IRS Charitable Remainder Trust: CRAT, CRUT, and the 10% Test

The IRS rules for a charitable remainder trust come from Internal Revenue Code Section 664 and a handful of related provisions: the trust must pay a named beneficiary between 5% and 50% of its value each year, run for life or a fixed term of no more than 20 years, leave at least 10% of its initial value to a qualified charity on a present-value basis, avoid any self-dealing between the donor and the trust, and file Form 5227 annually.¹ Miss any structural requirement and the trust loses its tax-exempt status entirely, meaning every dollar of income it earns becomes taxable.²

The Two Qualifying Structures

Only two basic structures satisfy Section 664, and the choice between them determines how the annual payout is calculated.

Charitable Remainder Annuity Trust

A CRAT pays a fixed dollar amount set when the trust is funded. That amount must be at least 5% and no more than 50% of the initial fair market value of the property contributed.³ Because the payout is tied to the initial value, no additional contributions are allowed after funding. A $1 million CRAT with a 6% payout sends $60,000 every year whether the trust grows to $1.5 million or shrinks to $700,000.

Charitable Remainder Unitrust

A CRUT pays a fixed percentage of trust assets revalued every year, within the same 5%-to-50% range.³ Payments rise and fall with trust performance, and additional contributions are permitted after the initial funding. CRUTs come in several IRS-recognized variants:

A Net Income CRUT (NICRUT) pays the lesser of the stated percentage or actual net income earned.
A Net Income with Makeup CRUT (NIMCRUT) does the same but tracks shortfalls and makes them up in later years when income exceeds the stated percentage.
A Flip CRUT starts as a NIMCRUT and converts permanently to a standard CRUT on a triggering event, typically the sale of an illiquid asset.

Payout, Term, and the 10% Remainder Test

The annual payout must be made at least once a year. The trust can last for the life of one or more individuals who are living when the trust is created, or for a fixed period of up to 20 years.³ You cannot combine both measures and pick whichever lasts longer.

On top of the payout range, the charity’s projected share has to be meaningful. The present value of the remainder interest, calculated when the trust is funded, must equal at least 10% of the net fair market value of the contributed assets.³ The calculation uses the Section 7520 rate, set at 120% of the federal midterm rate rounded to the nearest two-tenths of a percent. For April 2026 that rate is 4.6%.⁴ A high payout combined with a young lifetime beneficiary can easily push the projected remainder below 10%, so the trust document should include fallback language that adjusts the payout or term to meet the threshold.

The 5% Probability-of-Exhaustion Test for CRATs

CRATs face a second hurdle. Under Revenue Ruling 77-374, a CRAT is disqualified if there is a 5% or greater probability that the fixed annuity will exhaust the trust before the term ends. The risk appears whenever the annuity exceeds the assumed earning rate under Section 7520, because each invasion of principal shrinks the corpus and forces larger invasions in later years.

Revenue Procedure 2016-42 offers a workaround. If the trust document provides that the CRAT terminates and distributes the remaining assets to charity whenever the corpus falls to 10% of its initial value, the trust can satisfy the IRS without having to pass the probability test.

The Charitable Deduction and Its Limits

Funding a CRT produces an immediate income tax deduction, but only for the present value of the remainder interest the charity is projected to receive. That calculation depends on the payout rate, the term or life expectancy, and the Section 7520 rate in effect the month of funding.⁴

The deductible amount is capped as a percentage of your adjusted gross income based on how the trust was funded:

Cash contributions are deductible up to 60% of AGI.⁵
Appreciated long-term capital gain property is deductible up to 30% of AGI.

Any excess carries forward for up to five additional tax years on a first-in, first-out basis.⁵

How the IRS Taxes Your Distributions

The trust itself pays no income tax on its investment earnings, but the beneficiary does. Section 664(b) imposes a strict four-tier ordering system that characterizes each dollar distributed, starting with the most heavily taxed category.¹

Tier 1 is ordinary income from the trust’s current and prior years, taxed at your regular rate.
Tier 2 is long-term capital gains, taxed at preferential rates, once all accumulated ordinary income has been distributed.
Tier 3 is other income, such as tax-exempt municipal bond interest.
Tier 4 is return of corpus, which is tax-free, and only reached after every category of income has been distributed.

If a CRUT distributes $10,000 in a year with $3,000 of accumulated ordinary income and $5,000 of accumulated capital gains, the first $3,000 is ordinary income, the next $5,000 is long-term capital gain, and the final $2,000 is tax-free return of principal.

