Quick overview

A Charitable Remainder Trust (CRT) lets you place assets into an irrevocable trust, receive income (to you or named beneficiaries) for life or a fixed term, and direct the remaining assets to charity when the trust ends. CRTs are governed by Internal Revenue Code §664 and are commonly used to: convert appreciated assets into a steady income stream, avoid immediate capital gains tax on sale of donated assets, claim a current charitable income tax deduction for the present value of the remainder interest, and reduce estate tax exposure.

(Backed by IRS guidance on CRTs: https://www.irs.gov/charities-non-profits/charitable-remainder-trusts.)

Background and why people use CRTs

CRTs became widely used after Congress formalized split-interest trust rules in the late 1960s. In my 15+ years advising clients, I’ve seen three common motives:

  • Reduce tax friction on highly appreciated, low-basis assets (stocks, real estate). The trust can sell assets without triggering immediate capital gains tax at the donor level.
  • Create predictable lifetime or term income. CRTs can pay a fixed annuity (CRAT) or a variable unitrust amount tied to annual trust value (CRUT).
  • Leave a lasting charitable legacy while materially supporting the donor’s current financial needs.

How CRTs work — the basic mechanics

There are two primary CRT designs:

  • Charitable Remainder Annuity Trust (CRAT): pays a fixed dollar amount (an annuity) each year. The annuity amount is set when the trust is funded and does not change.
  • Charitable Remainder Unitrust (CRUT): pays a fixed percentage of the trust’s annual fair market value (commonly 5%–7%). The payout varies with trust value.

Key legal and tax rules to remember:

  • Irrevocability: A CRT is irrevocable once funded; the donor gives up ownership and control of contributed assets.
  • Minimum payout: The IRS requires a minimum charitable payout equivalent to a 5% annual distribution to noncharitable beneficiaries (practical minimum; see guidance) — in most cases, payout rates below 5% are not permitted when calculating the charitable deduction.
  • Remainder value test: The present value of the remainder interest ultimately passing to charity must meet IRS actuarial requirements (typically a minimum of about 10% of the initial trust value under valuation tests used to determine the donor’s allowable charitable deduction).
  • Tax status: A properly designed CRT is tax-exempt for the trust entity, so the trust may sell appreciated assets without recognizing immediate capital gains tax at the trust level. However, beneficiaries pay tax on distributions under a tier system (ordinary income first, then capital gains, then tax-free return of principal) [IRS split-interest trust rules].

IRS filing: CRTs generally must file Form 5227, “Split-Interest Trust Information Return,” and follow the trust income tax rules described by the IRS. See the IRS CRT overview and Form 5227 details at https://www.irs.gov/charities-non-profits/charitable-remainder-trusts and https://www.irs.gov/forms-pubs/about-form-5227.

Tax and financial benefits

  • Immediate charitable income tax deduction: You can claim a deduction in the year you fund the CRT equal to the present value of the remainder interest passing to charity, subject to the usual AGI percentage limits for charitable gifts. The deduction is actuarially calculated and depends on beneficiary ages, payout rate, and IRS interest-rate assumptions.
  • Avoid or defer capital gains tax: If you fund the CRT with appreciated stock or real estate, the trust can sell the asset without immediate capital gains tax. That often yields more proceeds to generate income.
  • Income flexibility: CRUTs provide payments that adjust with trust investment performance; CRATs provide stable, predictable payments.
  • Estate tax reduction: Transferring assets to an irrevocable CRT removes them from your taxable estate, which can reduce estate taxes.

Important considerations and risks

  • Irrevocable commitment: You cannot revoke the gift or resume personal ownership of trust assets once the CRT is funded.
  • Costs and administration: CRTs require setup costs (legal and actuarial), ongoing trustee fees, investment management expenses, and annual tax/filing work (Form 5227). Smaller CRTs may be impractical after fees.
  • Payout-rate tradeoffs: Higher payout rates increase current income but reduce the charitable remainder and the donor’s allowable deduction. A rate that’s too high can erode the remainder value quickly.
  • Trustee selection: The trustee controls investments and distributions; choose someone (or a corporate trustee) with experience managing charitable trusts and handling annual compliance.
  • Unrelated Business Taxable Income (UBTI): If the trust generates business income (for example, an operating business placed into the trust), the trust may owe UBIT.
  • Charity selection and contingencies: Include successor charities and contingency provisions in the trust document in case the primary charity dissolves or changes mission.
  • State law and estate rules: State trust and estate tax rules vary; consult counsel about state-specific reporting or inheritance tax consequences.

