Charitable Remainder Trusts: Lifetime Income From Appreciated Assets

It is a split-interest trust defined in section 664 of the tax code: one interest goes to non-charitable beneficiaries, usually you and your spouse, and the remainder goes to charity (26 U.S.C. 664). The IRS summary sets out the core rules: payments of at least 5% and no more than 50% of trust value each year, for a term of up to 20 years or the life of one or more beneficiaries, and a remainder to charity worth at least 10% of the initial net fair market value (IRS, updated July 2026).

Three features make it useful to someone in their 60s or 70s. First, the trust pays no income tax, so a $1.5 million stock position bought decades ago for $150,000 can be sold inside it and reinvested whole. Second, you receive a steady income from the diversified portfolio, which is often several times the dividend the old stock paid. Third, you get a charitable deduction in the year you fund it, even though the charity waits for its money.

The cost is the principal. The trust is irrevocable: you cannot take assets back, change the income terms, or leave the remainder to your children. If the main goal is to pass wealth to family, a CRT works against it, and our guide to gifting to children and grandchildren covers the tools built for that.

You sign a trust agreement, transfer the asset to the trust, and the trustee takes it from there. The trustee sells, reinvests, pays you on the schedule the trust sets, files the trust's return, and hands the remainder to the named charities when the last income beneficiary dies or the term ends.

You can be your own trustee in many states, but most people with a single large asset use a bank, trust company or the charity itself. Hard-to-value assets such as real estate or private company shares need an independent trustee or a qualified appraisal for each valuation, and the trust must follow the private foundation self-dealing rules: you and your family cannot buy from, sell to, lend to or borrow from it.

Choose a unitrust (CRUT) unless you specifically want a fixed check. A charitable remainder annuity trust (CRAT) pays a fixed dollar amount set on day one, and it can never accept more money. A unitrust pays a fixed percentage of the trust's value, revalued every year, so the payment rises and falls with the portfolio and you can add assets later (IRC 664(d)). For someone expecting 20 or 30 years of inflation, the unitrust's growing payment is usually the better fit.

The net-income versions exist because the law lets a unitrust pay the lesser of its actual income or the stated percentage, and to make up earlier shortfalls in years when income exceeds it (IRC 664(d)(3)). A flip unitrust starts that way and converts to a standard unitrust at the beginning of the tax year after a triggering event. Permitted triggers are a specific date, or an event not within anyone's discretion, such as the sale of unmarketable assets, a marriage, divorce, death, or the birth of a child (26 CFR 1.664-3). The classic use is a rental property or a closely held business: the trust pays little until the asset sells, then pays its full percentage.

Annuity trusts have regained some appeal because interest rates are higher. The deduction for a CRAT rises with the §7520 rate; the deduction for a CRUT barely moves with it. For our example couple, a 5% annuity trust would produce a remainder of about 33.7% of the gift at the January 2026 rate of 4.6% and about 38.5% at September's 5.4%, while a 5% unitrust stays near 34.6% at either rate.

Five tests, all in the statute or IRS rulings, decide whether the trust qualifies and whether you get a deduction. Fail one and the trust is not a CRT at all, which means no deduction and no tax-free sale.

The §7520 rate for September 2026 is 5.4%; it ranged from 4.6% to that level earlier in 2026 (IRS). Because you may use the rate for the month of the gift or either of the two months before it (IRC 7520(a)), your attorney can pick the most favorable of three. Higher rates help annuity trusts pass the 10% and 5% tests; they matter little for unitrusts.

The 10% test is what stops younger donors from using high payouts. The table in the next section shows where it bites: a couple both aged 60 fails at a 10% payout, and a couple both 55 fails at 8%.

The deduction equals the present value of the remainder the charity is expected to receive, which for donors in their 60s and 70s is typically a third to a half of the gift. The value comes from IRS mortality Table 2010CM, used for valuations from June 1, 2023 (26 CFR 20.2031-7), the payout rate, the payment schedule, and for annuity trusts the §7520 rate. The table below shows what we computed for a standard unitrust. A charity's planned-giving office or your attorney will run the exact figure for your dates and payment schedule; online "charitable remainder trust calculators" do the same arithmetic.

