Overview
A Charitable Remainder Trust (CRT) is a legal arrangement used in U.S. estate and tax planning that converts appreciated assets into a lifetime or term income stream while ensuring a gift to charity when the trust ends. CRTs are governed by Internal Revenue Code Section 664 and described by the IRS as a split‑interest trust because the economic benefits are split between noncharitable income beneficiaries and charitable remainder beneficiaries (IRS) (https://www.irs.gov/charities-non-profits/charitable-remainder-trusts).
In plain terms: you transfer an asset (stocks, real estate, a business interest, etc.) into an irrevocable trust. The trust can sell that asset without an immediate capital‑gains tax hit because it is tax‑exempt at trust level. The trust pays you or other named noncharitable beneficiaries an income stream. After the trust term ends, the remaining assets go to the charity you named.
This arrangement is commonly used to: convert low‑yield assets into predictable cash flow, reduce estate or income taxes, and create a charitable legacy.
Types of CRTs: CRAT vs CRUT
There are two primary charitable remainder trust structures. The choice affects flexibility, income variability, and administrative work.
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Charitable Remainder Annuity Trust (CRAT)
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Pays a fixed dollar amount each year (or other interval). The annuity amount is set when the trust is funded and does not change.
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Works best when you want predictable, level payments.
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The fixed payment cannot be changed and the trust cannot accept additional contributions after funding.
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Charitable Remainder Unitrust (CRUT)
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Pays a fixed percentage of the trust’s annually revalued assets (commonly 5% or higher). Payments rise and fall with investment performance and new contributions may be allowed depending on the trust terms.
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Offers more protection against inflation because payouts can increase if trust assets grow.
Both must meet legal requirements for payout and remainder value. Under IRC §664 and IRS implementing rules, the payout percentage generally must be at least 5% of the trust’s value and the present value of the remainder (what will go to charity) must be at least 10% of the initial fair market value of the property contributed (see IRS guidance and Section 7520 rate calculations) (IRS Section 7520 rate page: https://www.irs.gov/retirement-plans/section-7520-interest-rates).
Tax mechanics and key rules (2025 update)
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Income tax deduction: When you fund a CRT, you may claim a charitable income tax deduction equal to the present value of the remainder interest that will eventually pass to charity. That value is calculated using IRS actuarial tables and the monthly Section 7520 rate in effect for the month of the gift (IRC §7520) (IRS).
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Capital gains: One major advantage is the ability to transfer appreciated, low‑basis assets into the CRT and have the trust sell them without triggering capital gains tax at the time of sale. The trust itself is tax‑exempt while it holds the assets and sells them; however, when the trust distributes income to beneficiaries, that income is taxed to recipients under the tier system (ordinary income, capital gain, tax‑exempt income, then return of principal). This means tax is deferred and often spread over time rather than realized all at once.
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Estate and gift tax: Transferring assets to a CRT removes those assets from your taxable estate, which can reduce estate taxes for large estates. The charitable deduction can lower current income tax liability but may be limited by adjusted gross income ceilings for charitable contributions; consult your tax advisor for limits that apply to your situation.
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Reporting: CRTs file the split‑interest trust return (Form 5227) with the IRS and provide beneficiaries the appropriate K‑1 or trust tax reporting. Trustees should be familiar with trust accounting and federal reporting obligations (see IRS Form 5227) (https://www.irs.gov/forms-pubs/about-form-5227).
Step‑by‑step setup
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Identify objectives: income needs, desired charitable beneficiaries, time horizon (lifetime vs term of years), and which asset you’ll fund the trust. In my practice I begin with a goals checklist and a projected cash‑flow model.
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Choose trust type and payout rate: decide CRAT (fixed payments) or CRUT (unit percentage). Work with your advisor to set a payout that satisfies legal minimums and provides the income you need.
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Select trustee: pick a reliable institutional trustee or an individual with investment, tax, and fiduciary experience. Trustees handle investments, distributions, tax filings, and the eventual transfer to charity.
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Draft trust documents: use an attorney experienced with charitable and estate planning. The trust must be irrevocable and include language to satisfy IRC §664 and IRS rules.
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Fund the trust: transfer the chosen asset to the CRT. If transferring real estate or closely held business interests, expect additional due diligence, title work, and possibly appraisals.
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Trust sells/transforms the asset and begins payments: the trust invests sale proceeds and makes periodic payments to income beneficiaries.
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Remainder to charity: at the end of the term or the last beneficiary’s death, trustees distribute remaining assets to the named charity (or charities).
Pros and cons (practical considerations)
Pros:
- Defers capital gains tax on sale of appreciated assets held in trust.
- Generates a current charitable income tax deduction for the present value of the remainder interest.
