 5227 (2025)
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Internal Revenue Service. 2025 Instructions for Form 5227
8
Internal Revenue Service. Unrelated Business Income Tax
9
National Association of Attorneys General. Charities Regulation 101
10
Internal Revenue Service. Private Foundations Self-Dealing IRC 4941(d)(1)(C)
11
Office of the Law Revision Counsel. 26 USC 4941 Taxes on Self-Dealing