Charitable Remainder Trusts (CRTs)

How a CRT works

1. Trust funding. The grantor irrevocably transfers assets to the CRT, typically highly appreciated stock, real estate, or business interests.
2. Charitable income-tax deduction. The grantor receives an immediate deduction under IRC § 1701 equal to the present value of the projected remainder passing to charity.
3. Sale inside the trust. The CRT (a tax-exempt entity under IRC § 6642) can ordinarily sell the contributed assets without immediate trust-level capital-gains recognition, because a properly qualified CRT is itself exempt from income tax on the sale.
4. Reinvestment. Proceeds are reinvested in a diversified portfolio inside the trust.
5. Income distributions. The CRT pays the grantor (and optionally spouse, or term beneficiaries) the required annual amount, either a fixed annuity (CRAT) or a variable unitrust amount (CRUT), for the term of the trust.
6. Income taxation. Distributions are taxed under the "four-tier" system of IRC § 664(b)2: first as ordinary income, then capital gains, then tax-exempt income, then return of principal. Capital gain from an inside-trust sale remains in the trust’s cumulative capital-gain tier until later payments carry it out to a non-charitable beneficiary; the timing depends on the trust’s other income and payment amounts.
7. Termination. At the end of the trust term (or at the death of the last non-charitable beneficiary), remaining assets pass to the qualified charity (or charities) named in the trust document.

CRAT vs. CRUT: choosing the payment rule

The two CRT types use different payment formulas. Under IRC § 664(d)1, both must pay at least annually and use a payout rate from 5% through 50%. A CRAT tests its remainder against the initial property placed in trust. A CRUT applies the 10% remainder test to each contribution. The payment formulas also differ:

• CRAT (Charitable Remainder Annuity Trust). Pays a fixed dollar amount computed from the initial net fair market value. The nominal payment does not move up or down with an annual revaluation. The governing instrument must prohibit later contributions under Treas. Reg. § 1.664-2(b)2. A fixed payment offers predictability, but the label does not guarantee investment performance, purchasing power, or how much principal will remain at any later date. For a life-term CRAT, the statutory 10% test is not the only qualification issue. Rev. Proc. 2016-423 explains the separate probability-of-exhaustion test and supplies a sample qualified-contingency provision as an alternative for CRATs within its scope. A life-term CRAT using that alternative must meet the revenue procedure’s conditions and use the required provision; a generic early-termination clause is not enough.
• CRUT (Charitable Remainder Unitrust). Pays a fixed percentage of fair market value determined each year, so the dollar payment can rise or fall as the annual value changes. The instrument may prohibit later contributions or permit them under the adjustment rules in Treas. Reg. § 1.664-3(b)4. Annual valuation and any later contribution add administration; a percentage formula does not promise a particular dollar payment. Under IRC § 664(d)(2)(D), (4)5, each contribution must separately leave a qualifying remainder worth at least 10% of that contribution’s net fair market value on its contribution date. A contribution that would otherwise cause an existing CRUT to fail that test is treated as a transfer to a separate trust under the statute.

The IRS Form 5227 instructions6 distinguish the standard unitrust formula from net-income variants:

• Standard CRUT. Pays the unitrust percentage each year regardless of trust income or principal.
• NICRUT (Net Income CRUT). Pays the lesser of trust income or the unitrust amount. A shortfall is not carried forward for later makeup.
• NIMCRUT (Net Income with Makeup CRUT). Uses the same net-income cap, but tracks prior shortfalls for possible makeup in a later year when trust income is sufficient. A makeup account records a deficit; it does not guarantee that later income will exist to pay it.
• FLIP-CRUT. Begins with a permitted net-income limitation and changes to the standard unitrust method after an objectively defined triggering event in the governing instrument. The trigger and conversion mechanics must satisfy Treas. Reg. § 1.664-3(a)(1)(i)(c)7; the parties cannot simply choose a later year to change methods.

