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Tax Strategies · Retirement & Charitable

Charitable Remainder Trusts (CRATs and CRUTs): Income for Life, a Gift to Charity and the IRS Rules

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In Short

A Charitable Remainder Trust is an irrevocable trust under IRC §664 that pays an income stream to the donor or other beneficiaries for life or a term of up to 20 years, then gives what remains to charity. It is commonly used by people with highly appreciated assets who want income, a partial charitable deduction and a future gift.

TL;DR

  • A CRAT pays a fixed dollar amount each year; a CRUT pays a fixed percentage of the trust's value, revalued each year [1][2].
  • The payout must be at least 5% and no more than 50%, and the charity's remainder must be worth at least 10% of the value contributed [1][2].
  • The donor gets a partial charitable deduction for the present value of the remainder interest [1][3].
  • The trust itself is generally exempt from income tax, so it can sell appreciated assets without paying tax at the trust level; beneficiaries are taxed on payouts under ordering rules [2].
  • Certain CRAT arrangements using purchased annuities are now IRS listed transactions [4].

Quick Facts

Quick facts about a Charitable Remainder Trust. Audit risk and complexity are Zentavos's general assessments, not IRS ratings.
Legal ReferenceIRC §664, §170(f)(2)
ComplexityHigh
Audit RiskMedium
Setup CostHigh — trust document, appraisals, trustee and annual filings
Time to ImplementSeveral weeks — drafting, valuation and funding
Illustrative ExampleIllustrative example, not a projection. A 65-year-old transfers $1 million of long-held stock with a low cost basis to a charitable remainder unitrust paying 5% a year for life. The trust sells the stock without paying tax at the trust level and reinvests. The donor receives about $50,000 in the first year, taxed under the trust's ordering rules, and takes a partial charitable deduction for the remainder's present value. Actual results depend on the facts, IRS valuation tables, investment returns and tax rates.

Key Numbers & Limits

ItemLimit or RuleNotes
Annual PayoutAt least 5% and no more than 50%CRAT: of initial value; CRUT: of value revalued annually [1][2].
Minimum Charitable Remainder10% of the initial net fair market valueFor a CRUT, tested for each contribution [1][2].
Maximum TermUp to 20 years, or the life of one or more beneficiaries[1][2]
Trust-Level Income TaxGenerally noneExcept a 100% excise tax equal to unrelated business taxable income [2].
Annual ReturnForm 5227Beneficiaries receive Schedule K-1 (Form 1041) [1].

What Is a Charitable Remainder Trust?

A charitable remainder trust is an irrevocable trust that lets a donor give assets to charity while drawing income for life or for a specific period [1]. The non-charitable beneficiaries — often the donor and a spouse — receive payments for up to 20 years or for life, and at the end, the remaining assets go to one or more charities [1][2].

There are two main types. A charitable remainder annuity trust (CRAT) pays a fixed dollar amount each year, set at the start at no less than 5% and no more than 50% of the initial value; no additional contributions are allowed [1][2]. A charitable remainder unitrust (CRUT) pays a fixed percentage, between 5% and 50%, of the trust's assets revalued each year, so payments rise and fall with the trust's value [1][2]. In both, the value of the charity's remainder must be at least 10% of the property contributed [1][2].

The tax treatment has three parts. The donor gets a partial charitable deduction equal to the present value of the remainder interest [1][3]. The trust is generally exempt from income tax, so it can sell appreciated property without tax at the trust level, but it pays an excise tax equal to any unrelated business taxable income [2]. Beneficiaries are taxed on payments in order: ordinary income first, then capital gains, then other income, then tax-free return of principal [2].

How Does a Charitable Remainder Trust Work?

  1. An attorney drafts an irrevocable trust that meets §664, naming the income beneficiaries, the term, the payout rate and the charitable remainder beneficiary [1][2].
  2. The donor transfers assets — often appreciated stock or real estate — to the trust, with a qualified appraisal where required [3][5].
  3. The trustee may sell the assets and reinvest the proceeds; the sale is generally not taxed at the trust level [2].
  4. The trust pays the annuity or unitrust amount at least once a year and files Form 5227; beneficiaries receive Schedules K-1 [1].
  5. At the end of the term or the last beneficiary's death, the remaining assets pass to the charity [1].

The Good: What Are the Benefits of a Charitable Remainder Trust?

  • An income stream for life or up to 20 years, from assets that will later go to charity [1].
  • A partial charitable deduction in the year of the gift for the remainder's present value [1][3].
  • Appreciated assets can be sold inside the trust without tax at the trust level, which keeps the full sale proceeds invested [2].
  • The gain is spread out to beneficiaries over time through the ordering rules rather than taxed all at once [2].

