Charitable Remainder Trusts — CRATs, CRUTs, and the Split-Interest Trust Strategy

A charitable remainder trust (CRT) is a tax planning device and charitable vehicle that lets you sell a highly appreciated asset — a piece of real estate, stock in a family business, low-basis securities — without immediately recognizing the capital gain. You transfer the asset to the trust, the trust sells it tax-free (the trust itself pays no capital gain on the sale), and then the trust pays you (or you and your spouse) an income stream for life or a term of years. When you die or the term ends, whatever is left in the trust goes to charity. The IRS allows you to take a charitable deduction today for the present value of the charitable remainder — the share of the trust that will eventually pass to charity. The strategy combines income tax savings, capital gain deferral, estate tax planning, and charitable giving into a single structure. Section 664 of the Internal Revenue Code governs both the two main flavors — the charitable remainder annuity trust (CRAT), which pays a fixed dollar amount, and the charitable remainder unitrust (CRUT), which pays a fixed percentage of trust value recalculated annually.

Current Law (2026)

Legal Authority

• 26 U.S.C. § 664(a) — General rule: this section applies to charitable remainder annuity trusts and charitable remainder unitrusts; these trusts follow special tax rules under § 664, overriding other subchapter J trust provisions
• 26 U.S.C. § 664(b) — Taxation of distributions: amounts distributed are characterized in the beneficiary's hands in tiers — (1) first, as ordinary income to the extent of trust income for the year and undistributed income from prior years; (2) second, as capital gain to the extent of trust capital gain; (3) third, as other income; (4) fourth, as a return of corpus (tax-free)
• 26 U.S.C. § 664(c) — Trust exempt from tax: a CRT is not subject to income tax for any year — with the exception that a CRT with unrelated business taxable income pays an excise tax equal to the UBTI amount; this ensures the trust cannot shelter ordinary business income while paying out to the donor
• 26 U.S.C. § 664(d)(1) — Charitable remainder annuity trust (CRAT): a trust paying a fixed sum (5%–50% of initial FMV) at least annually to one or more non-charitable beneficiaries for a term of years (≤20) or for lives; no additional contributions allowed; remainder passes to charity on termination
• 26 U.S.C. § 664(d)(2) — Charitable remainder unitrust (CRUT): a trust paying a fixed percentage (5%–50%) of the net fair market value of trust assets, revalued annually, at least once per year; unlike a CRAT, additional contributions may be made; remainder passes to charity
• 26 U.S.C. § 664(d)(1)(D) / (d)(2)(D) — 10% remainder test: for both CRATs and CRUTs, the present value of the charitable remainder (the portion expected to pass to charity) must be at least 10% of the net fair market value of the assets transferred at the time of funding; this test prevents trusts that are effectively 100% for the donor's benefit from qualifying as charitable remainder trusts

How CRTs Work in Practice

The core mechanic: You own appreciated property — real estate bought years ago for $200,000 now worth $2 million, or a concentrated stock position with a low cost basis. If you sell it directly, you pay capital gain tax on the $1.8 million gain (potentially 20% federal plus 3.8% NIIT plus state taxes). If you instead transfer the property to a CRT, the trust sells it — and because the trust is a tax-exempt entity under § 664(c), it pays no capital gain on the sale. The entire $2 million stays in the trust, fully invested. You then receive an annual income stream from the full $2 million, not the after-tax proceeds.

CRAT vs. CRUT:

• CRAT (Charitable Remainder Annuity Trust): You specify a fixed dollar amount — say, $80,000/year. That amount is calculated at the outset as a percentage of the initial trust value (must be 5%–50%). If the trust grows, your payout stays $80,000. If the trust shrinks, you still receive $80,000 (until the corpus runs out). You cannot add more assets to a CRAT after initial funding.
• CRUT (Charitable Remainder Unitrust): You specify a fixed percentage — say, 5%. Each year, the trust assets are revalued, and you receive 5% of that year's value. If the trust grows to $3 million, you receive $150,000 that year. If it falls to $1.5 million, you receive $75,000. CRUTs provide inflation protection and allow additional contributions.

The charitable deduction: When you fund the CRT, you receive an income tax deduction equal to the present value of what the charity will eventually receive. The IRS uses the "§ 7520 rate" — a monthly published interest rate equal to 120% of the applicable federal rate — to discount the future charitable remainder. At low interest rates (low § 7520 rates), the present value of the far-future charitable remainder is smaller, reducing the deduction. At high § 7520 rates, the deduction is larger. The deduction is limited to 30% of AGI for appreciated property transferred to a CRT (excess carries forward 5 years).