A practical CRT variant decision path

1. Define the payment need. Decide whether the client needs a fixed nominal dollar amount or can accept annual changes tied to trust value. Then model more than one payout rate instead of treating 5% as a recommendation.
2. Identify the funding pattern. A one-time contribution can fit either form if every other requirement is met. A plan for later additions rules out adding them to a CRAT and requires a CRUT instrument and administration that permit them.
3. Match liquidity to the formula. Marketable assets can support regular valuation and payments more readily than an illiquid business interest or real property. Give tax counsel every binding sale agreement, letter of intent, buyer communication, and negotiation timeline before funding. IRS Chief Counsel Memorandum 2001490078, which is nonprecedential, illustrates the fact-specific assignment-of-income inquiry: whether a right to sale proceeds was already fixed and whether the transferee could decide whether, when, and to whom to sell. A CRT label alone does not answer those questions.
4. Test the term and recipients. The payout rate, payment timing, term length, applicable § 7520 rate, and, for a life term, the non-charitable recipients’ measuring lives affect the actuarial remainder. Separately,IRC § 664(d)(1)(C), (2)(C)9 requires the remainder to pass to or for the use of a qualifying charitable organization. Choosing that organization is an eligibility and planning decision, not one of the actuarial inputs just listed. The statutory term-of-years maximum is 20 years.
5. Price the administration. A CRUT needs annual valuation. Every CRT needs distribution accounting and generally an annual Form 5227. The person or institution serving as trustee must be able to perform those duties for the full term.

What the variant choice does and does not decide

Choosing CRAT, standard CRUT, NICRUT, NIMCRUT, or FLIP-CRUT selects a payment rule. It does not by itself determine the charitable deduction, the character of beneficiary distributions, the investment return, the value of a difficult asset, or whether the plan leaves enough flexibility for the family. The IRS CRT guidance10 explains that, for a lifetime transfer, the trust generally takes the donor’s carryover basis and that payments to non-charitable beneficiaries are taxable under the statutory tiers. Under IRC § 664(b)-(c)11, a qualified CRT generally owes no current federal income tax on its sale, while a non-charitable beneficiary recognizes capital gain when a later payment carries out current or accumulated capital gain. The payment amount and accumulated income tiers determine that timing. The structure does not erase gain or relabel it as tax-free principal.

Before choosing a variant, collect current account statements, basis and acquisition records, valuation materials for nonmarketable assets, any sale documents or negotiation timeline, the desired payment amount, beneficiary ages, the intended term, the proposed charity, recent tax returns, prior charitable gifts, and any plan for later contributions. The next step is a side-by-side projection of the permitted variants with estate-planning counsel and the client’s tax and investment advisers. That comparison should show the payment range, actuarial remainder, projected deduction, distribution character, valuation work, and administration under the same assumptions before any asset is transferred.

The minimum-payout and 10%-remainder tests

Under IRC § 664(d)1:

• Minimum payout. At least 5% and not more than 50% of trust value (initial value for CRAT; revalued annually for CRUT).
• 10% remainder test. For a CRAT, the present value of the charitable remainder must be at least 10% of the initial net fair market value placed in trust. For a CRUT, the remainder interest attributable to each contribution must be at least 10% of that contribution’s net fair market value on its contribution date. The calculation uses the applicable § 7520 rate and the trust’s payout and term assumptions.

The 10% test constrains the permitted combination of payout rate, term, payment timing, and measuring lives. A later CRUT contribution must be tested on its own facts rather than assumed to pass because the initial contribution did.

Capital-gains deferral mechanics

The CRT's primary benefit for owners of highly appreciated assets:

• Outside a CRT, an outright sale of appreciated assets ordinarily triggers immediate capital-gains tax, at federal long-term rates (generally 15% or 20%, plus the 3.8% net investment income tax for higher-income taxpayers) on top of New Jersey income tax. New Jersey does not apply a preferential capital-gains rate, so the gain is generally taxed as ordinary income at rates that reach 10.75% at the top bracket. The combined bite can take a meaningful slice off the top before a dollar is reinvested.
• Inside a CRT, the same sale generally triggers no immediate trust-level capital-gains recognition, because a qualified CRT is exempt from income tax under IRC § 6641. The full proceeds stay invested and working for the income stream rather than being reduced by an up-front tax.
• A non-charitable beneficiary recognizes current or accumulated capital gain only when a distribution carries that gain out under the four-tier system of IRC § 664(b)1. Distributions are taxed first as ordinary income from the trust's current-year ordinary income, then as capital gain, then as tax-exempt income, then as principal. The statute does not require every dollar of accumulated gain to be distributed before the charitable remainder becomes payable.
• For an appreciated asset with virtually zero basis, the sale proceeds remain trust property and the trustee invests them under the governing instrument. Payments to a non-charitable beneficiary carry out income according to the statutory tiers; whether and when a payment carries capital gain depends on the trust's current and accumulated tier balances.
• The timing benefit can be meaningful because the trustee can invest the pre-tax sale proceeds and a beneficiary reports income only as later payments carry it out under the statutory tiers. That is not a promise that every beneficiary payment will be capital gain, or that all accumulated gain will reach a beneficiary before the charitable remainder becomes payable. The charitable deduction, payout terms, investment results, tier balances, and projected remainder all belong in the comparison with a straightforward sale before selecting the structure.

