Charitable Remainder Trust FAQs

Updated for 2026

In short

Two very different people use a charitable remainder trust.

The seller. This is most of them. You own something worth far more than you paid for it — a rental property, a business, a concentrated stock position — and you want out. Sell it outright and roughly a third of the gain leaves in the first year. A CRT converts that sale into something close to an installment sale, with one large difference: the money that would have gone to tax stays in the trust and compounds untaxed for the whole payout period. You are taxed only as payments reach you. The charitable remainder is set just above the statutory minimum, which is exactly where the law allows it to sit.

The donor. You have already decided that a meaningful part of your estate is going to charity. A CRT moves that gift to the present, so the income tax deduction lands while your income is high, and the same assets pay you for the rest of your life — or your family for a term of up to twenty years — first.

The design is not the same for the two. Neither is the deduction. Find yourself in the last question.

How does it work?

You transfer property to an irrevocable trust. The trust sells it and pays no income tax on the sale. The trust then pays you a percentage of its value every year — for life, for the lives of you and your spouse, or for a fixed term of up to twenty years. Whatever remains at the end goes to charity.

The charitable remainder, valued at funding, must be worth at least ten percent of what you contribute. That is the price of admission. Within the statute’s other limits — a payout between five and fifty percent, a term no longer than twenty years — it is the requirement that shapes everything else.

Why is this like an installment sale?

Because you spread the gain over years instead of paying it in one.

Take property worth $2,000,000 with a basis of $200,000. Sell it yourself and the $1,800,000 gain is taxed now — federal capital gain, the 3.8 percent net investment income tax, and California at up to 13.3 percent. Call it a third. You reinvest about $1,330,000.

Put it in the trust and the trust sells it. Nothing is taxed at the sale. The full $2,000,000 is invested, and it grows without tax inside the trust for as long as the trust runs. You are taxed only on what comes out, in the year it comes out.

An ordinary installment sale spreads the gain too. It does not let the unpaid tax compound for you in the meantime, and it leaves you holding a buyer’s note.

How do you design it for a seller?

We take the payout to the maximum the statute allows.

The remainder has to be worth at least ten percent at funding, so we design to just over ten percent and put everything else in the payment stream. For a twenty-year term that is a payout of roughly eleven percent — about $220,000 a year on a $2,000,000 trust, recalculated annually as the portfolio moves.

Charity receives the remainder, and Congress set the floor at ten percent. Designing to it is not aggressive; it is the bargain the statute offers, and it is what the great majority of our clients have chosen for forty years. The trade is that the current deduction is correspondingly small — a little over ten percent of what you put in. For a seller that deduction was never the point. The deferral is.

One constraint drives the choice between a term and a lifetime payout. A long life expectancy shrinks the remainder, so a lifetime trust at a high payout will not clear ten percent for a younger client. Younger sellers take a term of years, up to twenty years. Older clients can take a life.

How do you design it if you want a significant portion of your estate going to charity?

The opposite way. We dial the payout down, which pushes the remainder up, which produces a large deduction now.

The logic is simple. You already intend the charity to receive this money. Making the gift today rather than at death moves the deduction into your high-income years, takes the appreciation out of your estate, and still pays you or your family in the meantime. The charity gets certainty. You get the deduction while it is worth the most to you.

Nothing stops us from splitting the difference. The payout rate is a dial, not a switch.

Why a unitrust and not an annuity trust?

We almost always use a unitrust. A unitrust pays a percentage of the trust’s value, revalued every year. An annuity trust pays a fixed dollar amount, set once and frozen.

The annuity trust loses on nearly every point. It cannot accept another contribution. It gives no inflation protection over twenty years. Its qualification swings on the IRS interest rate, and a lifetime annuity trust has to clear a further test showing the trust is unlikely to exhaust itself — in the near-zero-rate years, most could not. And if the market falls, the fixed payment drains the trust while the charity watches.

A unitrust barely feels the interest rate. The rate touches the calculation only at the margin, so a unitrust that works this year works next year. It accepts later contributions if drafted to. And it self-corrects: the payment falls in bad years and rises in good ones, which is what keeps a max-payout trust alive for twenty years.

There is one case for an annuity trust — a client who needs an exact, predictable dollar figure and will not tolerate variation. It is rare.

How big is my deduction?

You deduct the present value of what is expected to reach charity, not what you transferred.

At a maximum payout that number is just over ten percent of the contribution. Dial the payout down and it climbs.

The rest of the calculation turns on your age or the trust term, the payout rate, and the IRS interest rate in effect when you fund the trust.

There is also a ceiling on how much of the deduction you can use against your income in any one year, with the unused part carried forward. We work that through with your accountant before the trust is funded.

Does the trust pay income tax?

Not on its investment income and not on its sale gains. That is the entire engine.

You pay as distributions come out, under a four-tier ordering rule that pushes the worst tax first. Ordinary income first. Then capital gain. Then other income, which in practice means tax-exempt income. Then tax-free return of principal.

