Private Charitable Trust: CRTs, CLTs, and Excise Taxes

A private charitable trust is an irrevocable legal arrangement that divides the benefits of transferred property between a charity and one or more non-charitable beneficiaries, producing income tax, gift tax, and estate tax advantages in the process. It takes one of two basic forms: a charitable remainder trust (CRT), which pays income to you or your beneficiaries first and sends what’s left to charity, or a charitable lead trust (CLT), which pays the charity first and passes the remainder to your heirs. Once assets go in, they don’t come back.¹ Get the structure wrong and the trust loses every tax advantage it was designed to provide, so the details matter before you sign anything.

CRT or CLT: Which One Fits Your Goal

The choice between a CRT and a CLT is really a choice about timing. A CRT pays income to the donor or other non-charitable beneficiaries during the trust term, then delivers whatever remains to charity. A CLT reverses that flow: the charity receives payments during the term, and the remaining assets pass to family or other non-charitable beneficiaries at the end.

If you need income now — perhaps from an appreciated asset you can’t sell without triggering a large capital gain — a CRT does that work. If your goal is to move wealth to heirs at a reduced tax cost while supporting a charity in the meantime, a CLT is the tool.

Charitable Remainder Trusts

CRTs come in two basic forms defined by how the payout is calculated. A charitable remainder annuity trust (CRAT) pays a fixed dollar amount each year, set when the trust is created. A charitable remainder unitrust (CRUT) pays a fixed percentage of the trust’s fair market value, recalculated annually.² Both must pay out at least 5% and no more than 50% of trust assets each year. A CRAT gives you predictable, unchanging payments. A CRUT lets your income grow if the trust’s investments appreciate, providing some inflation protection.

The CRUT has three common variations. A standard CRUT pays the stated percentage regardless of the trust’s actual income. A net income with makeup CRUT (NIMCRUT) pays the lesser of the stated percentage or the trust’s actual net income and tracks shortfalls to make them up in future years when income is higher. A FLIP CRUT starts as a NIMCRUT and converts to a standard CRUT when a specified triggering event occurs, such as the sale of an illiquid asset. FLIP CRUTs are useful when you’re funding with property that doesn’t produce income right away, like undeveloped real estate.

Charitable Lead Trusts

CLTs mirror the CRT structure. A charitable lead annuity trust (CLAT) pays a fixed dollar amount to the charity each year. A charitable lead unitrust (CLUT) pays a fixed percentage of the trust’s annually revalued assets. The CLAT is far more common; its fixed payments give the charity a stream it can rely on, and the math tends to work better for wealth transfer planning.

How a CLT is taxed depends on whether it’s set up as a grantor trust or a non-grantor trust. A grantor CLT gives the donor an upfront income tax deduction for the present value of the charity’s annuity stream, but the donor then pays income tax on all the trust’s income each year during the term. If the donor dies before the term ends, part of that upfront deduction is recaptured on the final return. A non-grantor CLT provides no upfront income tax deduction to the donor, but the trust itself claims a charitable deduction under Section 642(c) for amounts paid to charity, and the transfer of the remainder to heirs can generate significant gift or estate tax savings. Most CLTs are structured as non-grantor trusts because the estate and gift tax benefits are usually more valuable than the income tax deduction.

Qualification Rules You Have to Meet

A charitable trust that doesn’t meet the IRS requirements is just an irrevocable trust with no tax benefits. For CRTs, the governing rules are in Section 664, and missing any one of them disqualifies the entire arrangement.

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. If the payout rate is too high, the term too long, or the Section 7520 discount rate too low, the trust fails.¹
Payout range. The annual payout must be at least 5% and no more than 50% of trust assets.²
Term limit. A CRT can last for the life of one or more named beneficiaries or for a fixed term of up to 20 years, whichever the trust instrument specifies.¹
Irrevocability. Once you fund the trust, you cannot take assets back. The trust is a separate, permanent entity from the moment it’s funded.¹
Qualified charitable beneficiary. The remainder recipient must be an organization described in Section 170(c) of the Internal Revenue Code.

The 10% test is where planning trips people up. A high payout combined with a long term or a low Section 7520 rate can push the remainder value below the threshold. The 7520 rate changes monthly; in early 2026 it has ranged from 4.6% to 4.8%.³ Higher rates generally make it easier to satisfy the 10% test for CRTs because they raise the present value of the future remainder. Running the numbers with an actuary or qualified advisor before drafting saves you from creating a trust that can’t qualify.