Charitable remainder selection

Remainder beneficiaries must be qualified charities under IRC § 170(c)1. Options:

• Public charity (a 501(c)(3) classified as a 50%-type organization): generally carries the highest deduction limits (commonly 30% of AGI for gifts of appreciated property; 60% for cash), which is why public charities are the most common remainder beneficiaries.
• Private operating foundation: treated similarly to public charity for deduction purposes.
• Donor-advised fund (DAF) at a sponsoring public charity (Fidelity Charitable, Schwab Charitable, NJ community foundations): an effective remainder vehicle with ongoing donor advisory privileges over how the remainder is ultimately granted.
• Community foundation with named-fund structures.
• Private non-operating foundation: lower deduction limits (20% of AGI for property gifts; 30% for cash) and additional restrictions; used where the grantor wants ongoing family involvement in grant-making.

CRTs are often drafted to allow the grantor to retain the limited power to substitute among qualified charities, preserving flexibility without compromising the deduction.

When a CRT may not be the right tool

A CRT is a strong fit for a specific set of facts, and naming where it does not fit is part of giving honest advice. The structure is irrevocable, so it rewards a settled charitable intent and penalizes hesitation; if the charitable commitment is uncertain, a revocable approach or a donor-advised fund usually serves the family better. A CRT is also at its strongest with a low-basis, highly appreciated asset that is genuinely ready for sale; when the basis is already high, the capital-gains deferral that powers the strategy has little to defer, and a simpler plan may produce a comparable result with less complexity and cost.

• Charitable intent is tentative. The remainder is permanently committed to charity; a family that may want those assets back, or for heirs, should generally look at a revocable structure instead.
• The asset is high-basis. With little embedded gain to defer, the central tax advantage is muted, and the administrative weight of a CRT may not earn its keep.
• Heirs need the principal. A CRT pays an income stream, not the underlying assets, to the non-charitable beneficiaries; the remainder goes to charity, not to children. Families focused on transferring principal to the next generation are usually better served by GRATs, IDGTs, or SLATs.
• Liquidity and administration matter. A CRT is a separate taxpayer that generally must file IRS Form 5227 each year and be administered for its full term, which adds ongoing cost and recordkeeping that a one-time gift does not.

None of this is a reason to avoid a CRT where the facts fit; it is the reason the recommendation comes after modeling, not before. The right answer turns on the asset, the basis, the payout rate, the term, the prevailing § 7520 rate, and the family's charitable and income goals together.

NJ tax considerations

• New Jersey does not offer a state-level charitable income-tax deduction equivalent to the federal § 170 deduction. New Jersey allows certain limited deductions on the NJ-1040 but generally does not provide a personal charitable-gift deduction, so the federal deduction is ordinarily the primary income-tax benefit of a CRT for a New Jersey resident.
• NJ repealed its estate tax effective 2018; the charitable gift at CRT termination doesn't help with NJ estate tax (there isn't one) but does help with federal estate tax for estates above the federal exemption.
• New Jersey inheritance tax under N.J.S.A. 54:34-1 et seq.1 generally exempts transfers to qualified charities, so the charitable remainder passing at the end of the trust term is typically free of New Jersey inheritance tax. Whether that exemption reaches every element of a particular plan depends on the beneficiaries and how the trust is structured.
• CRT-generated income distributed to NJ-resident grantors is subject to NJ income tax under the four-tier characterization.

How we work a CRT decision

A Charitable Remainder Trust is a modeling decision before it is a drafting decision. Before recommending one, we run the numbers that actually determine whether it serves you: the asset and its basis, the payout rate you need, the trust term, the prevailing § 7520 rate, the projected charitable deduction at funding, and how the four-tier income taxation is likely to fall across the years of the income stream. We test the 5%-payout and 10%-remainder requirements under IRC § 664(d)1, weigh a CRAT against the CRUT variations, choose and coordinate the charitable remainder beneficiary, and integrate the trust with the rest of your estate plan, and then we draft. If the modeling shows a simpler path serves you better, we will tell you that, because the goal is the right structure, not the most elaborate one.

How we help: If you hold a low-basis asset you are ready to sell and your charitable intent is real, we map the deduction, income stream, trust term, and charitable remainder to your actual numbers. The resulting legal structure is bespoke, not a CRT template. Request a CRT analysis for the asset and payout you are considering.