What Is a Unitrust: Types, Tax Benefits, and Compliance

A charitable remainder unitrust, or CRUT, is an irrevocable trust that splits assets into two interests: an income stream paid to you or other named beneficiaries for a set term, and a remainder that passes to one or more charities when the term ends. Each year the trustee pays out a fixed percentage — between 5% and 50% under federal law — of the trust’s net asset value, recalculated annually.¹ Because the trust itself is exempt from income tax, you can move appreciated property into it and let the trustee sell without triggering an immediate capital gains bill. That deferral, combined with an upfront charitable deduction and favorable estate treatment, is why people use them.

How the Annual Payout Works

Every year, the trustee determines the net fair market value of everything the trust holds, subtracting debts and liabilities. The annual payout equals the trust’s fixed percentage multiplied by that updated value. If the document sets a 6% rate and the assets are worth $1 million on the valuation date, the payout for that year is $60,000. If the portfolio grows to $1.2 million the following year, the payout rises to $72,000. A drop to $900,000 cuts the payout to $54,000.

This recalculation is what separates a CRUT from a charitable remainder annuity trust (CRAT). A CRAT locks in a fixed dollar amount at creation and never adjusts it.² With a CRUT, your payments track the market: better in strong years, smaller in weak ones. That fluctuation is the feature for donors who want inflation protection over a long term, and a risk for anyone counting on a stable check.

A CRUT can also accept additional contributions after the initial funding. A CRAT cannot. Each new contribution triggers its own 10% remainder test, but the ability to add assets over time gives the CRUT flexibility for donors who expect future wealth events like a business sale or inheritance.

The Four Types of CRUTs

Not every CRUT works the same way. The tax code and Treasury regulations allow four payout variations, and the choice matters most when the trust holds illiquid assets like real estate or closely held business interests that don’t produce predictable cash flow.

Standard CRUT. Pays the full fixed percentage of asset value every year, whether the trust earned that much income or not. If investments underperform, the trustee may have to sell assets to make the distribution. This is the common choice when the trust holds cash or publicly traded securities.
Net Income CRUT (NICRUT). Pays the lesser of the trust’s actual income or the fixed percentage amount. If the trust earns less than required, the beneficiary gets only what was actually earned, with no mechanism to make up the shortfall later.
Net Income with Makeup CRUT (NIMCRUT). Works like the NICRUT but tracks cumulative shortfall. In years when income exceeds the fixed percentage, the excess repays past shortfalls. This is the go-to structure when the trust starts out holding non-income-producing property that will eventually be sold and reinvested.¹
Flip CRUT. Starts as a net income or NIMCRUT, then permanently converts to a standard CRUT on the January 1 after a specified triggering event, such as the sale of real estate held in the trust. Any accumulated makeup deficit is forfeited at the flip. This works well when a donor funds the trust with property that needs time to sell.

Choosing the wrong variation is where things go sideways. Fund a standard CRUT with a commercial building that takes two years to sell, and the trustee has to find another way to make the annual distribution or risk breaching the trust terms. A flip CRUT defers the full payout obligation until the asset becomes liquid.

Tax Benefits of Funding a CRUT

Capital Gains Deferral

This is the headline benefit. A CRUT is exempt from income tax under IRC 664(c), so when the trustee sells appreciated property inside the trust, no capital gains tax is owed at the trust level.¹ The full sale proceeds stay invested, generating returns on money that would otherwise have gone to the IRS. The tax isn’t eliminated permanently. It’s paid gradually as the trust distributes money to you through the four-tier system below. But the deferral, and the ability to invest the untaxed proceeds, produces a significant compounding advantage over decades.

Charitable Income Tax Deduction

The year you fund a CRUT, you can claim an income tax deduction equal to the present value of the remainder interest, meaning the amount the IRS estimates the charity will eventually receive. That value depends on the payout rate, the trust term, and the Section 7520 interest rate in effect when you contribute. A higher payout rate or longer term shrinks the remainder and the deduction. A higher Section 7520 rate increases the deduction because it assumes the trust will grow faster.

Starting in 2026, new rules affect the deduction for high-income donors. Itemized charitable contributions are subject to a 0.5% AGI floor, so only contributions above that threshold are deductible. Taxpayers in the top 37% federal bracket see the tax benefit of their itemized deductions capped at 35%. For a donor with $2 million in AGI, the first $10,000 of charitable contributions produces no federal tax benefit.

