Charitable Remainder Trust

A Charitable Remainder Trust in the United States creates a fiduciary arrangement under which a trustee holds and distributes assets for the beneficiaries.

Two primary forms of Charitable Remainder Trusts are recognized under IRC Section 664 and the related Treasury Regulations. A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount annually — calculated as a percentage (minimum 5%, maximum 50%) of the initial net fair market value of the trust's assets at the time of creation. A CRAT is appropriate when the grantor wants certainty of income amount regardless of trust performance, but additional contributions to a CRAT after its establishment are prohibited under Treasury Regulation § 1.664-2(b). A Charitable Remainder Unitrust (CRUT) pays a fixed percentage (minimum 5%, maximum 50%) of the trust's net fair market value, revalued each year. A CRUT's income payments fluctuate with trust performance — rising when the portfolio grows and falling when it contracts. Unlike a CRAT, a CRUT permits additional contributions after establishment.

For either type of CRT to qualify under IRC Section 664, the IRS requires that the present value of the charitable remainder interest — computed using the Applicable Federal Rate (AFR) published monthly by the IRS under IRC Section 7520 — must equal at least 10% of the net fair market value of the assets transferred to the trust on the date of contribution. If this 10% minimum is not met, the trust does not qualify as a CRT, and the tax benefits are not available. CRT planning therefore involves careful mathematical modeling using the grantor's age, the chosen payout rate, the applicable AFR, and the expected term.

The charitable deduction available to the grantor in the year of contribution equals the present value of the remainder interest — the portion of the contributed assets mathematically projected to pass to charity. For transfers of appreciated property such as publicly traded stock or real estate, the trust can sell the property and reinvest the proceeds without recognizing capital gain at the time of sale. Instead, the capital gain is recognized by the trust beneficiary over time as trust distributions are received, following the four-tier ordering rules under Treasury Regulation § 1.664-1(d)(1): ordinary income, capital gain (short-term before long-term), other income, and return of principal.

A CRT must be drafted with precise compliance with the IRS model trust language provided in Revenue Procedures 2003-53 through 2003-60, which set out approved provisions for CRAT and CRUT documents. Trusts drafted using IRS model language receive a presumption of qualification, while trusts using non-standard language are subject to heightened IRS scrutiny. Every CRT must file IRS Form 5227 (Split-Interest Trust Information Return) annually and provide income beneficiaries with Schedule K-1 reporting the character of trust distributions.

A Charitable Remainder Trust is most valuable when an individual or married couple holds highly appreciated assets, wants to generate income from those assets, has charitable intent, and is seeking to minimize income and estate taxes — making the CRT appropriate at several specific life and wealth planning junctures.

A CRT is most tax-efficient when used to sell appreciated, low-yielding assets such as concentrated stock positions, rental real estate with a low tax basis, or farmland held for decades. Selling such assets outright would trigger immediate federal capital gains tax at rates up to 23.8% (20% long-term capital gains plus 3.8% Net Investment Income Tax under IRC Section 1411). Transferring the asset to a CRT before the sale defers that capital gain over the trust's distribution period, allowing the full proceeds to be invested and compounded before taxes are paid.

Business owners planning to sell a closely held company frequently use CRTs before the sale closes. Transferring business interests to a CRUT before a sale allows the owner to receive income from the proceeds, defer capital gains, and support a charitable cause, while the business is acquired and the CRT invests the sale proceeds.

Retired professionals and investors who have accumulated significant retirement assets in IRAs or 401(k) plans occasionally use CRTs in estate planning contexts, though transferring IRA assets to a CRT requires careful tax analysis because the rollover of pre-tax IRA funds to a CRT causes immediate income recognition.

High-net-worth individuals subject to the federal estate tax — applicable to taxable estates exceeding $13.61 million per individual as of 2024 under IRC Section 2010(c) — use CRTs to remove appreciated assets from the taxable estate while generating a current income stream. Assets held in a CRT are not included in the grantor's gross estate under IRC Section 2036, subject to specific requirements.

Philanthropically motivated donors who have identified specific charitable causes — universities, hospitals, religious organizations, community foundations — use CRTs to make a meaningful charitable gift while retaining income during their lifetime. The named charity may provide administrative support to the donor in establishing and funding the CRT as part of its gift planning program.

A Charitable Remainder Trust agreement must comply with precise statutory and regulatory requirements under IRC Section 664 and the related Treasury Regulations to qualify for the associated tax benefits, and must address the full range of administrative and trustee obligations.

The grantor and initial trustee identification section names the individual or individuals creating the trust (the grantor or settlor), the trustee (which may be the grantor, an independent trustee, a bank trust department, or a community foundation), and the initial charitable remainder beneficiary. The grantor may retain the power to change the charitable remainder beneficiary under Treasury Regulation § 1.664-3(a)(4), provided the replacement is a qualified IRC § 501(c)(3) organization.

The trust type election — CRAT or CRUT — must be made explicitly. For a CRAT, the fixed annuity amount must be stated as a specific dollar amount or as a percentage of the initial net fair market value. For a CRUT, the unitrust percentage must be stated. The chosen payout rate must result in a charitable remainder interest of at least 10% of the initial contribution under the IRC Section 7520 test.

The income interest term states how long income payments will be made — either for the lifetime of one or more named individuals, or for a fixed term not to exceed 20 years. Both a lifetime term and a fixed term cannot be combined (except in some CRUT variants). For lifetime income interests, the trust must include the named income beneficiaries' dates of birth to allow computation of the present value of the charitable remainder.

The payment schedule specifies how frequently income payments are made — annually, semi-annually, quarterly, or monthly. IRS model trust language under Revenue Procedure 2003-53 requires that annual payments be made no later than 105 days after the close of the taxable year, and more frequent payments are prorated accordingly.

The trustee powers section, drawn from Treasury Regulation § 1.664-1(a)(3), grants the trustee broad investment authority: to buy, sell, exchange, lease, and manage trust assets; to invest in publicly traded securities, real estate, and other permitted investments; to retain contributed property; to distribute required payments to income beneficiaries; and to maintain records sufficient for IRS Form 5227 filing and K-1 preparation.

The charitable remainder beneficiary designation names the qualified IRC § 501(c)(3) organization(s) that will receive the trust assets upon termination. The trust should confirm the charitable organization's current tax-exempt status and EIN, and should address what happens if the named charity loses its tax-exempt status or ceases to exist before the trust terminates.

The spendthrift clause protects income beneficiaries from assignment of their income interest and from creditor claims against future distributions, consistent with IRS model trust language requirements.

The trustee compensation, accounting, and annual reporting obligations must be addressed, including the obligation to file IRS Form 5227 by April 15 of each year and to provide Schedule K-1 to each income beneficiary showing the character of distributions under the four-tier system.