The Charitable Remainder Trust (CRT)

How it works

A charitable remainder trust is an irrevocable split-interest trust created under Section 664. A donor transfers an appreciated asset into it, a completed gift of the remainder interest. Because the trust itself is tax-exempt under Section 664(c)(1), it can sell that asset and pay no capital gains tax at the moment of sale. The full pre-tax proceeds stay invested.

In exchange for giving up the asset permanently, the donor, or another named beneficiary, receives an income stream for life, for joint lives, or for a fixed term of up to 20 years. The donor also takes an upfront income tax charitable deduction equal to the present value of what the charity will eventually receive, computed under Section 7520 and claimed the year the trust is funded. When the term ends, whatever remains passes to one or more charities described in Section 170(c).

None of this erases the capital gain. It defers the gain and recharacterizes it as it comes back out to the beneficiary, through a four-tier ordering in Section 664(b) that treats distributions as ordinary income first, then capital gain, then other or tax-exempt income, and only then a tax-free return of principal. The benefit is built from deferral and the time value of money, from spreading a large gain across years and possibly lower brackets, from tax-free compounding while the money sits inside the trust, and from the upfront deduction itself. A trust sold as a way to make a gain disappear, rather than move it through those tiers over time, is being sold wrong.

CRAT or CRUT

A charitable remainder annuity trust pays a fixed dollar amount, set once at funding as a percentage of the trust's initial value and never revalued afterward. No further contributions are allowed once it is funded. It is simple and predictable, and that fixed payment is also its weakness. It does not adjust for inflation, and it becomes harder to sustain when the government's own valuation rate is low, a problem covered below.

A charitable remainder unitrust pays a fixed percentage of the trust's assets, revalued every year, so the dollar payment rises and falls with the portfolio. Additional contributions are allowed. Variants exist that pay only actual income until a triggering event and then convert to a standard payout, which is generally why a unitrust is the more workable choice when the funding asset is real estate or another holding that will not produce cash right away.

What this is worth in Florida

Some of what makes a CRT attractive in California or New York does not travel here, and I want to be direct about which part that is. Florida has no individual income tax, so there is no state-level tax being deferred in the first place. What remains is entirely federal: deferral of the capital gain, the upfront federal income tax deduction, and removal of the asset from a future taxable estate. A Florida resident who funds a CRT with appreciated Florida real estate, or with an interest in a closely held Florida entity such as a Sunbiz-registered LLC, gets the full federal benefit without giving up anything at the state level, because there was no state income tax cost to begin with.

Who this applies to

A CRT is not gated by income the way some strategies are. Qualification is entirely structural: either the trust document satisfies the definitional tests in Section 664 or it does not, and a trust that fails even one of them is not a CRT at all. It is simply a taxable trust that made an irrevocable gift and lost the deduction along with it.

The clearest fit is someone holding a large, highly appreciated position in a single asset, stock that has run up for years, raw land, or a business interest, who wants to diversify out of it without absorbing the entire capital gain in one year, wants an income stream from what is left, and is comfortable with a charitable legacy as part of the plan.

• The best funding asset is highly appreciated and low-yield. A large embedded gain is exactly what the trust's tax exemption is built to absorb, and an asset that was not throwing off much income anyway is not being asked to give up much by moving into the trust.
• Ordinary-income property is a poor fit. Inventory, art the donor created, depreciation recapture, and income in respect of a decedent are all reduced under Section 170(e)(1) to the donor's basis for deduction purposes, which removes most of the reason to use a CRT for that asset in the first place.
• Encumbered real estate brings its own problems. Mortgaged property contributed to a CRT can trigger bargain-sale gain to the donor and raise self-dealing concerns, so the debt is cleared before the transfer or the asset is routed through a unitrust built for that situation.
• Anyone who cannot part with the corpus permanently should stop here. The transfer is irrevocable by definition. A donor who wants the assets back under any circumstance wants a different tool, one built around keeping assets inside the family rather than charity, covered in my guide to grantor trusts and IDGTs.

What it requires

Several conditions have to hold at once for the trust to be a CRT at all, not a menu to pick from.

• A payout between 5% and 50%. The annual amount paid to the income beneficiary must be at least 5% and no more than 50% of the relevant base, under Section 664(d)(1)(A) for an annuity trust or Section 664(d)(2)(A) for a unitrust.
• At least 10% has to reach the charity. The present value of the charitable remainder, computed under Section 7520, must equal at least 10% of the initial net fair market value of what was contributed. A unitrust has to clear this test again for every additional contribution, independently.
• A term measured in lives or capped at 20 years. The payout period can run for the life or joint lives of individuals living when the trust is created, or for a fixed term, but a fixed term cannot exceed 20 years.
• A qualifying charity waiting at the end. The remainder has to pass to an organization described in Section 170(c), and the transfer into the trust has to be irrevocable from the start.
• An annuity trust carries one more test. Because its payout never adjusts, an annuity trust also has to show no more than a 5% probability that the corpus will be exhausted before the charity's interest vests. That test comes from Revenue Rulings 77-374 and 70-452 rather than from the Code itself, and it is covered further under where this goes wrong.

What the deduction is actually worth

Passing the definitional tests decides whether a deduction exists. A separate set of rules, keyed to the remainder beneficiary and the funding asset, decides how much of it the donor can use in the year of the gift.