The tier system for distributions: When you receive payments from the CRT, they're taxed based on what type of income the trust has accumulated. The trust must pay out in order: (1) ordinary income first, (2) capital gain second, (3) tax-exempt income third, (4) principal (corpus) last. This means if the trust sold the appreciated asset for $2 million of capital gain, that gain sits in "tier 2" and eventually flows out to you as capital gain — at favorable 20% rates — over time, rather than all at once. This is the deferral benefit: the gain is still taxable to you, but spread over the years of the trust term rather than recognized immediately.

CRUT Variations

The CRUT has several statutory variants:

• Standard CRUT: pays the fixed percentage every year regardless of trust income
• Net Income CRUT (NICRUT): pays the lesser of the fixed percentage or the trust's actual income; useful when the trust holds illiquid assets that generate little current income
• Net Income with Makeup CRUT (NIMCRUT): pays the lesser of the fixed percentage or actual income, but tracks a deficiency account — if trust income is below the target payout in one year, the trust can "make up" the shortfall in later years when income exceeds the target; used in retirement planning to defer income to post-retirement years
• Flip CRUT: starts as a NICRUT and "flips" to a standard CRUT upon a triggering event (such as the sale of a specific asset or the donor reaching a certain age); used when funding the trust with illiquid real estate

How It Affects You

If you're approaching the sale of a highly appreciated asset: Run the numbers before you close. Example: you own rental property bought for $200,000, now worth $2 million. Direct sale generates $1.8M in capital gain — at 20% federal LTCG + 3.8% NIIT + 9.3% California state tax (if applicable), the combined federal/state tax on gain could be $592,000, leaving $1.4M to invest. Fund a CRT instead: the trust sells the property for $2M tax-free, invests the full $2M, and pays you 5% annually — that's $100,000/year from a $2M base vs. $70,000–80,000/year if you'd invested the $1.4M after-tax proceeds. You also receive an immediate income tax deduction for the present value of the charitable remainder (typically 20–40% of the initial transfer, depending on the § 7520 rate, your age, and the payout rate). The tradeoff is real: the $2M never comes back to your heirs — it goes to charity. A CRT is not a wealth preservation tool; it's a charitable income tool that front-loads the tax benefit. It makes the most sense when you (1) have a specific charitable institution or DAF you'd fund anyway, (2) want income for life rather than a lump sum, and (3) are in a high marginal bracket where the deduction and gain deferral have maximum value. A Flip CRUT is the preferred structure when funding with illiquid real estate: it starts as a Net Income CRUT (paying little income while the property is unsold) and flips to a standard CRUT (paying the full percentage) once the property is sold. This avoids the trust being forced to make distributions before the asset converts to cash.

If you're doing estate planning with a large taxable estate: The estate tax exemption is $13.99M per person in 2025 (expiring to approximately $7M per person after 2025 if TCJA sunsets — verify current law). Assets transferred to a funded CRT are removed from your taxable estate at the full fair market value on the date of transfer — not your basis. For an estate where the CRT transfer pushes the remaining assets below the estate tax threshold, the saving is the estate tax rate (40%) on the entire transferred amount. The classic pairing: CRT + Irrevocable Life Insurance Trust (ILIT). You transfer $5M in appreciated real estate to a CRT; the CRT pays you $200,000–250,000/year in income; you use a portion of that income to pay premiums on a life insurance policy held in an ILIT — effectively replacing the wealth that passes to charity rather than heirs. The life insurance death benefit (income-tax-free and outside the estate if properly structured) provides heirs with equivalent wealth, while the CRT income funds the premiums. This "wealth replacement" strategy lets you give to charity, reduce estate tax, and leave heirs whole — but it requires significant life insurance underwriting eligibility and premium payments, so it works best for donors in their 50s and 60s in good health.

If you're charitably inclined and want flexibility in which charity ultimately benefits: Name a donor-advised fund (DAF) as the CRT remainder beneficiary rather than a specific charity. You receive the charitable deduction now (the present value of the remainder interest) — and after the trust term, the remainder flows to the DAF. From the DAF, you (or your heirs, if you designate them as DAF advisors) can direct grants to any qualifying charity over time. This preserves all the CRT tax benefits while keeping your charitable flexibility open for decades. Alternatively, if your charitable focus is likely to evolve, you can name your own private foundation as remainder beneficiary and use the foundation's grant-making flexibility to adapt to changing priorities. Both structures let the CRT function as an irrevocable commitment to charitable giving while leaving the final destination flexible. The IRS requires that the remainder beneficiary be a "qualified organization" under § 170(c) — a DAF sponsor organization, private foundation, or public charity all qualify.

