How do remainder interest gifts work in planned giving?

Remainder interest gifts let a donor give an asset to a qualified charity today while keeping the right to use the asset or receive income from it for a defined period (usually the donor’s lifetime). When the retained interest ends, the charity takes full ownership. This structure can offer estate-tax reduction, potential income-tax deductions, and avoidance of immediate capital gains tax on highly appreciated property.

Below I explain the common structures, tax mechanics, practical steps, examples, and pitfalls—drawing on IRS guidance and years of client work.

Basic structures and common forms

There are two primary ways remainder interest gifts are made:

  • Donating a remainder interest in a personal residence or farm. The donor deeds the property to a charity but reserves a lifetime right to live there (a retained life estate). The charity receives the property after the donor’s death or after a term ends.

  • Funding a charitable remainder trust (CRT). The donor transfers assets into a trust that pays the donor (or other beneficiaries) an income stream for life or a term of years and then distributes the trust’s remainder to the charity.

For CRTs, there are two popular types:

  • Charitable Remainder Annuity Trust (CRAT): pays a fixed dollar amount each year.
  • Charitable Remainder Unitrust (CRUT): pays a fixed percentage of the trust’s value, recalculated annually.

If you want a practical comparison, see our detailed guide on Charitable Remainder Trusts: Charitable Remainder Trusts: How They Work and an overview page: Charitable Remainder Trusts Explained.

Tax mechanics — what gives and what you receive

Two tax benefits commonly drive remainder interest gifts:

  1. Income-tax charitable deduction. When you donate the remainder interest, you may claim an immediate charitable deduction equal to the present value of the remainder interest. That present value is calculated using IRS actuarial tables and the Section 7520 rate published monthly by the IRS (see IRS guidance on charitable remainder trusts and valuation).

  2. Avoidance or deferral of capital gains tax. Donating appreciated property to a charity (either directly as a remainder interest or via a CRT) can eliminate immediate capital gains tax that would have been due on a sale. In a CRT, the trust can sell appreciated assets tax-free and reinvest the proceeds to produce the income stream.

Important IRS references: the IRS maintains pages on charitable remainder trusts and charitable contributions, and Publication 561 explains how to determine the value of donated property. See: https://www.irs.gov/charities-non-profits/charitable-remainder-trusts and https://www.irs.gov/publications/p561 (IRS).

Note: The precise deduction and tax results depend on the retained interest (life vs. term), the age of income beneficiaries, the Section 7520 rate at the time of the gift, and whether the receiving organization is a qualified public charity. Calculations require actuarial rounding and compliance with the IRC (notably Section 664 for CRTs).

A practical example (simplified)

Assume you own stock worth $1,000,000 with a $200,000 cost basis. You are 75 years old and want lifetime income. If you place the stock in a CRUT that pays you 5% of the trust value each year, the trust can sell the stock without immediate capital gains tax, reinvest tax-free within the trust, and provide annual payments. Your charitable income-tax deduction equals the present value of the remainder that will go to charity (calculated with the 7520 rate). The trust’s eventual remainder to the charity will reflect investment growth net of payments and expenses.

This example is illustrative. Exact tax deductions require an actuarial valuation based on the current Section 7520 rate published by the IRS each month (so the timing of the gift matters).

Who benefits most from remainder interest gifts?

  • People with appreciated, low-basis assets (stock, real estate). Donating the asset avoids the capital gains tax that would arise on sale.
  • Donors seeking lifetime use or income plus charitable legacy.
  • Donors with taxable estates aiming to reduce estate tax exposure by removing future appreciation from their estate.
  • Charities that can manage or liquidate the gifted asset when the remainder vests.

In practice, remainder interest gifts are a fit for high-net-worth individuals and families who want both current tax benefits and a future philanthropic impact. In my advisory work, clients with vacation homes or concentrated stock positions find this approach especially useful.

Step-by-step: how to set up a remainder interest gift in a residence or via a trust

  1. Confirm the charity’s acceptance policy. Not every charity accepts a remainder interest in a residence or complex gifts. Speak with the charity’s planned-giving officer.
  2. Get professional valuations. For real estate, obtain a qualified appraisal (see IRS Publication 561). For securities, use broker statements and cost-basis records.
  3. Determine the valuation and deduction. Work with your CPA or tax attorney to calculate the present value of the remainder (using actuarial tables and the Section 7520 rate).
  4. Draft the legal documents. For a retained life estate, prepare a deed and a written agreement. For a CRT, have a trust document drafted by an estate planning attorney familiar with IRC Section 664.
  5. Fund the gift and file applicable forms. CRTs require trustee administration and annual trust filings. For donated property, retain documentation for IRS substantiation.

Common pitfalls and how to avoid them

  • Assuming the charity will accept any asset. Many charities decline property that is costly to manage. Confirm acceptance before transferring title.
  • Miscalculating the tax deduction. Small changes in the Section 7520 rate or payout percentage materially affect the deductible amount. Always run calculations with a tax professional.
  • Overlooking ongoing costs. If you retain a life estate in a residence, you may still be responsible for maintenance, property taxes, and insurance.
  • Not planning for legacy and liquidity. If your estate needs liquidity for other beneficiaries, ensure the remainder gift aligns with your broader estate plan.

Frequently asked questions (brief)

  • Can I change my mind after I grant a remainder interest? Reversing a completed transfer usually requires the charity’s consent and may be complicated; discuss alternatives with counsel before gifting.

  • Will donating a remainder interest eliminate capital gains tax for sure? If the charity ultimately sells the appreciated asset, the charity generally will not pay capital gains tax. When a CRT sells appreciated property, the trust is tax-exempt on the sale.

  • How much is the immediate charitable tax deduction? It depends on the actuarial present value of the charity’s remainder interest, the payout structure, and the Section 7520 rate.

Practical tips from my experience

  • Time the gift carefully. The Section 7520 rate can change monthly and affects the present value calculation; higher rates generally lower the charitable deduction for the donor.
  • Work with charities that have a clear policy and experience accepting remainder interests or administering CRTs.
  • Consider a CRT if you want professional asset management and an income stream; consider a retained life estate if your priority is ongoing use of a home with a charitable legacy.

Authority, resources, and next steps

For authoritative rules and valuation details, consult the IRS pages on charitable remainder trusts and Publication 561: https://www.irs.gov/charities-non-profits/charitable-remainder-trusts and https://www.irs.gov/publications/p561 (IRS). For charitable contribution rules generally, see https://www.irs.gov/charities-non-profits/charitable-contributions (IRS).

Further reading on FinHelp: see our walkthroughs on Charitable Remainder Trusts: How They Work and Charitable Remainder Trusts Explained, and for estate context, Estate and Gift Tax Basics: What You Need to Know.

Professional disclaimer: This article is educational and reflects general principles and my professional experience. It is not tax, legal, or financial advice. Values, rates, and tax results vary by circumstances and over time. Consult a qualified tax advisor, estate-planning attorney, and the receiving charity before making a remainder interest gift.

If you’d like, I can help outline the documents and calculations you’ll need to discuss with your advisor.