- Provides lifetime income or term payments.
- Removes assets from estate for estate‑tax planning purposes.
Cons:
- CRTs are irrevocable — you cannot reclaim the principal once transferred.
- Administrative complexity: trustee duties, periodic valuations, and tax filings add cost.
- Fees: initial legal fees, trustee fees, investment management costs, and possible appraisal fees can be material.
- Income is taxable to beneficiaries when distributed and may be taxed in layers under trust distribution rules.
Common mistakes and how to avoid them
- Underfunding or choosing a payout that leaves little remainder for the charity. Use conservative projections and test scenarios.
- Naming an unsuitable trustee. Choose a trustee with experience handling split‑interest trusts.
- Failing to coordinate with estate and income tax planning. Always run CRT scenarios alongside estate projections and income tax forecasts.
- Assuming immediate tax‑free income. The charitable deduction and deferred gains have limits and timing rules—work with a CPA.
Real‑world examples
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Example 1 (appreciated stock): A donor contributed $1.5 million in highly appreciated stock to a CRUT with a 5% payout. The trust sold the stock tax‑free, diversified into a balanced portfolio, and paid the donor an annual income that rose with market growth. The donor claimed a charitable deduction in the year of funding calculated using the Section 7520 rate and actuarial tables.
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Example 2 (real estate): A homeowner placed a rental property into a CRAT and received fixed payments for life while the trust sold the property, avoided immediate capital gains, and after the donor’s death the property proceeds funded a university scholarship endowment.
These are simplified; actual tax consequences and deduction amounts depend on the Section 7520 rate, the donor’s age, payout rate, and the asset’s fair market value. For current valuation rules see the IRS CRT guidance and Section 7520 rate tables (IRS Section 7520 page) (https://www.irs.gov/retirement-plans/section-7520-interest-rates).
Trustee duties and administration
Trustees must invest prudently, make timely distributions, keep accurate records, arrange valuations for unitrusts each year (CRUTs), and file required IRS returns (most CRTs must file Form 5227). Institutional trustees often handle these tasks for a fee; many clients prefer a bank or trust company when complex assets or long‑term administration is expected.
Practical tips from a practitioner
- Use a CRT to sell highly appreciated assets you do not need for immediate cash. The tax-deferral and diversification benefits are often worth the trust fees.
- Run multiple scenarios with different Section 7520 rates—those monthly rates materially affect the charitable deduction and how much remainder the charity will receive.
- If you want flexibility to add assets later, consider a CRUT that allows additional contributions (a NIMCRUT or standard CRUT with appropriate drafting).
- Coordinate CRT funding with your overall estate plan and beneficiary designations to avoid unintended interactions with wills or other trusts.
Related resources on FinHelp
- For guidance on handling noncash gifts and appraisals when funding a CRT with property, see our guide on Donating Complex Assets: Real Estate, Art and Business Interests (FinHelp) (https://finhelp.io/glossary/donating-complex-assets-real-estate-art-and-business-interests/).
- To understand timing and tax strategies around capital gains that often motivate CRT funding, read Planning Capital Gains Around Life Events and Charitable Goals (FinHelp) (https://finhelp.io/glossary/planning-capital-gains-around-life-events-and-charitable-goals/).
Frequently asked practical questions
- Can I change the charitable beneficiary later? No — a CRT is irrevocable and the remainder beneficiaries are generally fixed; changing them typically requires court approval and is rare.
- Can a CRT own S‑corp stock? Generally no. CRTs are tax‑exempt trusts and owning S‑corp stock usually causes tax issues; transfer of S corporation shares into a CRT is normally disallowed. Discuss alternatives with a tax attorney.
- Are CRT payments taxable? Yes. Distributions to income beneficiaries are taxed under the trust tier system. The timing and nature of tax depend on the trust’s income categories.
Final notes and professional disclaimer
Charitable Remainder Trusts are powerful tools for combining income needs with philanthropic goals, but they require careful legal drafting, tax planning, and trustee administration. The examples and rules above reflect federal tax law and IRS guidance current as of 2025; state law, charitable rules, and individual circumstances affect outcomes.
This article is educational and does not replace personalized legal or tax advice. Before establishing a CRT, consult a qualified estate planning attorney, a tax advisor familiar with split‑interest trusts, and the charity you plan to name.
Authoritative sources: IRS — Charitable Remainder Trusts (https://www.irs.gov/charities-non-profits/charitable-remainder-trusts); IRS — Section 7520 interest rates (https://www.irs.gov/retirement-plans/section-7520-interest-rates); IRS — About Form 5227 (https://www.irs.gov/forms-pubs/about-form-5227).