If you're in your 40s or 50s and want to reduce taxable retirement income (NIMCRUT strategy): A Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT) can function as a tax-deferred retirement income account with a charitable component. The structure: you fund the trust now (say, age 48) with a low-basis stock block worth $1M. The trust sells the stock and invests in growth assets that produce minimal current income (index funds, growth stocks). Each year, the trust pays out the lesser of 5% of trust value or actual net income — because growth investments produce little income, the payout is near-zero during the accumulation years. The difference accumulates as a "makeup account" — the amount of missed distributions the trust owes you when income exceeds the percentage. At retirement (say, age 68), you reallocate trust assets to income-producing investments; the trust now pays out the current-year percentage plus makeup amounts — potentially $150,000–200,000/year from a $2M trust that grew tax-free for 20 years. This shifts income from your high-bracket working years (37% marginal) to lower-bracket retirement years. The complexity: the NIMCRUT document must be drafted precisely to handle the makeup account correctly; the flip point (from low-income to high-income investment strategy) must match the trust terms; and IRS auditors scrutinize NIMCRUTs for manipulated payout timing. Work with an attorney who is a fellow of the American College of Trust and Estate Counsel (ACTEC) — find members at actec.org — who has specific experience with NIMCRUTs.

State Variations

CRTs are governed by federal law for income and estate tax purposes, but trust administration — trustee duties, investment standards, cy pres (purpose modification), and trust accounting — is governed by state law. Most states follow the Uniform Trust Code or have analogous trustee standards. California has additional state-level charitable trust registration requirements (administered by the California Attorney General) that apply to CRTs with California-resident beneficiaries. New York similarly requires registration of charitable trusts with the Attorney General's Charities Bureau. State income tax treatment of CRT distributions generally mirrors federal — ordinary income in the ordinary income tier, capital gain in the capital gain tier — but states vary in their treatment of trust income sourced to the state if the trust, trustee, or beneficiary is located elsewhere.

Pending Legislation

No major changes to § 664 are pending. Proposals to restrict CRT benefits — tightening the 10% remainder test, reducing the maximum payout percentage, or limiting the capital gain deferral benefit — have been raised in various tax reform discussions but not advanced in recent Congresses. Legislation to clarify the treatment of CRTs invested in S corporation stock and cryptocurrency has been proposed but not enacted.

Recent Developments

IRS regulations issued in 1998 and updated since remain the core guidance on CRT requirements. The IRS has issued guidance on specific CRUT variants — particularly flip CRUTs — and on the treatment of UBTI in CRTs. The 2017 TCJA's changes to the § 7520 rate environment (driven by rising interest rates in 2022–2024) significantly affected CRT economics: higher § 7520 rates produce larger charitable deductions (better for the donor's current deduction) but reduce the present value of the donor's income stream from a CRUT. At § 7520 rates above 5%, many long-term CRTs struggle to pass the 10% remainder test if the payout rate is also high, requiring careful calibration of payout rates. The IRS updates § 7520 rates monthly, and rate-sensitive CRT planning must consider the current rate environment at the time of funding.

• § 7520 rate declining in 2025 as Fed cuts rates — CRT deduction mechanics shift: The Federal Reserve cut rates three times in late 2024 (September, November, December), reducing the federal funds rate from 5.25–5.50% to 4.25–4.50%. The § 7520 rate — set at 120% of the midterm applicable federal rate — peaked near 6.0% in 2023 and declined to approximately 5.0–5.4% through early 2025. At lower § 7520 rates, the present value of the charitable remainder decreases, which reduces the charitable deduction available when funding a CRT. For donors who delayed CRT funding during the high-rate period expecting to capture a large deduction, the window for maximum deductions has partially closed. The 10% remainder test is generally easier to satisfy at lower payout rates when § 7520 rates are lower — run the actuarial calculation at the current month's § 7520 rate (published monthly on irs.gov) before funding.
• OBBBA extends TCJA — high estate tax exemption makes CRT-ILIT strategy less urgent for mid-size estates (2025): The One Big Beautiful Bill Act would make the TCJA estate tax exemption permanently high — $13.99 million per individual ($27.98 million per married couple) as of 2025, indexed for inflation. If enacted, the urgency of CRT-ILIT "wealth replacement" strategies diminishes for estates under the exemption amount: if the CRT-funded estate is fully below the exemption, no estate tax is owed regardless of the CRT transfer, removing the estate tax motivation. For estates well above the exemption — large farm, business, or real estate portfolios exceeding $14–28 million — CRTs remain powerful planning tools combining capital gain deferral, income stream, and charitable intent. The income tax deduction and capital gain deferral benefits of CRTs are completely unaffected by OBBBA.
• Trump IRS and DOGE — no CRT rule changes, longer processing times (2025): The Trump IRS under DOGE-driven workforce reductions has not changed CRT rules or IRS model documents (Rev. Procs. 2005-52 through 2005-59 remain the IRS-approved CRT templates). However, DOGE IRS staffing cuts have lengthened processing times for PLR (Private Letter Ruling) requests, including unusual CRT structures that require IRS blessing before funding. If you're planning a non-standard CRT (unusual assets, hybrid structure, crypto funding), factor in longer PLR timelines. Standard CRTs using IRS model language do not require a PLR and are unaffected by processing delays.