Computed by My Finance Platform from IRS Table 2010CM with the September 2026 §7520 rate. Quarterly or monthly payments give slightly different results. Illustration only; not a substitute for the trust's own calculation.

Two limits then decide how much of that deduction you can actually use. A remainder interest given in trust counts as a gift "to" the charity (26 CFR 1.170A-8), so appreciated property held more than a year, left to a public charity, is deductible up to 30% of your adjusted gross income in the year of the gift. If the remainder can go to a private non-operating foundation, the limit is 20%, and for property other than publicly traded stock the deduction is based on your cost, not market value. Whatever you cannot use carries forward for 5 years and then expires (26 U.S.C. 170(b) and (d); IRS Pub. 526). Cash gifts to public charities have a 60% limit, which is why funding a CRT with cash changes the math.

Two changes that took effect in 2026 trim the value further. Charitable contributions now count only to the extent they exceed 0.5% of AGI (IRC 170(b)(1)(I)). And for anyone in the 37% bracket, itemized deductions are reduced by 2/37 of the smaller of the deductions or the income taxed at 37%, which caps their value at about 35 cents on the dollar (IRC 68). A retiree whose income has fallen faces the opposite problem: a deduction too large for the 30% limit to absorb in six years, as the worked example shows.

Each payment carries out the trust's income in a fixed order: first ordinary income, then capital gains, then other income such as tax-exempt interest, and only then principal, which is tax-free (IRC 664(b)). Within each tier, the highest-taxed categories come out first; the trust's Form 5227 tracks short-term gains, 28% collectibles gains, unrecaptured section 1250 gains from depreciated real estate, and other long-term gains separately (Form 5227 instructions). You receive a Schedule K-1 each year showing the character of what you were paid.

This is why a CRT defers the capital gains tax rather than eliminating it. When the trust sells stock with a $1.35 million gain, that gain sits in tier two. Every year, the part of your payment not covered by the trust's current dividends and interest is taxed as long-term gain, until the $1.35 million has been paid out. Only the gain still inside the trust when it ends goes untaxed, because it passes to charity.

The deferral is still valuable, for three reasons. The tax is paid over decades, not in April. Spread thin, the gain is often taxed at 15% instead of 20%. And a modest annual payout can keep income under the $250,000 joint threshold for the 3.8% net investment income tax (IRS Topic 559) and below the Medicare premium surcharges covered in our Medicare and IRMAA guide, where a one-year sale would blow through both.

Richard is 68 and Margaret is 66. They file jointly and have $150,000 of adjusted gross income from two pensions, Social Security and IRA withdrawals, plus $20,000 of state and property taxes. Richard's former employer's stock, received over a 30-year career, is now worth $1,500,000, with a cost basis of $150,000. It pays a small dividend and makes up a third of their net worth. They want to diversify, they want more income, and they already leave a sizable sum to their alma mater and a hospital in their wills.

Day one favors the trust by a wide margin. The trust starts with $295,000 more working for them, and its first payment is $15,000 larger than a 5% draw from the after-tax portfolio. The payments are taxable: with the trust's 2% dividend yield in tier one and the rest as long-term gain from tier two, all of it is taxed at capital gains rates of 15% or less, and their income stays below the net investment income tax threshold. Without the deduction, the first year's payment would add about $13,000 to their federal tax. With the deduction, the extra tax in each of the first six years is no more than about $800; from year seven it is about $14,000. By comparison, the sold portfolio's dividends add about $4,000 a year.

The deduction is smaller than it looks. Their income is modest relative to the gift, so the 30%-of-AGI limit lets them use only about $68,000 a year, and about $111,000 of the deduction expires after the fifth carryforward year. A couple in this position can fund the trust in two stages across tax years (each addition to a unitrust gets its own deduction), or time the gift for a year with more income, such as a year with a large Roth conversion.

Both portfolios pay 5% of their start-of-year value and earn 6%, so both grow 1% a year. The trust pays Richard and Margaret roughly $242,000 more after tax over 25 years, and leaves about $1,924,000 to charity. Selling leaves their children about $1,545,000. The trust is the better choice if the charities were going to receive a large bequest anyway; it is the wrong one if that money was meant for the children. Couples who want both sometimes use part of the extra income to buy life insurance for the heirs, a decision to price separately rather than accept as part of a package.

