Charitable remainder trust (CRT) - How Millionaires Live

A charitable remainder trust (CRT) is an irrevocable US trust that pays an income stream to the donor or other chosen beneficiaries for a fixed term or for life and transfers whatever remains to charity at the end, giving the donor an immediate income tax deduction for the projected charitable remainder.

In plain terms

It is the standard answer to a specific problem: someone owns one asset that has appreciated enormously — founder stock, a building, a family business — and wants income from it without paying the capital gains tax that selling would trigger. The asset goes into the trust, the trust sells it without paying tax, and the full pre-tax proceeds get reinvested to produce the payments. The price of admission is that a real share of the money has to end up at a charity, and the donor cannot change that decision afterward.

How it works

There are two forms, both defined in Section 664. A charitable remainder annuity trust (CRAT) pays a fixed dollar amount set at the outset. A charitable remainder unitrust (CRUT) pays a fixed percentage of the trust’s value as revalued each year, so the payment floats with the portfolio. CRUTs are far more common, because a CRAT’s fixed payment is a slow liquidation in a bad decade.

The trust itself is exempt from income tax, which is what allows the tax-free sale. But the payments carry the tax out to the recipient under a four-tier ordering rule, worst tier first: ordinary income, then capital gain, then tax-exempt income, then return of principal. The IRS’s rules for both structures also cap the arrangement at both ends — the payout cannot be so small that the trust is really a private investment account, and cannot be so large that nothing plausibly reaches the charity.

The size of the upfront deduction is not a matter of negotiation. It is the present value of the charitable remainder, calculated using the Section 7520 rate for the month of funding.

The numbers

Payout band: at least 5% and no more than 50% of trust value annually.
Minimum charitable remainder: 10% of the initial net fair market value at funding. Fail it and the trust does not qualify at all.
Maximum term: 20 years, or the life or lives of the named beneficiaries.
Section 7520 rate, September 2026: 5.40%.
Tax on the trust: none on ordinary investment income — but a 100% excise tax on any unrelated business taxable income the trust receives.
Deduction ceiling, 2026: 30% of AGI for appreciated property given to a public charity, 20% if the remainder goes to a private foundation, with a five-year carryforward.
New in 2026: charitable deductions only count above a floor of 0.5% of AGI, and their value is capped at 35% for taxpayers in the 37% bracket.

What people get wrong

That a CRT eliminates capital gains tax. It defers and spreads it. The trust’s sale is untaxed, but the four-tier rule means every distribution carries out the trust’s realized gain to the income beneficiary before it returns any principal — so the tax is paid, just over twenty years and in the beneficiary’s brackets rather than all at once. The second misreading runs the other way: unlike a GRAT, a CRT gets better as interest rates rise. A higher 7520 rate implies faster assumed growth, which implies a larger projected remainder for the charity, which means a larger deduction today for the identical gift. The two structures are pulled in opposite directions by the same published number.

In plain terms

How it works

The numbers

What people get wrong

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