Estate Tax Treatment

If you name yourself as the income beneficiary and die during the trust term, the trust’s value is included in your gross estate. The present value of the charity’s remainder interest, however, qualifies for an estate tax charitable deduction. When you’re the only income beneficiary, that deduction equals the entire trust value, effectively zeroing out the estate tax on those assets. If a surviving spouse or other successor beneficiary continues receiving payments, the deduction covers only the remainder interest, and the rest may be taxable unless it qualifies for the marital deduction.

How Your Distributions Are Taxed

The trust pays no income tax on its investment gains, but you owe tax on each distribution you receive. The IRS uses a four-tier system that characterizes every dollar paid out, on a “worst in, first out” principle: the highest-taxed income comes out first.²

Tier 1, ordinary income. Distributions are treated as ordinary income first, to the extent of the trust’s current-year and accumulated undistributed ordinary income.
Tier 2, capital gains. Once ordinary income is exhausted, distributions are characterized as capital gains from the trust’s asset sales, including both current-year and accumulated gains.
Tier 3, other income. After ordinary income and capital gains are fully distributed, payments are treated as other income, including tax-exempt interest.
Tier 4, return of principal. Only after every category of income and gain has been paid out do distributions become tax-free returns of trust corpus.

The trustee reports each beneficiary’s share on Schedule K-1 (Form 1041), breaking down how much falls into each tier.² The early years of a CRUT funded with appreciated stock tend to be heavy on capital gains, since the trust’s first major transaction is selling the contributed shares. Over time, as gains are distributed, the character of payments may shift.

The 10% Remainder Test

Every contribution to a CRUT must clear one threshold: the present value of the charity’s remainder interest must equal at least 10% of the net fair market value of the contributed property.¹ Fail this test and the trust doesn’t qualify as a CRUT: no charitable deduction, no tax-exempt treatment for the trust’s income.

The remainder value is calculated using the IRS Section 7520 rate, which equals 120% of the applicable federal midterm rate, rounded to the nearest two-tenths of a percent. It changes every month.³ As of March 2026, the rate is 4.8%. A higher rate makes the 10% test easier because the IRS assumes faster growth, leaving more for charity. A lower rate makes it harder, especially for younger donors or those choosing high payout percentages, because the projected payout stream consumes a larger share of the trust’s assumed growth.

Timing matters. You can elect to use the Section 7520 rate from the month you fund the trust or either of the two preceding months, giving you some flexibility to pick the most favorable rate. For donors on the edge of the 10% threshold, waiting a month for a rate increase can be the difference between a valid trust and a failed one.

Who’s Involved

Four roles have to be filled, though the same person can sometimes wear more than one hat.

Donor (grantor). The person who contributes assets and establishes the trust. Often also the income beneficiary.
Trustee. Manages investments, handles annual valuations, makes distributions, and files tax returns. The trustee is a fiduciary, legally required to balance the income beneficiary’s interests against the charity’s eventual receipt. The donor can serve as trustee, though many donors choose an independent trustee or a corporate trust company to avoid conflicts and self-dealing concerns.
Income beneficiary. Receives the annual percentage payments for the trust’s term. Can be the donor, the donor’s spouse, or other individuals, but beneficiaries must be living at the time the trust is created, and the trust term cannot exceed 20 years unless it is measured by the beneficiary’s life.²
Charitable remainder beneficiary. The qualified nonprofit that receives whatever remains when the trust terminates. The organization must qualify under IRC Section 170(c). If the charity loses its tax-exempt status during the term, the trust document should include language allowing substitution of another qualified organization.⁴

Setting One Up

The Trust Agreement

The document is irrevocable, so the terms have to be right before signing. You need to settle several specifics before a drafter can put pen to paper: which assets you’ll transfer (cash, publicly traded securities, real estate, or closely held interests, each with account numbers or legal descriptions); the payout percentage between 5% and 50%; the trust term, either a fixed number of years up to 20 or the lifetime of named beneficiaries; and full legal names and tax identification numbers for beneficiaries and each charity’s EIN.¹ A lifetime term for a 45-year-old donor with a 7% payout rate may fail the 10% remainder test, so run the numbers before finalizing.

