Charitable Remainder Trust: Definition, How It Works, and Types

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A charitable remainder trust (CRT) is an irrevocable, tax-exempt trust that pays income to one or more noncharitable beneficiaries, usually the donor or family members, for life or for a term of up to 20 years, then passes whatever remains to one or more charities. The donor receives a partial income tax deduction when funding the trust, and the trust can sell appreciated assets without paying capital gains tax at the time of the sale. Internal Revenue Code Section 664 governs these trusts, which come in two main forms: the charitable remainder annuity trust (CRAT) and the charitable remainder unitrust (CRUT).

How a charitable remainder trust works

The trustor (also called the grantor or donor) transfers assets into the trust, commonly cash, publicly traded stock, real estate, private business interests or closely held company stock. The trust document then sets four main terms:

1. Who receives income. This can be the trustor, a spouse, children or other named individuals, alone or one after another.
2. How long payments last. The term can be the life or lives of one or more beneficiaries, a fixed term of no more than 20 years, or the shorter of a lifetime and a fixed number of years.
3. How much is paid and how often. The payout must fall between 5% and 50% of trust assets, and the projected charitable remainder must be worth at least 10% of the initial contribution. Payments can be made annually, semiannually, quarterly or monthly.
4. Who receives the remainder. The remainder can go to a public charity or a private foundation, and the trust can name several charities.

A trustee invests the assets, makes the payments and files the trust’s annual information return. The trustor can often serve as trustee, but many people appoint a bank, trust company or the charity itself.

Types of charitable remainder trusts

Charitable remainder annuity trust (CRAT)

A CRAT pays the same dollar amount every year, set as a percentage of the initial fair market value of the assets. Because the payment does not fall when markets do, the trust can deplete faster, so IRS rules also require a CRAT to pass a test showing a very low probability that it will run out before the charity receives anything. No additional contributions are allowed after the trust is funded.

Charitable remainder unitrust (CRUT)

A CRUT pays a fixed percentage of the trust’s value, and the trust is revalued every year. Income rises when assets grow and falls when they decline, so beneficiaries share the investment risk with the charity. Unlike a CRAT, a CRUT accepts additional contributions. Two common variations exist:

• Net income CRUT (NIMCRUT). This version pays the lesser of the stated percentage or the trust’s actual net income. A “makeup” provision can let the trust pay shortfalls in later years. It suits assets that produce little income at first.
• Flip CRUT. This version starts as a net income trust and converts (“flips”) to a standard unitrust after a triggering event, such as the sale of real estate or another hard-to-sell asset.

Tax treatment

The income tax deduction

The donor deducts the present value of the charity’s remainder interest, not the full value of the gift. That value depends on the trust type, the payout rate, the term or the beneficiaries’ ages, and the IRS Section 7520 interest rate in effect at the time of the gift. Higher payouts, longer terms and younger beneficiaries all shrink the remainder and therefore the deduction. The deduction is subject to the usual adjusted gross income limits for charitable gifts. Those limits are lower when the remainder goes to a private foundation. Any unused amount can be carried forward for up to five years.

Capital gains inside the trust

Because the trust is tax-exempt, it can sell appreciated stock or property and reinvest the full proceeds. The gain is not erased, though. It is tracked inside the trust and passes out to beneficiaries over time as they receive payments. One exception applies: if the trust earns unrelated business taxable income, a 100% excise tax applies to that income.

Is income from a charitable remainder trust taxable?

Yes. Each payment is taxed to the beneficiary under a four-tier ordering rule: ordinary income first, then capital gains, then tax-exempt income, and finally a tax-free return of principal. Each tier, including amounts accumulated from prior years, must be used up before the next tier applies.

Estate and gift taxes

Assets in the trust are generally removed from the donor’s taxable estate, and the charitable remainder qualifies for estate or gift tax charitable deductions. When income goes to someone other than the donor or the donor’s spouse, the value of that income interest can be a taxable gift.

Worked example (hypothetical)

Assume a donor contributes stock worth $1,000,000 with a cost basis of $200,000 to a 5% CRUT.

• The sale. The trust sells the stock and reinvests the full $1,000,000. The $800,000 gain is not taxed at the time of sale. Instead, it sits in the capital gains tier.
• Year 1. The payment is 5% × $1,000,000 = $50,000.
• Year 2. Assume the trust is revalued at $1,040,000. The payment becomes 5% × $1,040,000 = $52,000.
• Taxation of payments. If the trust earned $20,000 of dividends and interest in year 1, the first $20,000 of the payment is taxed as ordinary income. The other $30,000 comes from the capital gains tier.

How a charitable remainder trust is used

• Diversifying a concentrated position. Someone holding a single low-basis stock or property can sell it through the trust without an immediate tax bill and spread the proceeds across a portfolio.
• Retirement income. A lifetime CRUT or CRAT can turn a non-income-producing asset into regular payments.
• Estate planning. Removing assets from the estate can reduce estate taxes and keep them out of probate, and the irrevocable trust can give some protection from the donor’s creditors, depending on state law.
• IRA funding. The SECURE 2.0 Act, part of the Consolidated Appropriations Act, 2023, allows a one-time qualified charitable distribution from an IRA to a CRAT or CRUT, with a limit of $50,000 as enacted, now indexed for inflation. That trust must be funded only with qualified charitable distributions, and special rules apply to how its payments are taxed.

Limitations

• Irrevocability. The trustor cannot take back the principal, and beneficiaries receive only the payments set in the trust document, although a beneficiary may be able to give their income interest to the charity early. Changing terms is difficult and may require court approval or the consent of the charitable beneficiaries.
• Less wealth for heirs. The remainder goes to charity, not family. Some donors pair a CRT with life insurance to replace that value for heirs.
• Cost and complexity. Legal drafting, appraisals for non-cash assets, annual tax filings and ongoing trustee work can outweigh the benefits for smaller gifts.
• Payout constraints. For young beneficiaries, a lifetime trust may fail the 10% remainder test unless the payout rate is set low or a fixed term is used.

How it differs from similar tools

• Charitable lead trust. This structure is the reverse of a CRT: the charity receives income first, and the remainder goes to family.
• Charitable gift annuity. This is a contract with a single charity, backed by that charity’s assets. It does not create a separate trust, and the donor has no say over investments.
• Donor-advised fund. The donor receives a full deduction at the time of the gift but no income stream.
• Revocable living trust. The donor can change or cancel it, but its assets remain in the donor’s taxable estate. It provides no charitable deduction.

FAQs

The Bottom Line

A charitable remainder trust fits donors who hold appreciated stock or property, want steady income, and plan to leave part of their wealth to charity. The trust can sell assets without an immediate capital gains bill and provides a partial deduction, but the gift is permanent and heirs receive less. Legal, appraisal and trustee costs can outweigh the benefits for smaller gifts, so the structure works best for larger contributions.