Consider a retiree who spent 30 years at a technology company and holds $800,000 in a single stock with a cost basis of $40,000. Selling it outright would trigger a federal capital gains tax bill somewhere in the range of $140,000 to $190,000 — before state taxes — at federal long-term capital gains rates of 15%–20% (as of 2026) plus, where applicable, the 3.8% net investment income tax. (This range is illustrative; actual liability depends on total income, filing status, and applicable state taxes.) The stock pays almost no dividend, so it generates little income despite its size. She gives to charity every year. And she has been meaning to simplify her estate for some time now.
(This is a hypothetical composite scenario for illustration purposes.)
A charitable remainder trust (“CRT”) can address all three problems at once. But for most people, a CRT sits in a mental category called “complex estate planning vehicle for the very wealthy” — and it stays there, unexamined.
The goal of this guide is to change that. Not because every retiree should run out and establish one, but because the CRT is a specialized tool that solves specific problems. Understanding how it works, and where it fits, is useful regardless of whether or not your estate planning needs call for one.
What Is a Charitable Remainder Trust?
A charitable remainder trust is an irrevocable, tax-exempt trust with two categories of beneficiaries: a non-charitable income beneficiary (typically the donor) who receives an income stream for a defined period, and a charitable remainder beneficiary (a qualified charity or charities) who receives whatever assets remain in the trust when the income period ends.
Several words in that definition carry significant weight.
Irrevocable means the transfer of assets to the trust cannot be undone. Once you contribute property to a CRT, you cannot retrieve it. This is not a liquid planning tool that permits full accessibility to the contributed assets, and the decision to fund one deserves the same deliberation you would give any permanent commitment.
Tax-exempt means the trust itself pays no income tax. When it sells an appreciated asset, it does not recognize capital gains. The full proceeds stay in the trust for reinvestment. This is the engine of the strategy.
Income stream can be structured two ways: as a percentage of annually revalued trust assets (a “CRUT”), or as a fixed dollar amount (a “CRAT”). More on that distinction below.
Defined period means the trust pays income either for the donor’s lifetime (or joint lifetimes of the donor and a spouse), or for a fixed term not exceeding 20 years, or some combination.
Qualified charitable remainder is not a formality. It is instead a critical component of the structure that must be added to obtain the benefits that this form of trust provides. The IRS requires that the present value of what goes to charity must represent at least 10% of the initial fair market value of assets contributed to the trust. If the CRT cannot meet this threshold (because the payout rate is too high, the trust term is too long, or both), the trust does not qualify. The donor also must have genuine charitable intent; the charity is not merely a technicality.
The payout rate itself is subject to IRS limits: at least 5% and no more than 50% of the relevant base (initial trust value for a CRAT; annually revalued assets for a CRUT).
Source: IRS Publication 664; IRC §664; 26 CFR §1.664-2 and §1.664-3.
The Three-Layer Tax Benefit
This is an often overlooked component of CRT planning that deserves a complete explanation. Let’s examine it one layer at a time.
Layer 1: Capital Gains Bypass
The trust sells the appreciated asset and reinvests the full proceeds. No capital gains tax at the time of sale.
Back to our hypothetical: If Linda transfers her $800,000 stock position to a charitable remainder trust, the trust sells the stock. The trust does not pay capital gains tax on the $760,000 of unrealized gain. The full $800,000 stays in the trust and gets reinvested according to the trust’s investment mandate.
If Linda had sold the same stock herself, she would have owed capital gains tax on that gain, potentially more than $140,000 to $190,000 at the federal level, depending on her total income and whether the 3.8% net investment income tax applies. The money that would have gone to the IRS instead stays in the trust, generating income for her.
This is not tax elimination. The gain does not disappear. It defers, and flows out to Linda as taxable income over the life of the trust. It will be taxed at preferential capital gains rates, not ordinary income rates. More on that in the distribution section below.
Source: IRC §664(c); IRS Publication 664.
Layer 2: Charitable Deduction
The donor receives a charitable income tax deduction in the year of contribution. The deduction equals the present value of the charitable remainder interest, which is an IRS calculation that estimates the current value of what the charity is expected to receive.
This calculation depends on three inputs:
- The IRS Section 7520 rate — a monthly interest rate the IRS publishes, based on the applicable federal mid-term rate. A higher Section 7520 rate produces a larger deduction for a CRT, because a higher discount rate reduces the present value of the income stream and increases the estimated remainder. Examination of the current rate environment is a key component of CRT planning. CRATs generally perform better in a high-interest rate environment, for example. This should be examined with an attorney when considering entering into such a planning structure.