Practical setup steps

  1. Identify objectives: income needs, tax goals, charitable priorities, and time horizon.
  2. Select assets to fund the CRT: highly appreciated stocks, real estate, or business interests are common choices. Non-liquid or hard-to-value assets require careful valuation and trustee planning.
  3. Choose CRAT vs CRUT and set a payout rate: decide whether you prefer fixed payments (CRAT) or value-linked payments (CRUT).
  4. Pick the charitable beneficiary(ies) and successor provisions: name qualified 501(c)(3) organizations or charities with solid governance.
  5. Select a trustee: a trusted individual, family member, law firm, or corporate trustee with experience in charitable trusts.
  6. Draft the trust with qualified counsel: include distribution rules, valuation methods (for CRUTs), powers to sell, successor charities, and administrative provisions.
  7. Fund the trust and implement: transfer title to the trust and execute funding steps, then invest and administer according to the trust terms.
  8. File required returns: annual Form 5227 and Form 1041 where applicable; coordinate with your tax advisor.

Example scenarios (realistic illustrations)

  • Appreciated stock sale: A donor with low basis stock worth $1,000,000 funds a CRT with shares. The CRT sells the shares tax-free at the trust level, reinvests cash to produce income, the donor receives annual payments, and the charity receives the remainder at the end of the term. The donor claims a charitable deduction for the present-value remainder that year.
  • Illiquid real estate: A donor places a rental property into a CRT. The trustee sells the property, redeploys proceeds into diversified investments, and the donor begins receiving income. Because the trust sold the property, capital gains tax is not triggered at the donor level, though trust distributions later are taxed in tiers.

Professional tips and strategies (from practice)

  • Use a CRT to convert concentrated equity positions into diversified income without triggering immediate capital gains tax.
  • Consider a “net income with makeup” CRUT (NIMCRUT) or flip CRUT if you want flexibility with income in early years when property is illiquid.
  • Compare CRTs with alternatives — donor-advised funds (DAFs), private foundations, or charitable lead trusts — to ensure the CRT best fits your goals. Our comparison guides, such as Charitable Remainder Trusts vs Donor-Advised Funds, explain these tradeoffs in depth: https://finhelp.io/glossary/charitable-remainder-trusts-vs-donor-advised-funds-choosing-the-right-vehicle/.
  • For practical administration and long-term oversight, consider a corporate or institutional trustee if your trust will be large or include complex assets. See our primer on how CRTs work for more detail: https://finhelp.io/glossary/charitable-remainder-trusts-how-they-work/.

Common mistakes to avoid

  • Underestimating costs: small CRTs often fail to produce net benefits once setup and trustee fees are accounted for.
  • Choosing an inappropriate payout rate: set a payout that balances current income and charitable intent.
  • Ignoring successor charity language: include fallback options if a charity ceases to exist or changes focus.
  • Funding the trust with assets that are difficult to value or transfer without prior planning (e.g., restricted stock or complicated partnership interests).

Short FAQ

  • How is CRT income taxed to beneficiaries? CRT distributions are taxed under a four-tier system (ordinary income, capital gains, other income, then tax-free corpus). The trustee issues required tax statements; consult your CPA for treatment in your state.
  • Does a CRT avoid all capital gains tax? No — the trust itself is tax-exempt and can sell appreciated property without immediate tax. However, beneficiaries may owe taxes on distributed income, and UBIT can apply if the trust generates unrelated business income.
  • Can I change the charity later? No — CRT terms are generally fixed. You can designate successor charities in the trust document, but you cannot reclaim the donated assets.

Resources and authoritative guidance

Final considerations and disclaimer

CRTs can be powerful when used for the right reasons — converting appreciated, concentrated assets into diversified income while supporting a charity. But they are complex, irrevocable, and require careful design, trustee selection, and ongoing administration. In my practice, the best outcomes come from interdisciplinary planning: tax counsel, an experienced estate attorney, a trustee who understands charitable vehicles, and a financial advisor who can model long-term cash flows.

This article is educational and does not constitute tax, legal, or investment advice. Consult a qualified attorney and tax advisor before establishing a CRT to evaluate your personal situation and ensure compliance with current federal and state law.