What is a Charitable Remainder Trust?

A charitable remainder trust, often referred to as a CRT, is an irrevocable trust that creates a steady stream of income for a donor or other beneficiaries. The donor or beneficiaries receive income from the trust for either a set term of years or for the life of the last remaining beneficiary. At the end of the term, the remainder of the assets in the trust goes to the designated charity or charities. As a split-interest trust, a CRT divides the benefit of the contributed assets between the income beneficiary and the charity, and the trust itself is generally exempt from income tax on its investments.

Donors can pair a charitable remainder trust with a donor-advised fund (DAF) by naming a DAF sponsor as the trust’s remainder beneficiary. When the trust term ends, the remaining assets pass to the donor’s DAF, where the donor or their family can recommend grants to the charities they choose over time. This gives donors flexibility to adjust their charitable plans without amending the trust, and it keeps the donor’s deduction at public charity rates, since DAF sponsors are public charities. 

What are the two types of charitable remainder trusts?

There are two types of charitable remainder trusts. The main difference is how the trust agreement defines the income interest. To receive the benefits of a qualified charitable remainder trust, the Internal Revenue Code (IRC) requires that one of these types be used:

Charitable remainder annuity trusts (CRATs): The trust pays a fixed dollar amount each year. The payment amount is determined by multiplying the payout rate by the initial fair market value of the assets contributed to the trust, and it stays the same every year regardless of how the trust’s investments perform. 

Charitable remainder unitrusts (CRUTs): The trust pays a fixed percentage of its assets each year. The payment amount is determined by multiplying that percentage by the value of the trust’s assets, which are revalued annually. 

Regardless of the payout structure, the payments are taxed to the income beneficiary under the four-tier rules described below and made in monthly, quarterly, semi-annual, or annual installments. 

CRUTs come in three common variations.

What is a Standard CRUT (SCRUT)?

A standard charitable remainder unitrust (SCRUT) is the most widely used type of CRT. It pays the income beneficiary a fixed percentage of the trust’s value each year, based on an annual revaluation of the trust’s assets. The payment is due regardless of how much income the trust actually earns, so the trustee may need to sell assets or distribute principal to make it.

Because payments are recalculated each year, they rise when the trust’s investments grow and fall when they decline, giving the income beneficiary a built-in hedge against inflation that a CRAT’s fixed payment doesn’t offer. Unlike a CRAT, a SCRUT can also accept additional contributions after it’s funded. A SCRUT works best with assets that are already liquid or will be sold soon after contribution, such as publicly traded securities, cash, or property the trust expects to sell promptly.

What is a Net-Income Makeup CRUT (NIMCRUT)?

A net income with makeup charitable remainder unitrust (NIMCRUT) is a unitrust that pays the lesser of the unitrust amount (the stated percentage times the trust’s annual value) or the trust’s net income for the year. Net income means trust accounting income as defined by the trust document and state law. It generally includes interest, dividends, and rents. Gain built into contributed assets at the time of the gift is always allocated to principal and never counts as income. However, the trust document may define income to include gains realized after the gift — appreciation that occurs while the trust holds an asset — to the extent state law allows, under Treas. Reg. § 1.664-3(a)(1)(i)(b)(3).

 When net income falls short of the unitrust amount, the shortfall is tracked in a makeup account. In later years when net income exceeds the unitrust amount, the excess is paid to the income beneficiary until the makeup balance is paid down, under IRC § 664(d)(3). Because payments depend on how much income the trust earns, the trustee’s investment approach largely determines when the beneficiary receives distributions. If the trust document defines income to include post-gift gains, the trustee has an additional way to generate distributable income when the beneficiary needs it. That makes the NIMCRUT useful in two situations: when the trust holds an asset that produces little or no income, so it isn’t forced to sell assets to meet a fixed payout, and when the donor wants to defer distributions during working years and receive larger payments later, such as in retirement. 

What is a Flip CRUT?

