What Is a CRUT: Types, Tax Benefits, and Payout Rules

A CRUT trust — properly, a charitable remainder unitrust — is an irrevocable trust that pays you or another beneficiary a fixed percentage of its assets each year, then transfers whatever is left to a qualified charity when the payment period ends. Under Internal Revenue Code Section 664, the annual payout has to fall between 5% and 50% of the trust’s value (recalculated every year), and the projected charitable remainder must equal at least 10% of what you put in.¹ In exchange for locking assets away for charity, you get three tax benefits at once: an upfront income tax deduction, deferral of capital gains on appreciated property, and removal of the contributed assets from your taxable estate.

How a CRUT Works

Three roles drive the structure. The donor funds the trust and sets its terms. The trustee manages the assets, invests them, and sends out the yearly payment. The income beneficiary receives that payment for life or for a fixed term of up to 20 years. When the payment period ends, the charitable remainder beneficiary — a qualified 501(c)(3) — receives whatever is left.

Many donors serve as their own trustee. A professional or corporate trustee makes more sense when the trust holds complex property such as commercial real estate or closely held business interests. Naming yourself as the income beneficiary is the most common setup, and married couples often name both spouses jointly so payments continue for the surviving partner’s lifetime.

Because a CRUT is irrevocable, you give up the contributed assets permanently. You cannot pull property back, change the payout percentage, or unwind the trust to reclaim principal. The charitable beneficiary can sometimes be swapped for a different qualified charity if the trust document allows it, but the basic structure is locked once funded. That permanence is exactly what makes the tax treatment possible; the IRS treats the contribution as a completed gift because you have actually surrendered control.

One useful feature: a CRUT can accept additional contributions after the initial funding, because it revalues its payout every year based on current fair market value.¹

Payout, Term, and the 10% Remainder Test

Section 664 sets precise rules that every CRUT must satisfy. Getting any of them wrong can disqualify the trust and wipe out the charitable deduction retroactively.

Payout range: the annual distribution has to be at least 5% and no more than 50% of the trust’s net fair market value, redetermined each year. Payments must go out at least once per year, though the trust document can call for quarterly or monthly distributions.¹
Term limit: a fixed-term CRUT cannot run longer than 20 years. Lifetime CRUTs have no maximum; they end when the last named beneficiary dies.¹
10% remainder test: at the time of each contribution, the present value of the charity’s projected remainder must equal at least 10% of the net fair market value of the property contributed. This is what keeps donors from combining a very high payout with a very long term and leaving the charity with almost nothing.¹

The Section 7520 Rate

Both the 10% remainder test and the size of your charitable deduction depend on the IRS Section 7520 interest rate. Published monthly, it equals 120% of the federal midterm rate rounded to the nearest two-tenths of a percent. For January 2026, the Section 7520 rate is 4.6%.² That rate, combined with the beneficiary’s age and the chosen payout percentage, feeds into IRS actuarial tables to project what the charity will ultimately receive.³

A higher 7520 rate produces a larger projected remainder and therefore a larger deduction; a lower rate shrinks both. Because the rate changes every month, timing matters. You can use the rate from the month of the contribution or from either of the two preceding months, whichever gives you the best result.

Types of CRUTs

Not every CRUT distributes the same way. The IRS permits several variations, each suited to a different asset mix and income need.

Standard CRUT

A standard CRUT pays the fixed percentage every year regardless of what the trust actually earned. If the payout is set at 6% and the investments only returned 3%, the trustee dips into principal to make the distribution. This structure works best when the trust holds liquid, income-producing assets such as a diversified securities portfolio.

Net Income CRUT (NICRUT)

A NICRUT caps each year’s distribution at the lesser of the fixed percentage or the trust’s actual net income. If earnings fall short, the beneficiary simply gets less that year, and there is no makeup later. It protects principal when investment returns are uneven, at the cost of steadier income.

Net Income with Makeup CRUT (NIMCRUT)

A NIMCRUT operates like a NICRUT but tracks the shortfall. When income comes in below the fixed percentage, the gap accumulates in a makeup account. In any later year when the trust earns more than the fixed percentage, the excess goes toward those past shortfalls. This is popular for donors contributing illiquid assets that may not generate income right away.