Two further limits reduce what an itemizer actually gets to use from that deduction. Congress added a floor, under the One Big Beautiful Bill Act of 2025, that disallows the first 0.5% of adjusted gross income given to charity, and a separate cap that limits the value of itemized deductions for a top-bracket taxpayer to 35 cents on the dollar. Both apply beginning with the 2026 tax year, reduce what the deduction is worth rather than whether the trust qualifies, and belong in current preparation software rather than a hand estimate.

What you need to document

A CRT lives or dies on paper as much as on the underlying transaction, because nearly every failure mode below is really a documentation failure wearing a legal name.

A trust instrument built on the IRS's own language

The IRS publishes sample annuity trust and unitrust forms. Using that language, rather than custom drafting, is the strongest available defense against an examiner arguing the trust fails a definitional test.

Proof that no sale was already lined up

The asset needs to be retitled into the trust, under its own employer identification number, before any binding agreement to sell it exists. A file showing that timeline is what defeats an argument that the donor sold the asset and simply routed the proceeds through the trust afterward.

A qualified appraisal for the contributed asset

Required once a non-cash gift exceeds $5,000, with Form 8283 attached to the donor's own return. This single piece of paper is the most common point of complete disallowance, because a missing appraisal does not reduce the deduction, it eliminates it.

An annual filing trail for the life of the trust

The trust files Form 5227 every year and issues a Schedule K-1 from that form to the income beneficiary, characterizing each distribution by tier. If the trust earns any unrelated business taxable income in a given year, it also files Form 4720 to pay the excise tax that income triggers, covered further below.

Where it goes wrong

A CRT built on the IRS's own sample language is not an aggressive or listed transaction. It is a mainstream, statutorily blessed planning vehicle. The risk is execution, not the concept.

The sale that was arranged too early

If the donor already has a binding commitment to sell the asset before contributing it to the trust, the gain is taxed to the donor personally rather than the trust, no matter whose name ends up on the closing documents. Revenue Ruling 78-197 is the IRS's stated position on that, and it grew directly out of Palmer v. Commissioner, which is worth reading the right way round. Palmer was a taxpayer win: the charity was not bound to go through with the redemption when it received the shares, so the form held and the donor was not taxed. The IRS acquiesced, and Rev. Rul. 78-197 codifies that boundary, taxing the donor only where the donee is legally bound, or can be compelled, to surrender the shares. Ferguson v. Commissioner is the case on the other side of the line, where the sale was far enough along that the gain was taxed to the contributor. The donor's own file needs to show that no such commitment existed at the time of the gift.

• Failing a definitional test voids the whole structure. A payout outside the 5% to 50% band, a term over 20 years, a remainder that fails the 10% test, or, for an annuity trust, a corpus that fails the 5% exhaustion test, means there is no CRT. The deduction is denied, and the trust itself becomes a taxable entity on its income.
• A low valuation rate makes an annuity trust brittle. Because Section 7520 sets the rate used to test exhaustion, a period when that rate is unusually low makes the test harder to pass for an older beneficiary, exactly when a fixed, non-adjusting payout becomes a liability. A unitrust, or the IRS's own early-termination language for an annuity trust, is the usual fix when rates work against the structure.
• Unrelated business income carries a punitive excise tax. If the trust earns any unrelated business taxable income, Section 664(c)(2) imposes a full 100% excise tax on that income. Debt-financed property and an active trade or business run inside the trust are the two most common causes, and both are avoidable by screening the trust's investments before they are made.
• The private foundation self-dealing rules still apply. A CRT is treated as a split-interest trust under Section 4947(a)(2), which pulls in the private foundation excise regime. The donor cannot buy an asset from the trust, sell one to it, lend to it, or otherwise transact with it once it exists.
• A missing appraisal is a clean disallowance. Skipping the qualified appraisal, or the Form 8283 that documents it, for a non-cash gift over $5,000 does not shrink the deduction. It removes it entirely, and this point is enforced strictly.

Treasury and the IRS went past flagging one abusive charitable remainder annuity trust structure and, in final regulations issued in July 2026, named it a listed transaction: appreciated property contributed to a purported CRAT, sold by the trust, with the proceeds buying a single premium immediate annuity, on the theory that only the income portion of the annuity payment is taxable. The label carries duties, not just a warning. Participants and material advisors have to disclose on Form 8886 and face penalties under Section 6707A for not doing so, which means anyone already holding one of these may owe a filing now. A legitimate CRT defers and spreads a gain through the four-tier ordering described above. It does not make the gain disappear, and a pitch promising zero eventual tax is describing the flagged version, not this one.

A situation where this comes up

The pattern I see most often is a Florida business owner or investor holding one concentrated position, appreciated real estate, a block of stock built up over a long career, or an interest in a closely held company, who wants to diversify without sending a large share of it to federal capital gains tax in one year. They want income from what is left, and giving part of it to charity eventually was already part of the plan, just not through this specific mechanism.

That is the version worth building. What I decline to build is the version where someone arrives already pitched a CRT paired with an insurance product and told the combination erases the gain rather than spreading it out, a promise that sounds like the abusive structure described above. The mechanism is legitimate. A pitch that promises it eliminates tax, rather than deferring and reshaping it, is what turns a mainstream planning tool into an audit.