This ordering is why CRTs work so well with appreciated assets. When the trustee sells low-basis stock inside the trust, no tax is due at the sale. The full pre-tax proceeds stay invested, and the gain reaches you only gradually through the tier system.

What You Can and Cannot Fund a CRT With

Publicly traded stock, real estate, and closely held business interests are the typical contributions, and the capital gains deferral makes highly appreciated low-basis assets ideal candidates. Two categories do not work. A CRT is not a permitted S corporation shareholder, so transferring S corp stock disqualifies the S election. Retirement account assets cannot be transferred directly either, because the withdrawal from the IRA or 401(k) triggers immediate income tax before the money ever reaches the trust.

Non-cash property valued above $5,000 requires a qualified appraisal and completion of Section B of IRS Form 8283, filed with your personal return for the year of the contribution.⁶ Publicly traded securities with readily available market prices are generally exempt. For other property, the appraisal must be performed no earlier than 60 days before the contribution and no later than the due date of the return claiming the deduction. The trustee also needs an Employer Identification Number for the trust, obtained by filing Form SS-4.⁷

Self-Dealing Prohibitions

CRTs are subject to the private foundation self-dealing rules in IRC Section 4941, applied through Section 4947(a)(2).⁸ The donor, trustee, family members, and related entities cannot transact with the trust beyond the ordinary distribution payments. You cannot sell property to the trust, buy property from it, lease space from it, or borrow against its assets.

The IRS has specifically targeted abusive arrangements that use CRTs to cash out appreciated assets while sheltering most of the gain through improper self-dealing.² Violations trigger excise taxes on the disqualified person, and the penalties escalate quickly if the transaction is not corrected.

Annual Compliance Obligations

Keeping a CRT qualified means annual valuations, mandatory IRS filings, and beneficiary reporting.

Annual Valuation

The trustee must determine the fair market value of trust assets on the required valuation date each year. For a CRUT, that figure directly sets the annual payment. For a CRAT the payment is fixed, but the valuation remains essential for the 10% remainder test, the four-tier accounting, and tax reporting.

Form 5227

Every CRT files Form 5227, the Split-Interest Trust Information Return, each year. It reports the trust’s income, gains, expenses, and the four-tier characterization of distributions.⁹ For a calendar-year trust, Form 5227 is due April 15 of the following year. A final return for a mid-year termination is due by the 15th day of the fourth month after the termination date.¹⁰

A separate Form 1041 is generally not required because the trust is tax-exempt. If the trust earns unrelated business taxable income in any year, however, it owes an excise tax equal to 100% of that UBTI.¹ The trust does not lose its overall exemption; the excise tax simply claws back the benefit on that specific income. UBTI usually comes from debt-financed property or active business operations, so most CRTs holding conventional investment portfolios never see it.

Schedule K-1 to Beneficiaries

The trustee must issue a Schedule K-1 to each income beneficiary, itemizing the character of payments across all four tiers.³ Beneficiaries use the K-1 to report CRT income on their own returns, and accurate tier reporting is what makes the preferential capital gains treatment work on the beneficiary’s side.

Ending a CRT Early

A CRT is irrevocable, but it does not have to run to the end of its stated term. With the charitable remainder beneficiary’s agreement, the trust can be terminated early by dividing current assets between the income beneficiary and the charity based on the present value of their respective interests. Early termination typically also requires consent from the state attorney general or a court with jurisdiction over the trust.

An income beneficiary can alternatively relinquish the income interest and assign it to the charity. Doing so produces a current income tax deduction for the present value of the surrendered interest, calculated using the same method applied to the original charitable deduction when the trust was funded.

1
Office of the Law Revision Counsel. 26 USC 664 Charitable Remainder Trusts
2
Internal Revenue Service. Self-Dealing and Other Tax Issues Involving Charitable Remainder Unitrusts
3
Internal Revenue Service. Charitable Remainder Trusts
4
Internal Revenue Service. Section 7520 Interest Rates
5
Office of the Law Revision Counsel. 26 US Code 170 – Charitable, Etc., Contributions and Gifts
6
Internal Revenue Service. Instructions for Form 8283
7
Internal Revenue Service. About Form SS-4, Application for Employer Identification Number (EIN)
8
Internal Revenue Service. A General Explanation of Trusts Subject to IRC 4947
9
Internal Revenue Service. Split-Interest Trust Annual Return Form 5227
10
Internal Revenue Service. 2025 Instructions for Form 5227