- The payout rate — higher payouts mean less goes to charity, which reduces the deduction.
- The trust term — a longer term means the charity waits longer, reducing the present value of the remainder.
There are AGI limits on the deduction. For contributions of long-term capital gain property to a CRT for the benefit of a public charity, the deduction is limited to 30% of adjusted gross income. Unused amounts may be carried forward for up to five years.
The deduction is a partial offset, not a dollar-for-dollar recovery of the gift. Its size depends on the specific numbers and the Section 7520 rate in effect at the time of contribution.
Source: IRC §170(f)(2)(A); IRS Publication 526; IRS Section 7520 rate tables.
Layer 3: Tax-Deferred Growth and Structured Distribution
Trust assets grow inside the trust without current taxation. When distributions are made to Linda, they are taxable. They follow a specific ordering designed to maximize tax efficiency. That ordering is covered below in the distribution section.
Together, these three features mean a retiree holding a large appreciated position gets income from what would have been a tax bill, a partial charitable deduction, and a giving legacy. No single tool does all three simultaneously. The specifics of how that deferred gain flows out over time, and at what tax rates, are covered in the distribution section below.
Now that the mechanics are clear, the more useful question is whether the structure fits your situation at all, and specifically, which version you would use.
CRUT vs. CRAT: Which One Fits Your Situation?
Two structural flavors. One decision that deserves careful thought.
Charitable Remainder Unitrust (CRUT)
A charitable remainder unitrust pays a fixed percentage of the fair market value of trust assets, revalued every year. If the trust performs well, payments increase. If it performs poorly, payments decrease.
Key features:
- Payments vary with investment performance which can provide potential inflation protection over time
- The trust may receive additional contributions after the initial funding
- Several variants exist: the Net Income CRUT (NICRUT) and Net Income with Makeup CRUT (NIMCRUT) are used when the trust holds illiquid assets and cannot distribute based on total value; the Flip CRUT converts from a net-income calculation to a standard unitrust calculation when a triggering event occurs (typically the sale of an illiquid asset like real estate)
CRUTs are the more common choice. The ability to add assets and the inflation-responsive payment structure make them more flexible for most planning scenarios. (According to National Philanthropic Trust guidance, CRUTs represent the majority of charitable remainder trusts established today.)
Charitable Remainder Annuity Trust (CRAT)
A charitable remainder annuity trust pays a fixed dollar amount each year, determined when the trust is created. The payment does not change regardless of how the trust performs.
Key features:
- Payments are stable and predictable which can be appealing for donors whose primary concern is income certainty
- No additional contributions are allowed after the initial trust funding
- A real risk: if the trust’s investment return is insufficient to fund the fixed distribution, the trust invades principal. If the trust is exhausted before the term ends, payments stop. To illustrate: a CRAT paying a 7% fixed distribution on a trust returning 5% annually will steadily deplete principal over time, eventually running dry. This makes CRATs inappropriate for payout rates that exceed a realistic assessment of the trust’s likely returns. Because of this, careful modeling and analysis must be considered before jumping into this type of arrangement.
When to choose a CRAT: When predictable, fixed income is the overriding priority and the donor accepts that there is no growth upside in the payments. Can be more appealing when the interest rate environment is high.
When to choose a CRUT: Most other situations. Especially when the donor holds real estate or other illiquid assets (see: Flip CRUT), wants flexibility to add assets later, or wants payments to have the potential to grow with the trust’s performance.
Source: IRS Publication 664; 26 CFR §1.664-2 (CRAT); 26 CFR §1.664-3 (CRUT); Fidelity Charitable CRT guidance.
But before choosing between CRUT and CRAT, the more fundamental question is whether a CRT belongs in the plan at all.
When a CRT May Make Sense (and When It Probably Doesn’t)
When a CRT May Make Sense
A large appreciated asset with a low cost basis. The CRT’s primary mechanical advantage is the capital gains bypass. Without a significant unrealized gain, the first layer of the tax benefit is absent, and the strategy loses much of its appeal. Common scenarios: concentrated stock from an employer or long-term holding, appreciated real estate, a private business interest.
A genuine need for an income stream. The CRT is designed to replace the income the asset itself was not generating. If the donor has no income needs and wants to give outright, other alternatives are likely more appropriate (these can include direct charitable contributions, bunching charitable contributions through a Donor Advised Fund, Qualified Charitable Distributions from an IRA, etc.)