At a maximum payout, expect the payments to come out as capital gain for many years. The gain is deferred and spread, not erased.

The trust also tracks accumulated net investment income and carries it out with the distributions. The 3.8 percent is deferred too.

One exception matters. Unrelated business taxable income triggers an excise tax of one hundred percent of that income.

The trust files Form 5227 every year.

What do I give up?

The principal. The trust is irrevocable and the assets do not come back.

You keep the payment stream. Whatever is left at the end belongs to charity. At a maximum payout that is a small share of a much larger number, which is the design the statute contemplates and the one most clients want.

What about my children?

Fund an irrevocable life insurance trust with part of the income stream.

The insurance proceeds reach your children free of income tax and outside your estate, replacing what the charity receives. Charity gets the remainder. The children get the insurance in its place.

How much it replaces depends on your age and health, and some clients cannot be insured at all. Get underwritten before you commit to the trust, not after.

What assets work, and what does not?

Publicly traded securities. Unencumbered real estate. Some closely held interests.

Mortgaged real property does not. Debt you remain liable for turns the trust into a grantor trust when trust income services it, which disqualifies the CRT from inception. Debt also drags in self-dealing problems and debt-financed income taxed at that hundred percent rate. These are not problems to manage afterward — they produce a dead CRT. Clear the loan first.

S corporation stock does not. A CRT is not an eligible shareholder, and the contribution terminates the S election — for every other shareholder, not just you. Partnership and LLC interests need review, because an operating business or entity debt produces the same unrelated business income problem.

Timing decides everything. The property must reach the trust before the sale becomes a done deal. Transfer after that and the assignment of income doctrine taxes the gain to you anyway — the Ninth Circuit so held in Ferguson v. Commissioner, 174 F.3d 997 (1999), which governs California.

Come see us before the letter of intent, not after. A nonbinding letter is not automatically fatal — the question is whether the sale was still genuinely uncertain when the trust took the property — but every week of delay makes the argument harder.

Can my spouse or children receive payments?

Yes, for one or more lives or a term not exceeding twenty years.

A spouse as joint or successor beneficiary is routine. Naming a child as successor beneficiary is different: it is a completed gift of that interest when you fund the trust. The fix is to retain a power, exercisable only by your will, to revoke the successor’s interest. Then the successor interest is not a completed gift, and it is includible in your estate but offset.

Can I be the trustee?

Usually. You may serve and direct the investments if the trust is properly drafted and administered.

You cannot reach the principal or redirect the remainder. And if the trust holds real estate, closely held stock, or anything else without a market, the annual revaluation a unitrust requires means an independent trustee or a current qualified appraisal every year.

IRS self-dealing rules, however, apply to a charitable remainder trust. You cannot borrow from it, use its property, or buy anything from it. Not at a fair price. Not at all.

What can I change later?

The charity: you can, and usually should, reserve the power and the replacement qualifies. Additional contributions, if the unitrust is drafted to accept them.

The remainder can go to a donor advised fund, which many families prefer — your children can go on advising the grants after your death, so the giving continues in the family name. (Note: all major investment houses, Vanguard, Fidelity, Schwab all have a DAF.) Your family’s, however, is advisory, the DAF’s (usually very liberal) succession rules govern how long it lasts.

If the named charity is gone when the trust ends, the trust does not fail. We draft in a successor and a trustee power to name a qualified replacement. 

What does it cost to run?

Our fee to draft. An annual Form 5227 prepared by a CPA who has done these before. For real estate or closely held stock, a qualified appraisal every year the trust holds it, because a unitrust revalues annually.

There is no statutory minimum, but the arithmetic imposes one. The costs are close to fixed, so they make sense only against a gain large enough that deferring the tax on it dwarfs them.

What else should I compare it against?

For California real estate, three things.

A § 1031 exchange, including into a Delaware statutory trust, defers the entire gain with no charitable remainder at all, and if you hold the replacement property until death your heirs still get the step-up.

A straight installment sale spreads the gain too, but the unpaid tax does not compound for you, you carry the buyer’s credit risk, and gains above $5,000,000 draw an interest charge.

Or hold until death. Your heirs take a new basis at market value and the gain disappears. With the federal estate tax exclusion at $15,000,000 per person, indexed after 2026, this beats every other option for anyone who does not need the money and does not want the charity.

The CRT wins when you want out of the asset now, want the proceeds working untaxed, and can live with a small remainder going to charity.

Which one am I?

Most people who sit down with us are sellers. You want out of the asset, you want the proceeds working instead of a third of them gone, and the remainder to charity is the price of that. We take the payout to the ceiling.

On the other hand, if you already want a significant share of your estate to go to charity, you are the donor, and a charitable remainder trust makes a tremendous amount of sense to do now. We lower the payout, and the deduction now is the point.

Either way, bring us the property or business interest before the buyer is lined up. That single piece of timing decides whether any of this is available to you.