The Bad: What Are the Drawbacks of a Charitable Remainder Trust?

  • The trust is irrevocable; the donor cannot take the assets back [1].
  • The deduction is only for the present value of the remainder, not the full value of the assets [1][3].
  • Setup, appraisals, trustee fees and annual Form 5227 filings add cost [1].
  • A CRAT's fixed payment does not adjust for inflation, and no more assets can be added to it [1][2].
  • Heirs receive less, because the remainder goes to charity.

The Ugly: What Are the Serious Risks of a Charitable Remainder Trust?

  • Treasury and the IRS issued final regulations in July 2026 identifying certain CRAT transactions — where a trust sells appreciated property and buys a single premium immediate annuity to avoid tax — as listed transactions, with disclosure duties and penalties for participants and material advisors [4][6].
  • A trust that fails the §664 requirements is not a charitable remainder trust, which can cost the donor the charitable deduction and the trust its tax exemption [2].
  • Unrelated business taxable income inside the trust is subject to an excise tax equal to 100% of that income [2].

Who Uses a Charitable Remainder Trust?

Who It's Commonly Used By

  • Owners of highly appreciated stock, real estate or business interests who want income from them [1][2].
  • Retirees seeking a lifetime income stream combined with a charitable goal [1].
  • Donors who want a current deduction while keeping income for a period of years [1][3].

Who It's Generally Not Suited For

  • People who may need access to the principal [1].
  • People whose main goal is passing assets to heirs.
  • Small gifts where setup and annual costs outweigh the benefits.
  • Assets that produce unrelated business taxable income, such as some debt-financed property [2].

What Are the Key Rules & Requirements for a Charitable Remainder Trust?

  • The trust must be a CRAT or CRUT described in §664 for the remainder interest to be deductible [2][3].
  • Payouts must be at least 5% and no more than 50% of the trust's value [1][2].
  • The charitable remainder must be worth at least 10% of the initial net fair market value of the property [1][2].
  • The term is up to 20 years, or the life or lives of the beneficiaries [1][2].
  • Distributions are taxed in order: ordinary income, capital gain, other income, then principal [2].
  • The trust files Form 5227 each year [1].
  • Certain CRAT and annuity transactions are listed transactions that must be disclosed [4][6].

What Are Common Mistakes & Red Flags With a Charitable Remainder Trust?

  • A promoter claiming a CRAT plus a purchased annuity lets the donor avoid tax on the sale proceeds [4][6].
  • A payout rate set so high that the remainder falls below 10% [2].
  • Funding the trust with property already under contract for sale.
  • Treating CRAT annuity payments as mostly tax-free return of principal [2][4].
  • Missing appraisal or Form 5227 requirements [1][5].

Frequently Asked Questions

What Is the Difference Between a CRAT and a CRUT?

A CRAT pays a fixed dollar amount each year, set at the start, and accepts no additional contributions. A CRUT pays a fixed percentage of the trust's assets, revalued every year, so payments change with the trust's value [1][2].

Can I Change or Cancel a Charitable Remainder Trust?

Generally no. A charitable remainder trust is irrevocable [1]. The donor cannot take back the assets once the trust is funded.

How Are Charitable Remainder Trust Payments Taxed?

Payments are taxed in a set order: ordinary income first, then capital gains, then other income, and finally tax-free return of principal [2]. Beneficiaries report them from Schedule K-1 (Form 1041) [1].

What Is the IRS Concern With Charitable Remainder Annuity Trusts?

Final regulations issued in July 2026 identify certain CRAT transactions as listed transactions: appreciated property is transferred to a CRAT, which sells it and buys a single premium immediate annuity, with participants claiming reduced taxable income [4][6]. Participants and material advisors must disclose them and face penalties for failing to do so [4].

Sources

  1. Charitable Remainder Trusts — Internal Revenue Service
  2. 26 U.S. Code §664 — Charitable Remainder Trusts — Legal Information Institute, Cornell Law School
  3. 26 U.S. Code §170 — Charitable, Etc., Contributions and Gifts — Legal Information Institute, Cornell Law School
  4. Treasury, IRS Issue Final Regulations Naming Certain Charitable Remainder Annuity Trust Transactions as Listed Transactions — Internal Revenue Service
  5. Publication 526 (2025), Charitable Contributions — Internal Revenue Service
  6. Charitable Remainder Annuity Trust Listed Transaction (Proposed Rule) — Federal Register

Primary sources only: the Internal Revenue Code, Treasury regulations and official agency guidance. Read how Zentavos researches these reports.