Flip CRUT

A Flip CRUT begins as a net income CRUT and converts to a standard CRUT on the first day of the year after a triggering event named in the trust document — usually the sale of a hard-to-value or illiquid asset like commercial real estate or a private business interest. Before the flip, net income rules protect the trustee from having to dump the asset at a bad price to fund payments. After the flip, the beneficiary receives the full fixed percentage from the now-liquid portfolio. The switch happens once and cannot be reversed.

Tax Benefits of Funding a CRUT

Three tax advantages stack in a CRUT, which is why planners reach for one when a client holds appreciated property and wants to support charity.

Capital Gains Deferral

A qualifying CRUT is exempt from income tax under Section 664(c).¹ When the trustee sells an appreciated asset inside the trust, no capital gains tax is owed at the trust level. The gain does not disappear — it gets allocated to the beneficiary gradually through the distribution tiers described below — but the deferral keeps more capital working for both the beneficiary and the eventual charitable remainder.

Income Tax Deduction

You claim a charitable income tax deduction in the year of the contribution, equal to the present value of the charity’s projected remainder interest. That figure depends on the Section 7520 rate, the payout percentage, and either the beneficiary’s age (for a lifetime trust) or the term length (for a fixed-term trust). Deductions for contributions of appreciated property to a CRUT are generally limited to 30% of adjusted gross income, with any unused portion carried forward for up to five additional tax years.

Estate Tax Reduction

Assets transferred to a CRUT during your lifetime come out of your taxable estate. If the trust is still making payments when you die, for instance because your spouse is the surviving beneficiary, the value of the charitable remainder interest qualifies for an estate tax deduction under Section 2055.⁴

How Your Payments Are Taxed

The trust itself pays no income tax, but the beneficiary does on each distribution. Section 664(b) assigns every payment a tax character using a four-tier ordering system. Each tier must be fully exhausted before the next one applies:¹

Tier 1, ordinary income. Distributions are first treated as ordinary income (including qualified dividends) to the extent of the trust’s current and accumulated undistributed ordinary income. This is the highest-taxed category.
Tier 2, capital gains. Once ordinary income runs out, distributions come out as capital gains from the trust’s current and prior years, tracked on a cumulative net basis.
Tier 3, other income. Tax-exempt income, such as interest from municipal bonds held in the trust.
Tier 4, return of principal. Only after all income categories are depleted does a distribution come out as a tax-free return of corpus.

The practical effect: in the early years of a CRUT that just sold appreciated assets, distributions will typically be taxed as ordinary income and capital gains rather than principal. The capital gain that was deferred at the trust level gets recognized here, spread across payments over the life of the trust. Beneficiaries expecting tax-free income from day one are usually disappointed.

Rules That Can Cost You the Trust

CRUTs borrow several rules from the private foundation world, and the penalties are heavy enough to matter.

Self-Dealing

Under Sections 4947(a)(2) and 4941, the self-dealing rules that govern private foundations also apply to charitable remainder trusts.⁵ A “disqualified person” — the donor, the trustee, their family members, and certain related entities — cannot engage in transactions with the trust such as buying or selling property, lending money, or using trust assets for personal benefit.⁶ Even fair-market transactions trigger excise taxes. A donor-trustee cannot lease office space from the trust or borrow against trust assets, no matter how clean the terms.

The 100% UBTI Tax

If a CRUT generates unrelated business taxable income, which can happen with certain partnership investments, leveraged real estate, or debt-financed property, the trust owes an excise tax equal to 100% of that UBTI.¹ The trust keeps its tax-exempt status, but the offending income is effectively confiscated. The trustee reports and pays this tax on Form 4720. Trustees need to screen investments carefully; a limited partnership that quietly throws off UBTI can erode trust value fast.

Setting One Up

Drafting the trust document is the easy part. The planning done beforehand decides whether the trust actually accomplishes what the donor wants.

