Trust Law/Level V · Tax and legacy/5.3 Generations and charity/Lesson 5
Charitable remainder trusts
How a US charitable remainder trust pays a set amount to the donor or others for a time, then passes what is left to charity, and how it is taxed.
Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.
The lean path
The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.
- Under the 2026 basic exclusion of $15,000,000, a CRT is not needed for estate tax; giving appreciated stock held over a year straight to a public charity deducts market value with no capital gains tax, up to 30% of AGI with a 5-year carryover.
- A CRT lets the trustee sell appreciated assets with no tax at trust level and spreads the gain over years of payments, taxed in tiers (§664(b)); the payout must be 5% to 50% and the charity’s remainder at least 10% of the initial value.
- From age 70½, a one-time qualified charitable distribution of up to $55,000 in 2026 can fund a CRT directly from an IRA (IRC §408(d)(8)(F)), excluded from income; it is a single lifetime election and counts toward the $111,000 annual QCD limit.
- A higher §7520 rate makes a CRAT’s remainder, and so the deduction, larger: 5.6% in October 2026, or either prior month’s rate under §7520(a); the trust files Form 5227 every year, and the remainder is given up permanently.
MaterialsThe IRS page on charitable remainder trustsThe text of IRC §664, free on law.cornell.eduLesson 5.2.3, on annuity trusts and unitrusts
Wonder
- What is the difference between a fixed annual amount and a fixed percentage of the trust’s value?
- Why must a set share of the trust’s value be expected to reach charity?
- Does selling appreciated property inside the trust mean the gain is never taxed?
Explore
- A charitable remainder trust (CRT) is an irrevocable US trust under IRC §664, a rule that dates from the Tax Reform Act of 1969. It pays an amount at least once a year to one or more non-charitable beneficiaries, often the donor or family members, for their lives or for a term of up to 20 years. When the payments end, the remaining property goes to charity. A CRT can be created during life or by will.
- There are 2 forms. A charitable remainder annuity trust (CRAT) pays a fixed dollar amount each year, set when the trust is created. A charitable remainder unitrust (CRUT) pays a fixed percentage of the trust’s value, revalued every year, so payments rise and fall with the assets. For both, the IRS says the rate must be at least 5% and no more than 50%: of the initial value for a CRAT, and of the annually revalued assets for a CRUT. A trust outside that range does not qualify as a CRT.
- IRC §664 also requires that the value of the remainder passing to charity, measured when property is placed in the trust, be at least 10% of the property’s initial net fair market value. The calculation uses IRS actuarial tables and the §7520 interest rate. Higher payout rates, longer terms and younger beneficiaries all shrink the remainder, so this test limits how much a trust can pay out to individuals.
- A donor who funds a CRT can generally claim a charitable income-tax deduction, but only for the present value of the charity’s remainder interest, not the full amount transferred. Annual deduction limits under IRC §170 also apply, and they can differ depending on the kind of property and whether the remainder charity is a public charity or a private foundation.
- A CRT itself is generally exempt from federal income tax, so when the trustee sells appreciated property, no tax is due at the trust level at the time of sale. The gain is not erased, however. Under §664(b), payments to beneficiaries are taxed in tiers: first as ordinary income, then capital gain, then other income such as tax-exempt income, and only last as a tax-free return of principal. A trust with unrelated business taxable income owes an excise tax equal to 100% of that income.
- CRTs file an annual information return, Form 5227, and beneficiaries receive a Schedule K-1 showing the character of their payments. Because the trust is irrevocable and the remainder must go to charity, the donor permanently gives up the remainder. This lesson describes how CRTs work under US federal law; it does not suggest using one, and state law and adviser costs vary.
Key facts
- Charitable remainder trusts are governed by IRC §664, from the Tax Reform Act of 1969.
- A CRT pays non-charitable beneficiaries for life or for a term of up to 20 years, then the remainder goes to charity.
- A CRAT pays a fixed dollar amount; a CRUT pays a fixed percentage of the trust’s value, revalued each year.
- The payout rate must be at least 5% and no more than 50%, and the charity’s remainder must be worth at least 10% of the initial value.
- The donor’s income-tax deduction is limited to the present value of the charity’s remainder interest.
- A CRT is generally income-tax exempt, but payments are taxed to beneficiaries in tiers: ordinary income, capital gain, other income, then principal.
Exercise nine, six, three, one
9CollectList up to 9 features of a charitable remainder trust you are reading about (some will have fewer), such as its type, payout rate, term, beneficiaries, remainder charity, assets, trustee and the deduction claimed.
6ClusterSort them into 6 categories: trust type, payments, people, charity, assets, and tax figures.
3DistillReduce the 6 categories to 3 groups: features fixed by §664, features chosen in the trust document, and features you would check with a tax adviser.
1CrystallizeWrite 1 sentence explaining, in your own words, why selling appreciated property inside a CRT defers tax rather than removing it.
Fact check
Dates, figures and claims checked against the published sources listed below.