A Flip CRUT begins as a NIMCRUT and converts to a SCRUT upon a triggering event set out in the trust document. Before the flip, payments are limited to the trust’s net income. After the flip, the trust pays a fixed percentage of its value each year, regardless of how much income it earns. The triggering event must be a specific date or a single event outside the control of the trustee or any other person, such as the sale of an unmarketable asset, the donor reaching a certain age, marriage, or the birth of a child, under Treas. Reg. § 1.664-3(a)(1)(i)(c) and (d).

The conversion takes effect on the first day of the tax year following the year of the triggering event. Any makeup balance remaining at that point is forfeited, so shortfalls accumulated before the flip are lost unless the trust has enough net income to pay them before conversion. 

A Flip CRUT is most often used in two ways. When a donor contributes an illiquid asset like real estate or closely held stock, the NIMCRUT phase avoids forced sales while the trust holds the asset, and the sale itself triggers the flip to a standard payout. When a donor wants to defer distributions, the trust can invest for growth during the NIMCRUT phase, keeping payments low during the donor’s working years, then flip on a set date, such as the donor’s planned retirement age, to provide a predictable income stream from that point forward.

Who can serve as trustee of a CRT?

Many donors serve as trustees of their own CRT. This donor-trustee model lets the donor keep control over how trust assets are invested, typically by continuing to work with their own financial advisor, while also deciding when to sell contributed assets and how to position the trust for their income goals. A donor can serve as sole trustee, as co-trustee with a spouse or family member, or retain the right to replace the trustee later.

Serving as trustee also means taking on fiduciary responsibility for the trust’s compliance. A CRT has administrative requirements that most individuals and many advisors don’t handle day to day: calculating the annual payout, tracking the four-tier character of every distribution, completing year-end valuations, preparing the trust’s annual Form 5227 and beneficiary K-1s, and monitoring the trust for self-dealing and UBTI issues. For that reason, most donor-trustees hire a specialized trust administrator to act as their agent. The donor remains trustee and keeps investment control, while the administrator handles the compliance, accounting, and reporting work that keeps the trust qualified.

If the trust holds hard-to-value assets like real estate, closely held stock, or cryptocurrency, the annual valuation must be performed by a qualified appraiser or an independent special trustee (IST) when the donor serves as trustee, under Treas. Reg. § 1.664-1(a)(7). The donor-trustee model accommodates this by naming an IST for that limited role while the donor keeps all other trustee responsibilities.

Donors who prefer not to serve as trustee have other options, including a bank or trust company, a professional corporate trustee, or the charitable remainder beneficiary. Some charities will only serve as trustees above a minimum trust size, and corporate trustees typically charge more and may limit investment flexibility.

How does a CRT compare to other charitable giving vehicles?

What are the benefits of a charitable remainder trust?

The trust itself pays no income tax. Under 26 U.S.C. § 664(c)(1), a qualified CRT is exempt from federal income tax on investment gains earned inside the trust. There is one exception: if the trust generates unrelated business taxable income (UBTI), such as income from an operating business or from debt-financed property, the trust owes an excise tax equal to 100% of the UBTI under § 664(c)(2). The trust keeps its tax-exempt status, and all other income remains exempt, but because every dollar of UBTI is effectively lost to tax, CRTs generally avoid holding UBTI-generating assets. 

Capital gains deferral on contributed appreciated assets. Because the trust is tax-exempt, it can sell contributed appreciated assets without immediate capital gains tax and reinvest the full proceeds. The gain is deferred, not eliminated: it’s taxed to the income beneficiary over time as distributions are made. 

An upfront income tax deduction. The donor receives a deduction equal to the present value of the charitable remainder interest. The calculation depends on the payout rate, the trust term or the beneficiaries’ ages, the payment frequency, and the IRS’s Section 7520 rate, which is published monthly. Higher Section 7520 rates increase the deduction for CRATs, while CRUT deductions are much less sensitive to the rate. The deduction is subject to the same AGI limits that apply to other charitable gifts: 60% of AGI for cash contributed to a public charity, 30% for appreciated property to a public charity, 30% for cash to a private foundation, and 20% for appreciated property to a private foundation. When the remainder beneficiary is a private foundation, the deduction for appreciated property other than publicly traded stock is generally limited to the donor’s cost basis rather than fair market value. The lower private foundation limits also apply if the donor retains the right to name a private foundation as the remainder beneficiary. Any unused deduction carries forward for up to five additional tax years.