Real charitable intent. The charitable remainder is irrevocable. At the end of the trust term, the remaining assets go to charity. If the donor would prefer those assets to pass to family, the CRT is the wrong tool. Charitable intent can not be an afterthought. It must be a significant goal in the individual’s planning.
Estate simplification goals. Removing a large concentrated position from the estate reduces both the estate’s complexity and, potentially, its taxable value.
Estate tax “redirection”. Because assets will go to charity at the end of the trust term, there is the real possibility for obtaining an estate tax deduction through this planning. This deduction, in essence, reduces money that would go to the IRS to pay estate tax, and instead directs it to the charities of the donor’s choosing. In this way, the donor is “disinheriting” the IRS, and instead using these dollars that would otherwise be subject to tax to provide for causes that the donor believes in.
A high-income year where a deduction has immediate value. The charitable deduction generated at funding can offset other income, making the timing of the contribution relevant to tax planning.
When a CRT Probably Does Not Make Sense
No charitable intent. The remainder must go to a qualified charity. If keeping assets in the family is the priority, look at other vehicles. A grantor retained annuity trust (GRAT), for example, is designed for intra-family wealth transfer. A CRT is not.
Assets below roughly $250,000–$500,000 that are intended to be contributed to the CRT. Setup costs for a CRT (typically $3,000 to $10,000 or more in legal fees, plus ongoing trustee and administrative costs) are largely fixed regardless of trust size. On a $100,000 trust, those costs represent a significant portion of the benefit. The rule of thumb: the trust should be large enough that setup and annual costs represent a small fraction of the tax benefit and income stream value. These cost estimates are illustrative; actual costs depend on the attorney, the complexity, and the market.
Anticipated short remaining life expectancy. If the income stream is expected to last only a few years, the present value of the benefit may not justify the complexity and cost.
IRA or retirement account assets. Withdrawing funds from an IRA to fund a CRT creates immediate ordinary income recognition. A qualified charitable distribution (QCD) is almost always more efficient for charitable giving from an IRA.
Illiquid assets without a buyer. The trust must be able to sell the asset to fund distributions. A CRT holding unsaleable property cannot operate as designed.
Every CRT decision involves irrevocable choices that interact with income tax projections, estate planning, and Medicare premiums. Before proceeding, the full plan (not just the trust mechanics) should be modeled.
Source: National Philanthropic Trust; Fidelity Charitable; IRS Publication 664.
How Distributions Are Taxed: The Four-Tier Ordering Rules
When the trust distributes income to the non-charitable beneficiary, those distributions follow the four-tier ordering rules under IRC §664(b). The rules determine what type of income each distribution represents and how it is taxed.
Tier 1 — Ordinary income. Distributions are first characterized as ordinary income, to the extent the trust has current or accumulated ordinary income. Taxed at ordinary income rates.
Tier 2 — Capital gains. After ordinary income is exhausted, distributions come from the trust’s capital gains, both current-year and accumulated. Long-term capital gains are taxed at preferential rates (0%, 15%, or 20% federally, depending on taxable income, plus the 3.8% net investment income tax for higher earners). Short-term capital gains, if any, are taxed at ordinary rates.
Tier 3 — Other income. Tax-exempt income the trust holds (for example, from municipal bonds). Generally not taxable at the federal level.
Tier 4 — Return of corpus. The donor’s original contribution. Generally not taxable.
In practice, a CRT that sold a large block of appreciated stock at funding will have substantial accumulated long-term capital gains. Most distributions will come out as Tier 2, taxed at capital gains rates. This is significantly more favorable than ordinary income rates, but these distributions are not tax-free.
The IRMAA Consideration
Capital gains distributions from a CRT are included in the beneficiary’s adjusted gross income and modified adjusted gross income (MAGI). MAGI determines Medicare Part B and Part D income-related monthly adjustment amounts (IRMAA) — the premium surcharges that apply to higher-income Medicare beneficiaries. CRT distributions can push a beneficiary above an IRMAA threshold, increasing Medicare premiums by several hundred to several thousand dollars per year.
This is not a reason to avoid a CRT. It is a factor to model before funding. The interaction between CRT distributions and IRMAA is an example of why this decision belongs in a comprehensive planning context, not in a vacuum.
Source: IRS Publication 664; IRC §664(b); Social Security Administration IRMAA guidance.
With the mechanics and the tax treatment in hand, it is worth knowing what alternatives exist and when each is better suited than a CRT.
Alternatives Worth Knowing
A CRT is one tool in a broader toolkit. Three alternatives are worth understanding.
