Charitable Remainder Trust (CRT): Income for Life, Charity at the End, Tax Deduction Today (2026)

The §664 CRT Framework

IRC §664 creates a special trust category called a "charitable remainder trust" with specific requirements for the trust structure. A qualifying CRT is generally exempt from federal income tax on its trust-level income under §664(c), provided the trust complies with the structural requirements. Distributions to non-charitable beneficiaries are taxed at the beneficiary level under the §664(b) four-tier characterization system.

The CRT structure provides three principal tax benefits to the grantor: (a) immediate income tax deduction under IRC §170 for the present value of the charitable remainder interest, (b) deferral of capital gains tax on appreciated property contributed to the trust (because the trust is generally tax-exempt and can sell the property without recognition), and (c) removal of the contributed assets from the grantor's gross estate under IRC §2055 (charitable estate tax deduction available for the remainder interest, with the income interest exiting the estate at the income beneficiary's death).

CRAT vs CRUT: The Two CRT Variants

A Charitable Remainder Annuity Trust (CRAT) under IRC §664(d)(1) pays a fixed dollar amount each year. The annuity must equal at least 5% of the initial fair market value of the trust assets. The annuity does not change with trust performance; the grantor knows exactly what income they will receive. CRAT funding contributions are not permitted after initial funding (the annuity is fixed at funding).

A Charitable Remainder Unitrust (CRUT) under IRC §664(d)(2) pays a fixed percentage of the trust's annual fair market value, with the percentage between 5% and 50% (in practice, typically 5% to 7%). The annual payment fluctuates with trust performance: high trust performance produces higher income; low trust performance produces lower income. The CRUT can receive additional contributions after initial funding (subject to gift tax consequences for any added remainder interest value).

CRUTs are more common in practice because of (a) the additional contribution flexibility, (b) the ability to grow the income stream with trust performance, and (c) variations such as the Net Income With Make-Up CRUT (NIMCRUT) under §664(d)(3) that defer income payments until the trust generates sufficient income, then make up missed payments. NIMCRUTs are useful for funding with non-income-producing assets (raw land, undeveloped real estate, illiquid investments) where the trust may not have current income to pay a fixed percentage.

The 10% Remainder-Interest Test

Both CRATs and CRUTs must satisfy the 10% remainder-interest test under §664(d)(1)(D) (CRAT) and §664(d)(2)(D) (CRUT). The present value of the charitable remainder interest, calculated using IRS actuarial tables and the §7520 rate at funding, must be at least 10% of the value of property contributed.

The 10% test is the principal mathematical constraint on CRT structuring. For a CRAT, the test is satisfied if the payout rate is low enough, the term is short enough, or the income beneficiary is old enough that the actuarial remainder interest is at least 10% of the contribution. For a CRUT, the test is somewhat easier to satisfy because the variable payout adjusts with trust assets, and the actuarial assumption of trust growth (the §7520 rate) is used to project the remainder.

At a 5% §7520 rate, a CRAT for a 70-year-old grantor paying a 5% annuity for life can typically satisfy the 10% test. A CRAT for a 50-year-old grantor (longer life expectancy means more years of annuity payment, larger present value of annuity, smaller remainder) may fail the 10% test at a 5% payout, requiring a lower payout rate or a fixed term shorter than life. Practitioners run the actuarial calculation as part of the CRT design process; tools from the IRS or commercial planning software automate the computation.

The Capital Gains Tax Deferral Benefit

The CRT's principal financial benefit for many grantors is the deferral of capital gains tax on contributed appreciated property. A grantor with a $1,000,000 stock position purchased for $100,000 has a $900,000 unrealized capital gain. Selling the stock directly produces approximately $214,000 of federal capital gains tax ($900,000 × 23.8%, including the 3.8% net investment income tax) and leaves $786,000 to reinvest.

Contributing the stock to a CRT and letting the CRT sell it: the CRT pays no capital gains tax under §664(c). The full $1,000,000 is available to reinvest within the CRT. The CRT pays out (say) 5% per year = $50,000 to the grantor; the grantor pays income tax on the $50,000 under the four-tier characterization rules (initially as capital gain because the trust has $900,000 of recognized gain in its capital gain "bucket"). The grantor effectively spreads the recognition of the capital gain over many years of CRT distributions rather than recognizing it all in the year of sale.

The remainder ultimately passes to charity, so the inflated trust corpus (relative to what an outright sale would have produced) ultimately funds the grantor's charitable goal. Combined with the immediate income tax deduction for the present value of the remainder, the CRT provides a tax-efficient combination of (a) immediate deduction, (b) deferred gain recognition, (c) lifetime income, and (d) ultimate charitable benefit.

The Four-Tier Distribution Characterization

Under IRC §664(b), distributions from a CRT to non-charitable beneficiaries are characterized in a specific order, with each tier exhausted before moving to the next:

1. Tier 1: Ordinary income (current and accumulated). Taxed at ordinary income rates.
2. Tier 2: Capital gains (current and accumulated). Taxed at long-term capital gains rates (or short-term if applicable).
3. Tier 3: Tax-exempt income (current and accumulated). Not taxed (typically municipal bond interest).
4. Tier 4: Return of corpus. Not taxed (return of the grantor's basis).

The CRT's character is therefore "worst first": ordinary income is distributed before capital gains, which is distributed before tax-exempt income. This means CRT distributions tend to be taxable to the income beneficiary as long as the trust has any current or accumulated ordinary income or capital gains. The four-tier system pushes the beneficiary into recognizing the full tax character of the trust's income over the trust's life.

Wealth Replacement with an ILIT

One common CRT use is "wealth replacement" planning. The CRT removes assets from the grantor's estate and ultimately passes them to charity. The grantor's heirs receive the income stream during the trust term but no remainder. To replace the wealth that would have passed to heirs, the grantor often funds an Irrevocable Life Insurance Trust (ILIT) with a life insurance policy on the grantor's life, funded with the income tax savings from the CRT charitable deduction.

The combined structure: (a) the CRT receives the appreciated asset, defers capital gains, pays income to the grantor for life, and funds the charity at death; (b) the ILIT receives life insurance death benefit at the grantor's death, outside the gross estate, and passes wealth to heirs. The combined plan transfers value to both charity and heirs with significant tax efficiency. See our ILIT page for the wealth replacement structure.

CRT Restrictions and Caveats

CRT planning is subject to specific restrictions: (a) the trust must comply with the private foundation excise tax provisions of IRC §§4940-4948 (self-dealing, excess business holdings, etc.); (b) the trust cannot pay anything to the non-charitable beneficiary other than the annuity or unitrust amount; (c) the trust cannot make distributions to charity during the term (only at the end); (d) the trust cannot accumulate income for later distribution to non-charitable beneficiaries (subject to NIMCRUT rules for delay).

CRT income to non-charitable beneficiaries that exceeds the annuity or unitrust amount creates a private foundation excise tax problem. CRT distributions to a beneficiary who is a "disqualified person" (the grantor, certain family members, etc.) outside the annuity stream are subject to harsh excise taxes.

CRTs are generally irrevocable; modifications during the term are limited. A "spigot CRUT" or "flip CRUT" can be designed to convert from a NIMCRUT to a standard CRUT upon a specified triggering event (sale of the contributed property, beneficiary's retirement, etc.); these conversions are permitted but must be drafted into the original trust. Modifications not contemplated in the original trust generally require court approval and may have transfer-tax consequences.

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