Beginning in 2026, the One Big Beautiful Bill Act made two changes that affect the deduction’s value. Itemized charitable deductions are now allowed only to the extent they exceed 0.5% of the donor’s AGI, and for donors in the top 37% bracket, the tax benefit of itemized deductions is capped at 35%. 

Removal from the taxable estate. The value of the charitable remainder qualifies for an estate tax charitable deduction. If the donor or the donor’s spouse holds the only income interests, the CRT generally won’t generate estate tax at the donor’s death. If a child or other non-spouse beneficiary has a primary or successor income interest, the value of that interest may be subject to gift or estate tax. 

What are the three key CRT qualification tests?

Every CRT has to satisfy three tests to qualify under § 664; together, they’re the fastest way to sanity-check whether a proposed trust actually works as designed.

1. The 5% payout floor / 50% ceiling. The annual payout to the income beneficiary must be at least 5% and no more than 50% of the trust’s initial value (CRAT) or its annually revalued value (CRUT) — IRC § 664(d)(1)(A) and (d)(2)(A).
2. The 10% remainder minimum. The actuarial present value of the charitable remainder interest must equal at least 10% of the value of the assets contributed — IRC § 664(d)(1)(D) and (d)(2)(D).
3. The 5% probability-of-exhaustion test (CRATs only). For a lifetime CRAT, the actuarial probability that the trust will be fully exhausted before the income beneficiary’s death or trust term must be less than 5% (Rev. Rul. 77-374). 

How are CRT distributions taxed?

CRT payments to the income beneficiary aren’t taxed as a single, simple category. They’re characterized under a four-tier ordering system set out in IRC § 664(b):

1. Ordinary income: Distributions are first characterized as ordinary income to the extent the trust has current or accumulated ordinary income, such as interest and nonqualified dividends, followed by qualified dividends. 
2. Capital gains: Next, as capital gains, with gains taxed at the highest rates distributed first: short-term capital gains, then long-term capital gains. 
3. Other income: then as other income, such as tax-exempt interest.
4. Tax-free return of corpus: finally, once the first three tiers are exhausted, any remaining distribution is a tax-free return of the trust’s principal.

This ordering matters in practice: early-year distributions from a CRT that has sold appreciated assets will typically be taxed at capital gains rates, not received tax-free. The trust itself pays no tax on its investment income, but the beneficiary does, tier by tier, on each distribution.

What assets can be donated to a charitable remainder trust?

• Cash
• Publicly traded securities
• Some closely held stock (not S-Corp stock)
• Real estate
• Cryptocurrency
• Collectibles 
• Farm equipment, stored grain
• Other complex assets

Illiquid or hard-to-value assets typically require an independent trustee and more lead time to fund the trust than cash or publicly traded securities do.

Can I fund a charitable remainder trust with my IRA?

Yes, within limits. Under SECURE 2.0 (IRC § 408(d)(8)(F)), donors age 70 ½ or older can make a one-time qualified charitable distribution (QCD) directly from an IRA to fund a CRT or a charitable gift annuity. The cap is indexed for inflation each year: $50,000 when the provision took effect on January 1, 2023, rising to $55,000 for 2026.

Key restrictions

• The transfer must come exclusively from IRA funds, with no co-mingling of other assets;
• income beneficiaries are limited to the donor and/or the donor’s spouse; 
• payments are treated entirely as ordinary income, and  there is no charitable income tax deduction for the QCD
• and the election can only be made once in the donor’s lifetime. 

Spouses may each direct up to the current-year cap from their own separate IRAs into a shared CRT.