Setting the Trust Up

Setting up a private charitable trust is a sequence, and the order matters because later steps depend on earlier ones.

Start with the trust instrument. This is the governing legal document, and it must specify the charitable beneficiary, the non-charitable beneficiaries, the payout rate, the payout frequency, the trust term, and the trustee’s powers. For a CRT, the instrument must comply with Section 664. Errors are extremely difficult to fix after funding because the trust is irrevocable, so have an attorney experienced in charitable trust drafting handle this step.

Next, select a trustee. The trustee holds fiduciary responsibility for managing investments and distributing payments. You can serve as your own trustee, appoint a family member, or hire a corporate trustee such as a bank or trust company. Serving as your own trustee gives you control over investment decisions, but it also means you bear the administrative burden and have to be careful to avoid self-dealing.

Obtain an Employer Identification Number. Because the trust is a separate legal entity, it needs its own EIN for tax filing and reporting. Apply through IRS Form SS-4, which can be filed online, by phone, or by mail.⁴

Then fund the trust. Transfer assets formally into the trust’s name — a new deed for real estate, retitled accounts for securities. Transferring appreciated assets is one of the main advantages of a CRT: the trust, as a tax-exempt entity, can sell those assets without the donor recognizing an immediate capital gain. The full pre-tax value stays invested and generating income for the beneficiary.

Finally, register with your state. Many states require charitable trusts to register with the attorney general’s office or secretary of state, and requirements and fees vary significantly by jurisdiction.⁵ Failing to register doesn’t invalidate the trust’s federal tax status, but it can create state compliance problems and penalties.

Appraisals and Form 8283

When you fund the trust with anything other than publicly traded securities or cash, the IRS requires a qualified appraisal to substantiate the contribution’s value. The appraisal must follow the Uniform Standards of Professional Appraisal Practice and include a detailed description of the property, its condition, the valuation method used, and the fair market value on the contribution date.⁶ The appraiser must be a qualified professional with relevant credentials and no conflict of interest with the donor or the trust.

File Form 8283 with your personal tax return for any noncash charitable contribution over $500. Contributions over $5,000 require the more detailed Section B, which includes the appraiser’s signature and the charity’s acknowledgment.⁷ A missing or incomplete Form 8283 can cause the IRS to disallow your entire deduction even if the underlying appraisal was valid.

What It Costs and When It’s Worth It

Private charitable trusts are not cheap to create or maintain, and the economics only work above a certain funding level. Attorney fees for drafting typically run from a few thousand dollars for a straightforward CRT to $25,000 or more for complex arrangements. Annual administration costs — trustee fees, tax return preparation, asset valuation — add further expense. Corporate trustees generally charge an annual fee based on a percentage of trust assets, often 1% to 1.5% for the first million dollars, with the percentage declining for larger trusts.

Because of these fixed costs, most advisors won’t recommend a CRT funded with less than $100,000, and many set the practical floor closer to $250,000. Below that level, administrative expenses eat too much of the trust’s income to justify the structure. If your charitable goals don’t require the complexity of a trust, a donor-advised fund or direct gift may accomplish the same thing for a fraction of the cost.

The Charitable Deduction and AGI Limits

The income tax deduction is based on the present value of the interest ultimately going to charity. For a CRT, that’s the present value of the remainder. For a grantor CLT, it’s the present value of the annuity stream the charity receives during the term. Both calculations use IRS actuarial tables and the Section 7520 discount rate published monthly.³

The deduction is capped as a percentage of adjusted gross income (AGI), and the ceiling depends on the type of property contributed and whether the charity is public or private. Cash contributions to a CRT whose remainder beneficiary is a public charity qualify for a deduction of up to 60% of AGI.⁸ Contributions of appreciated long-term capital gain property are generally limited to 30% of AGI. If the beneficiary is a private foundation rather than a public charity, lower limits apply. Any unused deduction carries forward for up to five additional tax years.

How the Trust Itself Is Taxed

CRTs and CLTs have fundamentally different tax profiles, and confusing them leads to expensive surprises.

