What Is a Charitable Remainder Trust and How Does It Work?

A charitable remainder trust is an irrevocable trust that pays income to you (or someone you name) for a set period, and then hands whatever is left to a charity you’ve chosen. In exchange for giving up ownership of the assets you put in, you get three tax advantages: an upfront income tax deduction, no capital gains tax when the trust sells appreciated assets, and removal of the charitable portion from your taxable estate. The tradeoff is real. Once the assets are in, they’re not coming back.

The Four Roles Inside the Trust

Every charitable remainder trust has the same cast. The grantor contributes the assets and sets the terms. A trustee manages the investments and handles compliance. One or more income beneficiaries receive regular payments. And a charitable remainder beneficiary, a qualified 501(c)(3), receives what’s left when the payment term ends.¹

The income beneficiary is often the grantor, a spouse, or both, but it can be anyone living at the time the trust is created. The payment term lasts either for the lifetime of one or more named individuals or for a fixed number of years up to a maximum of 20. When the term ends, the trustee distributes the remaining assets to the charity.²

There is one hard qualifying rule. The present value of the charity’s future remainder must equal at least 10% of the initial net fair market value of the property placed in the trust. The IRS calculates that present value using the Section 7520 interest rate and actuarial tables at the time the trust is funded. If the math doesn’t produce a remainder worth at least 10%, the trust doesn’t qualify. Higher payout rates and longer terms shrink the remainder; lower payout rates and shorter terms grow it.¹

CRAT or CRUT: Two Ways to Get Paid

The IRS recognizes two payment formats, and the choice between them shapes both your annual check and your flexibility to add more assets later.

Charitable Remainder Annuity Trust

A CRAT pays a fixed dollar amount every year, no matter how the investments perform. That dollar amount is set at the outset as a percentage of the assets contributed, and the percentage has to fall between 5% and 50%. Once the trust is funded, you cannot add anything more.¹ A CRAT suits donors who want a predictable, level income and don’t plan to contribute again.

Charitable Remainder Unitrust

A CRUT pays a fixed percentage of the trust’s value as revalued each year. If the investments grow, your payment grows with them. If they fall, so does the check. The same 5% to 50% range applies, and unlike a CRAT, a CRUT lets you make additional contributions after the initial funding.³ That flexibility is why CRUTs are the more common choice.

Two variations extend the CRUT format. A net income with makeup CRUT (NIMCRUT) only pays the stated percentage if the trust actually earns it that year. Shortfalls accumulate in a makeup account and get paid back in better years. It’s commonly used when the trust is funded with an illiquid asset like real estate that isn’t producing cash yet. A Flip CRUT starts as a NIMCRUT and permanently converts to a standard CRUT on a triggering event written into the document, such as the sale of a specific property. The trigger cannot be at anyone’s discretion, and the flip takes effect at the start of the tax year after the trigger occurs.⁴

The Three Tax Benefits

Upfront Income Tax Deduction

You get a partial charitable income tax deduction in the year you fund the trust. It equals the present value of the charity’s remainder interest, which is the total value of the donated property minus the present value of the income stream you’ll receive.²

How much of that deduction you can use in a single year depends on what you put in. Cash contributions are deductible up to 60% of your adjusted gross income. Appreciated property such as stock or real estate is limited to 30% of AGI.⁵ Anything you can’t use in year one carries forward for up to five additional tax years.⁶

Starting in 2026, the One Big Beautiful Bill Act adds a floor: charitable contributions are deductible only to the extent they exceed 0.5% of AGI. On $500,000 of AGI, the first $2,500 of charitable giving produces no deduction. For most CRT donors, that’s a small drag, not a dealbreaker.

No Capital Gains Tax When the Trust Sells

A qualifying CRT is exempt from income tax at the trust level. When the trustee sells appreciated assets inside the trust, no capital gains tax is owed at the time of the sale. The full proceeds get reinvested. This is the core reason CRTs are so effective for donors sitting on highly appreciated stock or real estate. Selling those assets outside the trust would trigger an immediate capital gains hit; selling them inside keeps the entire amount working.¹

Estate Tax Deduction

If the grantor dies while the trust is still paying out, the present value of the charitable remainder qualifies for an estate tax deduction under IRC 2055. The portion destined for charity is not subject to estate tax.⁷

How Your Payments Get Taxed

Payments to you are not all taxed the same way. The IRS applies a four-tier ordering system, and the trust essentially stacks its income in layers. Your payments draw from the top down:²

Ordinary income first, taxed at your regular income tax rates.
Capital gains second, once ordinary income is exhausted.
Other income third, including tax-exempt income.
Return of principal last, which is not taxed.