Qualified Charitable Distributions (QCDs) — for IRA Assets
A qualified charitable distribution allows IRA owners aged 70½ or older to transfer up to $111,000 (2026 indexed limit; this amount is adjusted annually) directly from a traditional IRA to a qualified charity. The distribution is excluded from gross income entirely. It does not appear in adjusted gross income, does not affect IRMAA calculations, and counts toward required minimum distributions. This is much more efficient compared to a donor receiving the full required minimum distribution amount for the given tax year and contributing to the charity from this amount. While the donor here would receive a charitable deduction to offset taxable income, they would still be required to report the full required minimum distribution amount as taxable income.
For donors whose charitable giving comes from IRA assets, a QCD is almost always more efficient than a CRT. The QCD keeps the distribution off the tax return entirely; a CRT distribution will eventually flow out as taxable income. The tradeoff: a QCD provides no income stream to the donor. It is an outright gift. Choose a QCD when your charitable giving comes primarily from IRA assets and you have no income replacement need. Choose a CRT when the giving comes from a large concentrated non-IRA position and you need an income stream.
Donor-Advised Funds (DAFs) — for Multiple Gifts Without an Income Stream
A donor-advised fund is a charitable giving account at a sponsoring organization (such as Fidelity Charitable or the National Philanthropic Trust). The donor contributes appreciated assets, takes an immediate charitable deduction, and recommends grants to qualified charities over time. This immediate charitable deduction can allow for a donor to receive an income tax deduction in the year of the charitable contribution above and beyond what they would otherwise receive relying on the standard deduction.
DAFs are simpler and far less expensive than CRTs. The sponsor organization handles administration; there are no trustees to engage, no annual tax filings for the donor, and no minimum contribution thresholds that approach CRT economics. The difference that matters: a DAF provides no income stream to the donor. The full contribution is a charitable gift.
A DAF is the right tool when the goal is tax-efficient charitable giving across multiple gifts over time, and no income stream is needed. A CRT is the right tool when income replacement is also part of the equation.
Outright Charitable Gift — the Simplest Path
For donors who have a large appreciated asset, need no income replacement, and want to give it to charity: an outright gift is the most efficient structure. The donor gives the appreciated asset directly to the charity. The charity sells it tax-free. The donor receives a deduction for the full fair market value (subject to AGI limits). No trust, no trustee, no ongoing administration.
The right tool depends on asset type, income needs, charitable intent, and estate goals. No single structure is universally best.
Source: IRS Publication 590-B (QCDs); National Philanthropic Trust (DAFs).
Common Questions About Charitable Remainder Trusts
What is a charitable remainder trust?
A charitable remainder trust is an irrevocable trust that pays an income stream to the donor (or another non-charitable beneficiary) for a defined period, after which the remaining trust assets pass to one or more qualified charitable organizations. The trust is tax-exempt, meaning it does not pay capital gains tax when it sells appreciated assets. Distributions to the income beneficiary are taxable, following specific IRS ordering rules. Source: IRS Publication 664.
What are the tax benefits of a charitable remainder trust?
A CRT may offer three potential tax benefits: (1) the trust can sell an appreciated asset without paying capital gains tax at the time of sale; (2) the donor may receive a charitable income tax deduction in the year of contribution, equal to the IRS-calculated present value of the charitable remainder; and (3) trust assets grow without current taxation, with gains flowing to the income beneficiary over time at preferential capital gains rates. Whether these benefits apply in a specific situation depends on the donor’s income, the asset’s basis and type, and other factors. Source: IRS Publication 664; IRC §664; IRS Publication 526.
What is the difference between a CRUT and a CRAT?
A charitable remainder unitrust (CRUT) pays a fixed percentage of the fair market value of trust assets, revalued annually; payments vary with performance. A charitable remainder annuity trust (CRAT) pays a fixed dollar amount each year, set at the time the trust is created; payments are stable regardless of performance. CRUTs are more common because they allow additional contributions, offer inflation-responsive payments, and include variants (like the Flip CRUT) for illiquid assets. CRATs may be appropriate when income predictability is the primary concern. Source: IRS Publication 664.
What are the pitfalls of a charitable remainder trust?
The main risks and limitations include: (1) irrevocability: once assets are contributed, they cannot be recovered; (2) setup and administration costs ($3,000–$10,000 or more in legal fees, plus ongoing trustee fees) make CRTs impractical for smaller asset transfers; (3) the charitable remainder is real and permanent, meaning assets do not pass to heirs; (4) CRT distributions can increase MAGI and affect Medicare premium tiers (IRMAA); (5) a CRAT carries the risk of trust exhaustion if investment returns fall short of the fixed distribution. Source: IRS Publication 664; Fidelity Charitable.