A CRT is exempt from federal income tax. It pays no tax on interest, dividends, or capital gains, so assets inside the trust compound without an annual tax drag. This is the mechanism that makes contributing appreciated property so powerful: the trust can sell the property at full value, reinvest the proceeds, and pay income to the beneficiary from a larger base than the donor would have had after selling the property personally.²

A non-grantor CLT, by contrast, is a separate taxpaying entity. It gets a charitable income tax deduction under Section 642(c) for amounts paid to the charity, which often offsets most or all of its taxable income, but in any year the trust’s income exceeds its charitable distribution, the trust owes tax on the excess. A grantor CLT is taxed entirely to the donor during the term.

The Four-Tier System for CRT Distributions

When a CRT distributes to the non-charitable beneficiary, the payment carries the tax character of the trust’s underlying income. Distributions are classified in a strict order that prevents cherry-picking the most favorable treatment:⁹

Tier 1 is ordinary income (interest, dividends, rents), to the extent the trust has current or accumulated ordinary income.
Tier 2 is capital gains, once ordinary income is exhausted.
Tier 3 is tax-exempt income the trust has earned.
Tier 4 is return of principal, received tax-free, and only reached after the three income categories are gone.

The practical effect is that most CRT distributions in the early years are taxed as ordinary income or capital gains. Tax-free distributions from corpus are rare and typically only occur late in the trust term or in trusts that have experienced significant investment losses.

The 100% Tax on UBTI

A CRT that generates any unrelated business taxable income (UBTI) faces an excise tax equal to 100% of that income.² The trust loses every dollar of UBTI it earns. Common sources include debt-financed income from leveraged investments and income from operating an active trade or business. Trustees have to screen investments carefully, because even a small allocation to a partnership that generates UBTI can trigger the tax.

Assets That Will Disqualify the Trust

Two asset types consistently cause serious problems for donors who don’t know the rules.

S corporation stock cannot be contributed to a CRT. A CRT is not a permitted shareholder, and transferring shares into the trust terminates the company’s S election entirely, converting it to a C corporation and affecting every shareholder, not just the donor. If you hold S corporation stock and want to use a CRT, the company must first convert to C status or you have to sell the shares and contribute the proceeds.

Debt-encumbered property is equally problematic. Contributing property with an outstanding mortgage to a CRT can disqualify the trust. The IRS position is that if the donor has personal liability on the debt, the trust becomes a grantor trust under Section 677(a), which is incompatible with CRT status under Section 664. The mortgage must be fully paid off before the property is transferred, and most practitioners insist on clean title before funding.

Annual Filings and Penalties

Maintaining a charitable trust means filing paperwork every year for as long as the trust exists. The primary filing is Form 5227, the Split-Interest Trust Information Return, which all CRTs and CLTs submit to the IRS.¹⁰ Form 5227 provides a detailed accounting of the trust’s assets, income, distributions, and valuations. For calendar year trusts, the deadline is April 15 of the following year.

If the trust files 10 or more returns of any type during the calendar year (including W-2s, 1099s, and Form 5227 itself), Form 5227 must be filed electronically. Submitting a paper return when electronic filing is required is treated as a failure to file, even though the IRS physically has the form.¹⁰

The trustee also provides each non-charitable beneficiary with a Schedule K-1 (Form 1041), reporting the beneficiary’s share of income, deductions, and credits for their personal return.¹¹ If a charitable trust is structured as or treated as a private foundation, Form 990-PF is required in addition to Form 5227.¹²

For a CRUT, the trustee performs an annual fair market value appraisal of all trust assets to calculate the correct unitrust payout. Getting the valuation wrong means the payout is wrong, which can jeopardize the trust’s qualified status if the error is large enough or goes uncorrected.

The penalty for failing to file Form 5227 on time, completely, or correctly is $25 per day, up to a maximum of $13,000 per return. For trusts with gross income exceeding $327,000, the penalty jumps to $130 per day with a maximum of $65,000 per return.¹⁰ The penalties fall on the trust itself, and repeated failures attract IRS scrutiny that can lead to examination of the trust’s entire operations.

Prohibited Transactions and Excise Taxes

Charitable trusts are subject to rules designed to prevent insiders from using tax-advantaged assets for personal benefit. Violations trigger excise taxes under Internal Revenue Code Sections 4941 through 4945.¹³ These rules apply most directly to trusts treated as private foundations, but the self-dealing prohibition applies to all split-interest trusts, including CRTs and CLTs.