Two other options sit between A and B. They could give part of the stock to a CRT and sell the rest. Or they could sell gradually over several years to stay in the 15% band, pairing gains with losses as our tax-loss harvesting guide explains. The Tax Bracket Calculator shows how much room each year leaves.

A CRT is the only one of these that pays you an income. If you do not need income from the asset, one of the simpler tools almost always wins.

For readers 70½ and older, the qualified charitable distribution is usually the first tool: it satisfies required minimum distributions and keeps the gift out of AGI entirely, which also helps with Medicare premiums. A QCD cannot go to a donor-advised fund. There is also a one-time option to send up to $55,000 in 2026 from an IRA to a CRT or charitable gift annuity funded only by QCDs, with only you or your spouse as income beneficiaries (IRS Notice 2025-67; IRC 408(d)(8)(F)). That amount counts toward the annual $111,000 QCD limit, and every payment from such a trust is taxed as ordinary income, so it is small and rarely worth a trust of its own.

A charitable gift annuity is the closest cousin to a CRT: you give cash or stock to a charity in exchange for a fixed lifetime payment backed by the charity's assets. There is no trust to run and minimums are low, but the payment is fixed, and you depend on the charity's finances.

A CRT fits when four things are true at once: you own an asset with a large built-in gain, you want to diversify or need more income than it produces, you intended to leave a meaningful sum to charity anyway, and the amount is large enough to carry the costs. Typical candidates are a concentrated position in a former employer's stock, a rental property or farmland with a low basis, or a business about to be sold (the gift must come before any binding sale agreement, or the IRS can tax the gain to you).

The costs are an attorney to draft the trust, then a trustee, investment management, an annual Form 5227 and K-1s for as long as it runs. Late filing carries penalties of $25 a day up to $13,000 for a small trust and $130 a day up to $65,000 for one with gross income over $327,000 (Form 5227 instructions). Some charities will serve as trustee at little or no charge if they are the remainder beneficiary; ask what they charge and what investment choices you give up. Get fee quotes in writing before you decide.

A CRT can also be named as the beneficiary of an IRA. Since most non-spouse heirs must now empty an inherited IRA within 10 years, a CRT can stretch payments to a child over their lifetime or up to 20 years, with the remainder to charity. Our guide to the inherited IRA 10-year rule explains the rule; the trade is the same, since the children get income but not the principal.

For estate tax, the value passing to charity is deductible, and a surviving spouse's continuing interest can qualify for the marital deduction when only the two of you are income beneficiaries (IRC 2056(b)(8)). With a $15,000,000 basic exclusion per person in 2026, few couples need a CRT for estate tax reasons; it is an income tax and giving tool. Our estate planning basics and the Estate Planning Worksheet help you see where a CRT would sit in the whole plan.

• •Agreeing to sell before the gift. If a buyer is already bound to purchase, the gain can be taxed to you. Fund the trust first; let the trustee negotiate the sale.
• •Counting the whole deduction. The 30%-of-AGI limit and the 5-year carryforward can strand part of it for retirees with modest taxable income, and the 0.5% floor applies from 2026.
• •Setting the payout too high. A high rate can fail the 10% remainder test at younger ages and, in a unitrust, shrinks the trust in real terms. Rates of 5% to 6% are common for couples in their 60s.
• •Contributing mortgaged real estate. Debt on the property can create unrelated business income, taxed at 100% inside the trust. Pay it off first or get specialist advice.
• •Naming a private foundation without checking the cost. It drops the limit to 20% of AGI and, for anything other than publicly traded stock, cuts the deduction to your basis.
• •Adding to a CRAT. An annuity trust cannot take additional contributions. Use a unitrust if you may add assets later.
• •Dealing with the trust. Buying from, selling to or borrowing from the trust is self-dealing, subject to excise taxes, even for a trustee who is family.
• •Forgetting the heirs. Tell your children before you sign. The asset they may have expected will go to charity.