In practice, most CRT trustees require minimum funding well above this amount, so this provision is more commonly used to fund a CGA than a CRT. A CRT funded at the QCD cap alone is rarely cost-effective once administrative and trustee fees are factored in.

Can I name a charitable remainder trust as the beneficiary of my IRA?

Yes. Naming a CRT as the beneficiary of an IRA or other retirement account is one of the most effective ways to spread the income tax on those assets over a longer period. Under the SECURE Act, most non-spouse beneficiaries who inherit an IRA must withdraw the full balance within 10 years, which can push large distributions into high tax brackets. When a CRT is named as beneficiary instead, the IRA is paid to the trust at the owner’s death. Because the CRT is tax-exempt, no income tax is due when the trust receives the IRA assets, and the full pre-tax balance can be invested for the benefit of the income beneficiaries.

The tax isn’t eliminated. The IRA assets are income in respect of a decedent (IRD), and they’re characterized as ordinary income inside the trust. The income beneficiaries pay tax on that ordinary income as they receive distributions, spread over the life of the beneficiaries or a term of up to 20 years. At the end of the trust term, the remainder passes to charity, and the donor’s estate receives an estate tax charitable deduction for the value of the remainder interest.

A few requirements apply. The CRT must be named on the IRA’s beneficiary designation before the owner’s death; a beneficiary who inherits an IRA generally can’t transfer it to a CRT afterward without triggering tax. The trust must also meet the 10% remainder test based on the beneficiaries’ ages at the owner’s death, which can limit lifetime payouts for younger beneficiaries and may call for a term of years instead. Because the remainder ultimately goes to charity, this strategy fits best when the donor has genuine charitable intent alongside the goal of providing income to family members.

Who should consider a charitable remainder trust?

A CRT is best suited for donors who hold a concentrated appreciated asset, want a predictable income stream, and intend to leave a meaningful charitable gift.

Example: a concentrated stock position. A 62-year-old executive holds $5,000,000 of her company’s publicly traded stock, accumulated over a long career at a very low cost basis. She has substantial retirement savings and other investments, but the stock represents an outsized concentration in her portfolio, and she wants to reduce that risk before retirement. Rather than selling, she decides to contribute $2,000,000 of shares, with a cost basis of $200,000, to a CRT, keeping the rest of the position and her other assets available for her family and future needs. Selling those shares outright would trigger approximately $428,400 in federal tax, 20% long-term capital gains plus the 3.8% net investment income tax on the $1,800,000 gain, leaving about $1,571,600 to reinvest.

Instead, she contributes the shares to a 5% SCRUT, serving as trustee with her financial advisor managing the investments and Ren handling administration. The trust sells the shares without immediate capital gains tax and reinvests the full $2,000,000 in a diversified portfolio. Her first-year payment is $100,000 (5% × $2,000,000), compared to $78,580 if she had sold the shares herself and reinvested the after-tax proceeds at the same rate. She also receives an upfront income tax deduction for the present value of the charitable remainder interest. The capital gain isn’t eliminated. It’s taxed to her gradually as her distributions carry it out under the four-tier rules.

Example: appreciated rental real estate. A couple in their late 60s owns a debt-free rental property worth $1,600,000, with an adjusted basis of $400,000 after $300,000 of depreciation. They’re tired of managing tenants and want a reliable retirement income. Selling outright would trigger approximately $300,600 in federal tax: 25% on the $300,000 of unrecaptured depreciation, 20% on the remaining $900,000 of gain, and the 3.8% net investment income tax on the full $1,200,000.

Because the property won’t produce enough cash to fund a fixed payout until it’s sold, they contribute it to a 6% Flip CRUT before entering into any sale agreement. The trust begins as a NIMCRUT, paying out only its net rental income. When the trust sells the property, the sale triggers the flip, and beginning the following tax year the trust converts to a SCRUT paying 6% of its value each year, about $96,000 based on the property’s current value. The trust sells without immediate capital gains tax, and the gain is taxed to the couple over time as distributions carry it out, with the depreciation-related gain distributed first.