Self-Dealing

No financial transaction is permitted between the trust and a “disqualified person,” which includes the donor, the trustee, family members of the donor, and any entity they control. Selling property to the trust, leasing property from it, lending money to it, or providing paid services to it all count as self-dealing. It does not matter whether the transaction is at fair market value. The initial tax on the disqualified person is 10% of the amount involved for each year the act remains uncorrected. If the act isn’t corrected in the allowed period, a second-tier tax of 200% of the amount involved applies.¹³

Excess Business Holdings

A charitable trust treated as a private foundation generally cannot hold more than 20% of the voting stock of a corporation, reduced by whatever percentage disqualified persons already own. Similar limits apply to partnership interests.¹⁴ Excess holdings must be disposed of, or the trust faces excise taxes on the excess amount.¹⁵

Failure to Distribute Income

This rule applies to trusts classified as private foundations, not to standard CRTs or CLTs operating as split-interest trusts. A private foundation must distribute at least 5% of the fair market value of its non-charitable-use assets each year for charitable purposes.¹⁶ Falling short triggers an excise tax on the undistributed amount.

Jeopardy Investments and Taxable Expenditures

Trustees exercise ordinary business care and prudence when investing trust assets. Investments that jeopardize the trust’s ability to carry out its charitable purpose — speculative bets with no reasonable upside analysis, for example — trigger an excise tax. The standard isn’t that the investment lost money; it’s that a reasonable person would have recognized the risk was inappropriate for a charitable trust’s portfolio.

Trust funds cannot be spent on lobbying, political campaigns, grants to individuals that don’t meet specific IRS requirements, or any purpose outside the trust’s charitable mission.¹⁷ Using trust assets to cover personal expenses of the donor or trustee is the most common violation and draws both the taxable expenditure penalty and the self-dealing penalty at the same time.

How the Trust Ends

A CRT terminates when the trust term expires or the last income beneficiary dies, whichever event the trust instrument specifies. The trustee distributes the remaining assets to the charitable beneficiary, files a final Form 5227 (due by the 15th day of the fourth month after termination), and the trust ceases to exist. The charity receives the assets free of any further obligation to the non-charitable beneficiaries.

A CLT terminates at the end of its stated term, and the remainder passes to the donor’s heirs or other non-charitable beneficiaries named in the instrument. For a non-grantor CLT, the gift or estate tax consequences were calculated and accounted for when the trust was created, based on the present value of the remainder interest. If the trust’s investments outperformed the Section 7520 rate used in that original calculation, the heirs receive more than was projected, and that excess passes free of additional gift or estate tax. That arbitrage is the entire point of CLT planning.

Early termination of a CRT is possible but complicated. It generally requires the consent of all beneficiaries and, in many states, approval from the attorney general. The IRS treats early termination as a sale of the income beneficiary’s interest, which creates capital gain for the beneficiary and triggers detailed disclosure requirements under Notice 2008-99. Terminating a CRT early to reach the principal defeats much of the trust’s original purpose and belongs on the table only in unusual circumstances.

1
Internal Revenue Service. Charitable Remainder Trusts
2
Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts
3
Internal Revenue Service. Section 7520 Interest Rates
4
Internal Revenue Service. About Form SS-4, Application for Employer Identification Number (EIN)
5
National Association of Attorneys General. Charities Regulation 101
6
eCFR. 26 CFR 1.170A-17 – Qualified Appraisal and Qualified Appraiser
7
Internal Revenue Service. Instructions for Form 8283
8
Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts
9
govinfo. 26 USC 664 – Charitable Remainder Trusts
10
Internal Revenue Service. Instructions for Form 5227 (2025)
11
Internal Revenue Service. Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR
12
Internal Revenue Service. Instructions for Form 990-PF
13
Office of the Law Revision Counsel. 26 U.S. Code 4941 – Taxes on Self-Dealing
14
Office of the Law Revision Counsel. 26 U.S. Code 4943 – Taxes on Excess Business Holdings
15
Internal Revenue Service. Excess Business Holdings of Private Foundation Defined
16
Office of the Law Revision Counsel. 26 USC 4942 – Taxes on Failure to Distribute Income
17
Office of the Law Revision Counsel. 26 U.S. Code 4945 – Taxes on Taxable Expenditures