The IRS publishes sample trust language in Revenue Procedures 2005-52 through 2005-59, covering single-life, term-of-years, consecutive-interest, and concurrent-and-consecutive configurations.⁵ Drafters typically start from these templates because using the IRS’s own language reduces audit risk. Professional drafting fees generally range from $2,000 to $10,000 for a straightforward CRUT and can exceed $25,000 for complex arrangements with multiple asset types or beneficiaries.

Signing and Funding

The donor signs before a notary public. Once executed, the document is irrevocable: you cannot take back the assets or change the fundamental terms. Some provisions, like the identity of the charitable beneficiary, can be made modifiable if the document specifically allows it, but the payout rate and trust term are locked in.

Signing creates the trust; funding it requires actually moving assets into the trust’s name. For real estate, that means recording a new deed at the county land records office. For brokerage accounts, you submit transfer instructions to retitle the securities. The transfer date matters for tax purposes: your charitable deduction is calculated using the Section 7520 rate from the month of the actual transfer, not the month you signed the agreement.

Qualified Appraisals

If you contribute property other than cash or publicly traded securities and plan to claim a deduction above $5,000, you need a written qualified appraisal from a qualified appraiser. The appraiser must follow the Uniform Standards of Professional Appraisal Practice (USPAP) and sign the appraisal no earlier than 60 days before the contribution date. You report the contribution on Form 8283, Section B, and the appraiser completes Part IV. For claimed deductions above $500,000, the full appraisal must be attached to your tax return.⁶ The appraisal fee cannot be based on a percentage of the appraised value.

EIN and Annual Filings

The trustee must apply for a separate Employer Identification Number because the trust is its own taxpaying entity. Each year, the trustee files Form 5227 (Split-Interest Trust Information Return), reporting income, distributions, and asset values. For calendar-year trusts, Form 5227 is due by April 15, with an automatic extension available by filing Form 8868 before that deadline.⁷ Missing this filing can draw scrutiny to whether the trust is operating in compliance with its terms.

Compliance Traps That Can Sink a CRUT

Unrelated Business Taxable Income

A CRUT is generally exempt from income tax, but that exemption disappears for any unrelated business taxable income (UBTI) the trust generates. The penalty is an excise tax equal to 100% of the UBTI, dollar for dollar.¹ UBTI most commonly shows up when a trust invests in debt-financed property or certain limited partnerships that pass through business income. The tax is allocated to the trust’s principal and cannot be deducted when calculating distributions.⁸ Even a small amount of UBTI triggers the full excise, so investment selection requires constant attention.

Self-Dealing

Federal law applies the private foundation self-dealing rules to split-interest trusts like CRUTs.⁹ The donor and other disqualified persons (family members, controlled entities) cannot engage in most transactions with the trust. Selling property to the trust, leasing from it, borrowing from it, or using trust assets for personal benefit can all trigger excise taxes. If you serve as your own trustee, pay close attention. Something as simple as living in a property owned by the trust could be a prohibited transaction.

Assignment of Income

The IRS watches for situations where a donor transfers appreciated assets to a CRUT with a buyer already lined up and the trustee then sells immediately. If the sale was essentially a done deal before the transfer, the IRS may argue that the donor, not the trust, should be taxed on the capital gain under the assignment of income doctrine.¹⁰ There is no bright-line rule for how much time must pass between contribution and sale, but transferring stock on Monday and having the trustee sell it on Tuesday to a buyer you already negotiated with is exactly the fact pattern that draws a challenge. The safer approach is to contribute assets without any binding agreement for the trustee to sell them.

1
Office of the Law Revision Counsel. 26 USC 664 Charitable Remainder Trusts
2
Internal Revenue Service. Charitable Remainder Trusts
3
Internal Revenue Service. Section 7520 Interest Rates
4
Office of the Law Revision Counsel. 26 USC 170 Charitable Etc Contributions and Gifts
5
Internal Revenue Service. Internal Revenue Bulletin 2005-52
6
Internal Revenue Service. Instructions for Form 8283
7
Internal Revenue Service. Instructions for Form 5227
8
eCFR. 26 CFR 1.664-1 Charitable Remainder Trusts
9
Office of the Law Revision Counsel. 26 USC 4947 Application of Taxes to Certain Nonexempt Trusts
10
Internal Revenue Service. Self-Dealing and Other Tax Issues Involving Charitable Remainder Unitrusts