How does a charitable remainder trust work?
Legitimate when designed and run correctly
A charitable remainder trust under IRC §664 pays you an annuity or unitrust amount of 5% to 50% a year for life or up to 20 years, and at least 10% of the initial value must pass to charity. The trust itself is exempt from income tax, so a sale inside the trust is not taxed when it happens; instead, payments to you carry out the trust's income and gains under the §664(b) ordering rules.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- The trust is exempt, but gains are deferred, not excluded: they are taxed to you as payments carry them out.
- The annual payout must be at least 5% and no more than 50% of the trust's value, and the charitable remainder must be worth at least 10%.
- You get an upfront deduction for the present value of the remainder, subject to AGI limits.
- Certain arrangements in which a CRAT buys a single premium immediate annuity are listed transactions under Treas. Reg. §1.6011-15.
- The trust is irrevocable.
What it is
A charitable remainder trust is an irrevocable split-interest trust. You, or other people you name, receive payments for life or a term of up to 20 years; when the term ends, the remaining assets go to one or more charities. A charitable remainder annuity trust (CRAT) pays a fixed dollar amount; a charitable remainder unitrust (CRUT) pays a fixed percentage of the trust's value, revalued each year.
People often fund these trusts with appreciated property they plan to sell, because the trust can sell without paying tax at that time and reinvest the full proceeds.
What the law says
IRC §664(c)(1) provides that a charitable remainder annuity trust or unitrust is not subject to income tax for the year. Under §664(d)(1) and (d)(2), the annual payout must be at least 5% and no more than 50% of the trust's initial or annual value, and the value of the charitable remainder, determined under §7520, must be at least 10% of the initial net fair market value of the contributed property.
Section 664(b) and Treas. Reg. §1.664-1(d) set the character of payments to the beneficiary: first ordinary income (current and accumulated), then capital gain, then other income such as tax-exempt income, and finally a return of principal. A trust that sells appreciated property therefore passes that gain out to you over time as part of your payments. If the trust has unrelated business taxable income, §664(c)(2) imposes a 100% excise tax on that income.
Requirements and tests
For a valid trust and deduction:
- Payout of at least 5% and no more than 50%, paid at least annually.
- Remainder value of at least 10% of the initial contribution, computed with the §7520 rate.
- For a CRAT, a probability of exhaustion no greater than 5%, under Rev. Rul. 77-374 and later guidance.
- A term of the lives of named individuals or a fixed term of no more than 20 years.
- No prearranged sale: if a buyer is already legally bound before the transfer, the gain can be taxed to you.
- Annual Form 5227 filing by the trust and Schedule K-1 reporting to beneficiaries.
- The charitable deduction is limited to 30% of AGI for appreciated long-term property given to a trust whose remainder goes to a public charity, or 20% if a private foundation can receive it.
How it works
You transfer appreciated property to the trust and receive a charitable deduction for the present value of the remainder, computed with IRS actuarial tables and the §7520 rate for the month of the gift. The trust sells the property without paying tax, reinvests the full proceeds, and pays you the required amount each year. Each payment is taxed to you based on the trust's accumulated income and gains, so a large sale gain is typically taxed over many years at capital gain rates.
Because more capital stays invested, your payments are based on the pre-tax value. The trade-offs are that you give up the principal, the charity receives the remainder, and administration costs continue for the life of the trust.
Assumptions: Stock value $500,000, basis $100,000, held more than one year; contributed in 2026 to a 5% charitable remainder unitrust for the donor's life.; Assume the donor's other income places the entire gain in the 20% capital gain bracket and subject to the 3.8% net investment income tax.; The trust sells the stock right away and earns $10,000 of ordinary dividend income in year one.; The upfront charitable deduction depends on the donor's age and the §7520 rate and is not computed here.
| Sell outright: tax on the $400,000 gain at 23.8% | $95,200 |
|---|---|
| Sell outright: amount left to reinvest | $404,800 |
| Sell inside the trust: tax paid by the trust at sale | $0 |
| Trust amount reinvested | $500,000 |
| Year-one payment to the donor (5% × $500,000) | $25,000 |
| Year-one payment: taxed as ordinary income / capital gain | $10,000 / $15,000 |
| Gain still inside the trust to be carried out in later years | $385,000 |
The trust keeps $95,200 more invested at the start, but the $400,000 gain is still taxed to the donor as payments carry it out.
Illustration only; not a projection of your results.
Risks and IRS scrutiny
The IRS has identified certain CRAT arrangements as listed transactions. Under Treas. Reg. §1.6011-15 (T.D. 10051, applicable July 9, 2026), a transaction in which appreciated property is transferred to a purported CRAT, the trust sells it and buys a single premium immediate annuity, and the beneficiary treats most of each payment as a nontaxable return of investment is a listed transaction. Participants and material advisors must file Form 8886, and penalties apply for failure to disclose and for understatements. The IRS also scrutinizes prearranged sales, trusts that fail the 10% or 5% tests, and self-dealing, since charitable remainder trusts are subject to the private foundation self-dealing rules.
Who it is not for
A charitable remainder trust is not for anyone who may need the principal back, has no real charitable intent, or holds a position too small to justify drafting and annual administration costs. It is also not for anyone offered a CRAT and annuity arrangement that claims payments are mostly nontaxable.
How ebotCPA helps
We model the payout rate, term, remainder test, deduction, and the tax on payments under the §664(b) tiers, and we compare the trust with selling outright. We coordinate with your attorney, who drafts the legal documents.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
We coordinate with your attorney, who drafts the legal documents.
Frequently asked questions
Does a charitable remainder trust avoid capital gains tax?
It defers it. The trust pays no tax when it sells, but the gain is taxed to you as your payments carry it out under IRC §664(b).
What is the minimum payout for a charitable remainder trust?
At least 5% and no more than 50% a year, and the charitable remainder must be worth at least 10% of the initial value.
Is a CRAT that buys an annuity a listed transaction?
Arrangements where a CRAT buys a single premium immediate annuity and treats most payments as nontaxable are listed transactions under Treas. Reg. §1.6011-15 and must be disclosed on Form 8886.
How much can I deduct when I fund a charitable remainder trust?
The present value of the charity's remainder, computed with IRS tables and the §7520 rate, subject to AGI limits such as 30% for appreciated property.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.