The least tax-friendly income comes out first. In the early years of a CRT funded with highly appreciated assets, expect most of your payments to be taxed as ordinary income or capital gains rather than tax-free principal. The trustee reports the character of your payments to you on Schedule K-1 (Form 1041), which you use to file your personal return.

The UBTI Trap

The trust-level tax exemption has one dangerous exception. If a CRT generates any unrelated business taxable income, the trust owes an excise tax equal to 100% of that income. Not a penalty on top of the tax owed. The entire UBTI amount is effectively confiscated.¹

The most common source is debt-financed property. If you transfer real estate with an outstanding mortgage into a CRT, income attributable to that debt can be treated as UBTI. Even if the trust didn’t take out the loan, existing debt on the property counts as acquisition indebtedness.⁸ Operating an active business through the trust and certain partnership investments can also generate UBTI. This is where CRT planning turns dangerous without professional guidance. A single overlooked loan can wipe out the tax benefit.

Setting Up and Funding the Trust

The trust instrument has to comply with IRS requirements, and the IRS has published sample language for the most common configurations in Revenue Procedures 2005-52 through 2005-59.⁹ Tracking that sample language closely reduces the risk of IRS disqualification. The document sets the payout rate, the trust term, the identity of income beneficiaries and charitable remaindermen, and the trustee’s investment authority. Most estate planning attorneys charge several thousand dollars to draft one.

Key decisions include CRAT vs. CRUT, the payout percentage, term of years vs. lifetime, and which qualified 501(c)(3) to name as the charitable remainderman.² You can retain the power to swap in a different qualified charity later, and IRS rulings confirm that retaining this power does not affect your original deduction.

Once drafted and signed, the trust applies for its own Employer Identification Number using Form SS-4 so it can open brokerage and bank accounts and file returns as a separate entity. Funding means actually retitling assets into the trust’s name: providing the EIN and governing documents to the brokerage for financial accounts, executing and recording a new deed for real estate. If you’re contributing non-cash assets worth more than $5,000 other than publicly traded securities, you need a qualified appraisal and must attach Form 8283 to your tax return.¹⁰

Annual Filings

A CRT must file Form 5227 (Split-Interest Trust Information Return) every year by April 15 following the close of the calendar year.¹¹ The trustee attaches Schedule K-1 (Form 1041) reporting the character and amount of each income beneficiary’s payments. Missing the filing deadline triggers penalties under IRC 6652.

Self-Dealing Is Off Limits

CRTs are subject to the same self-dealing prohibitions that apply to private foundations. The grantor, trustee, income beneficiaries, and their family members are disqualified persons who cannot transact with the trust. That means no selling property to it, no buying property from it, no borrowing from it, and no personal use of trust assets.

The penalties are steep. The initial excise tax on a disqualified person is 10% of the amount involved for each year the transaction remains uncorrected. If it isn’t fixed in time, an additional 200% tax applies. A foundation manager who knowingly participates faces a separate 5% tax.¹² The rules exist so donors can’t use the CRT’s tax-exempt status as a vehicle for personal financial transactions while claiming a charitable deduction.

1
Office of the Law Revision Counsel. 26 USC 664 Charitable Remainder Trusts
2
Internal Revenue Service. Charitable Remainder Trusts
3
LII / Legal Information Institute. Charitable Remainder Annuity Trust
4
eCFR. 26 CFR 1.664-1 Charitable Remainder Trusts
5
Office of the Law Revision Counsel. 26 USC 170 Charitable, etc., Contributions and Gifts
6
Internal Revenue Service. Publication 526, Charitable Contributions
7
Office of the Law Revision Counsel. 26 USC 2055 Transfers for Public, Charitable, and Religious Uses
8
Office of the Law Revision Counsel. 26 USC 514 Unrelated Debt-Financed Income
9
George Fox University Gift Legacy Planning. What Is a Charitable Remainder Trust and How Does It Work
10
Internal Revenue Service. Charitable Organizations Substantiating Noncash Contributions
11
Internal Revenue Service. Instructions for Form 5227
12
Office of the Law Revision Counsel. 26 USC 4941 Taxes on Self-Dealing