Example: a closely held business interest. A donor owns a 15% minority stake in a family-owned manufacturing company, organized as a C corporation, worth $3,000,000 against a $600,000 cost basis. The company pays no dividends, and the stake produces no income for him. Selling it would trigger approximately $571,200 in federal tax on the $2,400,000 gain, and there’s no ready buyer for a minority interest.

He contributes the shares to a 5% Flip CRUT, supported by a qualified appraisal for his deduction. As trustee, he names an independent special trustee (IST) to handle the required annual valuations of the stock. The trust holds the shares until the company offers to redeem stock from all shareholders on the same terms, which avoids self-dealing concerns. The redemption triggers the flip, and the trust converts to a SCRUT paying 5% of its value each year, about $150,000 based on the stake’s current value. The family keeps control of the business, the donor turns a non-income-producing holding into lifetime income, and at the end of the trust term, the remainder funds an endowed professorship at his alma mater.

A charitable remainder trust tends to fit donors who are:

• Seeking to sell a highly appreciated asset without an immediate capital gains tax bill
• Looking to convert a non-income-producing asset — real estate, a closely held business interest — into a lifetime income stream
• Balancing charitable goals against a genuine need for retirement income

These factors aren’t mutually exclusive, and the more of them that describe a donor, the more likely a charitable remainder trust will be a satisfying solution.

Donors who want their heirs to inherit the equivalent of what’s passing to charity sometimes pair a CRT with an irrevocable life insurance trust (ILIT), often called a “wealth replacement trust.” The donor uses part of the CRT’s distributions, along with the tax savings from the charitable deduction, to make gifts to the ILIT, which uses those gifts to pay premiums on a life insurance policy. At the donor’s death, the insurance proceeds pass to the family outside the donor’s taxable estate, replacing the value of the assets that ultimately went to charity. This is a standard estate-planning technique, and one worth raising with an attorney or advisor when family wealth-transfer goals sit alongside the charitable ones.

What are the downsides of a charitable remainder trust?

Irrevocability. Once assets are transferred into a CRT, the donor cannot reclaim them. This is a permanent decision and it should be treated as one.

CRAT exhaustion risk. A CRAT pays a fixed dollar amount regardless of investment performance. If the trust’s investments underperform, the trust can be depleted before the income term ends, a risk that’s particularly relevant for younger or healthier donors, whose life expectancy makes it harder to pass the 5% probability-of-exhaustion test in the first place.

Trustee-fee drag on smaller trusts. Legal drafting, annual trustee fees, tax return preparation (IRS Form 5227), and investment management fees can consume a disproportionate share of a small trust’s income. 

Valuation requirements. Contributions of real estate, closely held business interests, cryptocurrency, or other hard-to-value assets require a qualified appraisal to support the donor’s deduction. These assets also require independent annual valuations when the donor serves as trustee, performed by a qualified appraiser or an independent special trustee under Treas. Reg. § 1.664-1(a)(7). Disputes with the IRS over valuation can reduce the donor’s deduction or require corrective distributions from the trust. 

How much does it cost to set up a charitable remainder trust?

Setup and ongoing costs generally include legal drafting fees (typically quoted directly by an estate-planning attorney), ongoing trustee and administration fees, annual Form 5227 filing, and investment management costs. Industry estimates for a standard CRT typically run $3,000–$10,000 in legal fees to draft the trust document — more for complex assets like real estate or closely held business interests — plus 0.5%–1.5% of trust assets annually for a corporate or institutional trustee, or a flat annual fee in the low thousands for a simpler arrangement. Donors who serve as their own trustee and hire an administrative agent to handle compliance, accounting, and tax reporting often pay less than they would for a corporate trustee, while keeping investment control with their own financial advisor. For donors funding at a smaller scale, some universities and community foundations offer pooled income funds or charitable gift annuities with lower minimums than an individually drafted CRT would require. 

Learn more about charitable remainder trusts or contact us to speak with someone from our team.