What is the 10% rule for a charitable remainder trust?
The IRS requires that the present value of the amount passing to charity must be at least 10% of the initial fair market value of assets transferred to the trust. This is a threshold requirement. A CRT that does not meet the 10% test does not qualify as a charitable remainder trust and loses its tax-exempt status. The 10% test is calculated using the IRS Section 7520 rate in effect at the time of funding, along with the payout rate and trust term. Source: IRS Publication 664; IRC §664.
Does a charitable remainder trust avoid capital gains tax?
The trust avoids capital gains tax on the sale of appreciated assets within the trust; the trust itself is tax-exempt. However, the capital gains are not permanently eliminated. They are deferred and flow out to the income beneficiary over time as taxable distributions, following the four-tier ordering rules. In most cases, those distributions come out characterized as capital gains (taxed at preferential rates, not ordinary income rates), but they are not tax-free to the beneficiary. Source: IRS Publication 664; IRC §664(b).
How much does it cost to set up a charitable remainder trust?
Legal fees to establish a CRT typically range from approximately $3,000 to $10,000 or more, depending on complexity, the attorney’s market, and the asset type. Ongoing trustee fees (if using a corporate trustee) generally range from 0.5% to 1.5% of trust assets annually. The CRT must also file IRS Form 5227 each year. Because these costs are largely fixed, CRTs are generally not cost-effective for trusts funded below approximately $250,000–$500,000. These figures are estimates; actual costs vary. Source: Fidelity Charitable guidance; National Philanthropic Trust guidance.
Are charitable remainder trust distributions taxable?
Yes. Distributions to the income beneficiary are taxable, though the tax treatment depends on the character of the income. The four-tier ordering rules under IRC §664(b) determine the tax treatment: ordinary income first, then capital gains (including long-term gains at preferential rates), then tax-exempt income, then return of principal. Most CRTs funded with appreciated securities will distribute primarily capital gains, which are taxed at lower rates than ordinary income. They are not tax-free. Source: IRC §664(b); IRS Publication 664.
Can I change the charitable beneficiary in a charitable remainder trust?
The trust document can allow the donor to name and change the charitable remainder beneficiary, provided the replacement is a qualified charity under IRC §501(c)(3). This is not a change the donor makes unilaterally. It requires following the procedures in the trust document and should be coordinated with the trust’s estate attorney. The income beneficiary and the term of the trust are fixed and cannot be changed. Any charitable beneficiary change should be reviewed by the estate attorney who drafted the trust.
Key Takeaway
A charitable remainder trust is not solely a giving vehicle. The charity is the mechanism, the structural feature that makes the tax benefits available. For a retiree holding a large appreciated asset that generates no income, the CRT solves a genuinely useful set of problems: it avoids the capital gains tax on the sale, converts an illiquid, non-income-producing position into an income stream, and produces a charitable deduction. The charity receives the remainder at the end.
But the structure only makes sense in specific circumstances. The asset needs to be large enough to justify the costs. The charitable intent has to be genuine, because the remainder is irrevocable. And the income projections, the charitable deduction calculation, and the IRMAA implications all need to be modeled across a complete financial picture, not evaluated in isolation.
A charitable remainder trust involves irrevocable decisions: legal drafting, trustee selection, and income projections that interact with your tax situation, Medicare premiums, and estate plan. Before deciding whether a CRT fits your situation, consider working with both your financial planner and an estate attorney to model the full picture.
Sources
- IRS Publication 664 — Charitable Remainder Trusts: https://www.irs.gov/publications/p664
- IRS Charitable Remainder Trusts Overview: https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-remainder-trusts
- IRS Section 7520 Interest Rates: https://www.irs.gov/businesses/small-businesses-self-employed/section-7520-interest-rates
- IRS Publication 526 — Charitable Contributions: https://www.irs.gov/publications/p526
- IRS Publication 590-B — Distributions from IRAs: https://www.irs.gov/publications/p590b
- Fidelity Charitable — Charitable Remainder Trust: https://www.fidelitycharitable.org/guidance/philanthropy/charitable-remainder-trust.html
- National Philanthropic Trust — Charitable Remainder Trusts: https://www.nptrust.org/philanthropic-resources/philanthropist/charitable-remainder-trusts/
- National Philanthropic Trust — Donor-Advised Funds: https://www.nptrust.org/donor-advised-funds/
- Social Security Administration — IRMAA Medicare Premiums: https://www.ssa.gov/benefits/medicare/medicare-premiums.html
Lifeworks is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.