CRT Tax Rules – What You Need to Know

Ever wonder how you can give to charity and still keep some money in your pocket? That’s what a Charitable Remainder Trust (CRT) does, and the tax rules behind it are actually pretty straightforward once you break them down.

A CRT is a trust you create, fund with cash, stocks, or property, and then get an income stream for a set number of years or for life. After the term ends, the leftover assets go to the charity you pick. The IRS treats the trust as a separate tax entity, which means the income you receive is taxed differently than regular earnings.

How CRTs Reduce Your Taxes

The first big tax win comes when you donate the asset to the trust. You can claim a charitable deduction based on the present value of the remainder that will go to the charity. That value is calculated using IRS tables that factor in your life expectancy, the trust’s payout rate, and a discount rate set by law. The higher the payout rate, the lower the charitable deduction, and vice‑versa.

Second, any capital gains on appreciated assets are locked inside the trust. Because the trust sells the assets, it pays tax at the trust’s maximum rate (currently 37%). However, the gain never hits your personal tax return, and you still get a deduction for the charitable remainder. In many cases, the overall tax bill ends up lower than if you sold the asset yourself.

Third, the income you receive each year can be a mix of ordinary income, capital gains, and tax‑free return of principal, depending on how the trust’s investments perform. The IRS calls this a “tiered” distribution, and it can keep you in a lower tax bracket compared to ordinary salary or pension income.

Steps to Set Up a CRT

1. Choose the type of CRT. There are two main kinds: a Charitable Remainder Annuity Trust (CRAT) that pays a fixed amount each year, and a Charitable Remainder Unitrust (CRUT) that pays a fixed percentage of the trust’s assets, which can fluctuate.

2. Pick a qualified charity. The charity must be IRS‑approved. You can name one organization or a class of charities (like “any animal welfare group”).

3. Decide on the payout rate. The IRS requires a minimum of 5% and a maximum of 50% for a CRUT, while a CRAT must pay at least 5% of the initial trust value.

4. Transfer the assets. Put cash, stocks, real estate, or other property into the trust. The trust becomes the legal owner, and you give up direct control.

5. File the paperwork. You’ll need a trust document, a tax identification number for the trust, and a Form 5227 (Split‑Interest Trust Information Return) each year.

6. Calculate the charitable deduction. Work with a tax professional or use IRS tables (IRS Publication 526) to figure out the present value of the remainder. This figure becomes your itemized deduction on Schedule A.

7. Monitor the trust. The trustee (which can be you, a bank, or a lawyer) must manage investments, make annual distributions, and file the required tax returns.

Setting up a CRT isn’t a DIY project for most people. A qualified attorney, CPA, or financial planner can help you avoid costly mistakes, like setting a payout rate that triggers a penalty or choosing a trust structure that doesn’t match your goals.

Bottom line: CRT tax rules let you turn appreciated assets into a steady income stream, get a charitable deduction, and potentially lower your overall tax burden. If you’re looking for a win‑win between giving back and keeping money working for you, a Charitable Remainder Trust is worth a serious look.

Charitable Remainder Trust Disadvantages: Costs & Financial Downsides Explained

Charitable Remainder Trust Disadvantages: Costs & Financial Downsides Explained

  • Jul, 21 2025
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Uncover the real-world disadvantages of a charitable remainder trust. Learn about high costs, tricky tax rules, and why it's not always the best fit for everyone.

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