Assets and Appraisal

CRUTs can be funded with cash, publicly traded securities, real estate, closely held business interests, and certain other property. The biggest tax advantage comes from contributing assets with substantial unrealized appreciation: the wider the gap between your cost basis and current market value, the more capital gains tax you sidestep by contributing rather than selling first.

For any noncash contribution valued above $5,000, the IRS requires a qualified appraisal. The appraisal must be performed by a qualified appraiser following the Uniform Standards of Professional Appraisal Practice, completed no earlier than 60 days before the contribution date, and finalized no later than the due date (including extensions) of the tax return on which the deduction is first claimed.⁷ The appraiser’s fee cannot be based on a percentage of the appraised value. You will also need to attach Form 8283 to your tax return to substantiate the noncash deduction.⁸

Choosing the Charity

The remainder beneficiary must be a qualified tax-exempt organization. Confirm the charity’s status through the IRS Tax Exempt Organization Search, which includes Pub. 78 data on organizations eligible to receive tax-deductible contributions.⁹ If your named charity loses its exempt status before the trust terminates, the trustee has to redirect the remainder elsewhere, so writing a backup charity into the document is worth the extra paragraph.

Picking the Payout Rate

The payout rate sets a direct trade-off between the beneficiary’s income and the charity’s remainder. Higher payout, more income, smaller upfront deduction, and greater risk of failing the 10% remainder test. Lower payout, larger deduction, more growth for the charity, less income for the beneficiary. Most CRUTs land between 5% and 8%. Younger beneficiaries with longer life expectancies need lower payout rates to satisfy the 10% test.

Formation Steps

An attorney drafts the trust document specifying the CRUT type, payout percentage, income beneficiaries, charitable remainder beneficiary, trustee, and provisions for trustee succession or charity substitution. It has to comply with Section 664 and the associated Treasury Regulations. Signature and notarization make it a binding instrument.

The trustee then applies for a federal Employer Identification Number, which establishes the trust as a separate tax entity. EINs are issued online at no cost and are available immediately.¹⁰ Select “trust” as the entity type and indicate that it was created as an irrevocable trust.¹¹

With the EIN, the trustee opens a bank or investment account in the trust’s name. The donor then transfers assets in. For publicly traded securities, that means a brokerage transfer. For real estate, the donor signs and records a new deed transferring title to the trust. Recording fees vary by county, generally from about $30 to $100. Once funded, the trustee starts the annual cycle: value the assets, calculate the payout, distribute, invest the balance.

Annual Filings You Cannot Miss

A CRUT does not file a standard Form 1041. Every charitable remainder trust files Form 5227, the Split-Interest Trust Information Return, each year. For the 2025 calendar year, Form 5227 is due April 15, 2026.¹² If the trust terminates mid-year, the final return is due by the 15th day of the fourth month after termination.

Form 5227 reports the trust’s income, deductions, distributions, and accumulation of charitable amounts. The trustee also has to provide each income beneficiary with a Schedule K-1 showing the character of that year’s distributions under the four-tier system, so the beneficiary can report the income correctly on a personal return. If the trust generated any UBTI, Form 4720 goes in with the excise tax payment, due on the same date as Form 5227.

Beyond the federal filings, the trustee’s ongoing job is to revalue the assets each year (typically as of the first day of the trust’s tax year), calculate the correct distribution, pay it on time, and keep records good enough to track the four tiers across years. Falling behind is not a compliance headache. It can cost the trust its tax-exempt status.

1
Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts
2
Internal Revenue Service. Section 7520 Interest Rates
3
Internal Revenue Service. Actuarial Tables
4
Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses
5
eCFR. 26 CFR 1.664-1 – Charitable Remainder Trusts
6
Office of the Law Revision Counsel. 26 USC 4941 – Taxes on Self-Dealing
7
Internal Revenue Service. Publication 561 – Determining the Value of Donated Property
8
Internal Revenue Service. Charitable Organizations – Substantiating Noncash Contributions
9
Internal Revenue Service. Tax Exempt Organization Search
10
Internal Revenue Service. Get an Employer Identification Number
11
Internal Revenue Service. Instructions for Form SS-4
12
Internal Revenue Service. Instructions for Form 5227