How a Charitable Remainder Trust Can Lower Your Taxes
April 27, 2026
Protecting your assets for your heirs while also making a meaningful impact on a charity you love doesn’t have to be an either/or choice. A charitable remainder trust (CRT) is a fantastic planning tool that lets you do both. Think of it as a way to create a steady income stream for yourself from assets like appreciated real estate, all while setting up a future gift. By moving assets into the trust, you remove them from your taxable estate, which can be a huge win for your family. It’s a smart strategy with clear rules for how it all works.
Schedule a strategy session with Lawvex to find out if a charitable remainder trust fits your estate plan.
For California families with appreciated real estate, stock portfolios, or business interests, a CRT can solve a common problem: how to unlock the value of a highly appreciated asset without triggering a large capital gains tax bill. This guide covers how CRTs work, the two main types, their tax advantages, IRS payout rules, trustee requirements, and when a CRT makes sense as part of a broader estate plan.
What Is a Charitable Remainder Trust and How Does It Work?
A charitable remainder trust is an irrevocable trust authorized under Section 664 of the Internal Revenue Code. Here is how the basic structure works:
- You fund the trust. You transfer cash, stocks, real estate, or other assets into the CRT. Once transferred, you cannot take the assets back.
- The trust pays you income. The CRT distributes a fixed percentage or fixed dollar amount to you (or other named beneficiaries) each year. Payouts continue for a term you choose, up to 20 years, or for the lifetime of one or more beneficiaries.
- The remainder goes to charity. When the trust term ends, whatever is left in the trust passes to the charitable organization (or organizations) you named when you created the trust.
The IRS requires that the present value of the charitable remainder be at least 10% of the initial contribution. This rule ensures the charity receives a meaningful benefit, not just the leftover scraps after decades of payouts.
Because a CRT is irrevocable, the assets you contribute are removed from your taxable estate. This can be a valuable tool for families approaching or exceeding the federal estate tax exemption threshold. With the 2026 estate tax exemption changes potentially cutting the exemption roughly in half, CRTs are getting more attention from estate planners across California.
CRAT vs. CRUT: Which Type of CRT Is Right for You?
The IRS recognizes two types of charitable remainder trusts, and the difference comes down to how your annual payouts are calculated.
| Feature | CRAT (Charitable Remainder Annuity Trust) | CRUT (Charitable Remainder Unitrust) |
|---|---|---|
| Annual payout | Fixed dollar amount, set when the trust is created | Fixed percentage of trust value, recalculated each year |
| Payout range | 5% to 50% of initial fair market value | 5% to 50% of annual trust value |
| Additional contributions | Not allowed after initial funding | Allowed at any time |
| Income in rising markets | Stays the same regardless of trust performance | Increases as trust assets grow |
| Income in falling markets | Stays the same (trust may deplete faster) | Decreases as trust assets shrink |
| Best for | Donors wanting predictable, steady income | Donors wanting income that keeps pace with growth |
CRAT example: You contribute $1 million in appreciated stock and choose a 5% payout. You receive $50,000 per year for the duration of the trust, regardless of how the investments perform.
CRUT example: You contribute $1 million and choose a 5% payout rate. In year one, you receive $50,000. If the trust grows to $1.1 million by year two, your payout increases to $55,000. If it drops to $900,000, your payout decreases to $45,000.
Most estate planning attorneys recommend the CRUT for clients who want long-term income with inflation protection. The CRAT is often better for clients who need a guaranteed income floor and plan a shorter trust term. Your choice depends on your financial goals, risk tolerance, and how long you expect the trust to operate.
How a Charitable Remainder Trust Can Lower Your Taxes
CRTs offer three distinct tax advantages that work together to make them one of the most powerful charitable giving tools in the tax code.
1. Claim an Immediate Income Tax Deduction
When you fund a CRT, you receive an immediate income tax deduction based on the estimated present value of the charitable remainder. The deduction amount depends on several factors: the fair market value of the assets you contribute, the payout rate, the trust term, the ages of the income beneficiaries, and the IRS discount rate (called the Section 7520 rate) at the time of the contribution.
For example, a 65-year-old who contributes $1 million to a lifetime CRUT with a 5% payout rate might receive a charitable deduction of approximately $400,000 to $500,000, depending on the current 7520 rate. That deduction can be used in the year of the contribution, and any unused portion can be carried forward for up to five additional tax years.
2. Defer or Avoid Capital Gains Taxes
This is often the biggest benefit for California families. When you sell a highly appreciated asset, such as stock you bought at $50,000 that is now worth $500,000, you would normally owe capital gains tax on the $450,000 gain. California residents face a combined federal and state capital gains rate that can reach 33% or more for high earners.
With a CRT, you contribute the appreciated asset to the trust before selling it. The trust then sells the asset and pays no capital gains tax at the time of sale. This means the full sale proceeds stay inside the trust and can be reinvested to generate income for you. Over time, you pay tax on the distributions you receive (at ordinary income, capital gains, or tax-exempt rates depending on the trust’s income character), but you avoid the large upfront tax hit that would have reduced your investable assets.
To learn more about capital gains strategies, see our guide on how to avoid capital gains tax through estate planning.
Contact Lawvex for a free estate planning consultation to see how much a CRT could save you in capital gains taxes.
3. Reduce Your Estate’s Tax Burden
Assets transferred to a CRT are removed from your taxable estate. For families with estates that may exceed the federal exemption, this can produce significant estate tax savings. The current federal estate tax rate on amounts above the exemption is 40%, so removing $1 million from your estate could save your heirs up to $400,000 in estate taxes.
California does not impose a separate state estate tax, but the federal estate tax applies to all U.S. residents. For a full breakdown of how California handles estate and inheritance taxes, read our California estate and inheritance tax guide.
Is a Charitable Remainder Trust Right for You?
A CRT is not the right tool for everyone. It works best in specific financial situations:
- You own highly appreciated assets. Stocks, real estate, or business interests that have grown significantly in value are ideal CRT candidates. The greater the appreciation, the more capital gains tax you avoid.
- You want income in retirement. If you are approaching retirement and need a steady income stream, a CRT can convert an illiquid or concentrated asset into diversified, income-producing investments without the tax hit of selling outright.
- You have charitable goals. A CRT only makes sense if you genuinely want to benefit a charity. The IRS 10% remainder requirement ensures a real charitable purpose, and the tax benefits are designed to incentivize giving, not just tax avoidance.
- Your estate may owe federal estate tax. If your total estate is approaching or above the federal exemption (currently $13.99 million per individual, scheduled to drop to roughly $7 million in 2026), a CRT can reduce your taxable estate. For more on the upcoming changes, see our article on 2026 estate tax exemption changes.
- You want to diversify a concentrated position. Founders and long-time employees who hold a large block of a single stock can use a CRT to sell the stock tax-free inside the trust and reinvest in a diversified portfolio.
CRTs are less useful if your assets have little or no appreciation, if you need full access to your principal (CRTs are irrevocable), or if you have no interest in charitable giving.
Potential Downsides and Risks to Consider
While the tax benefits are compelling, charitable remainder trusts are sophisticated legal instruments with significant commitments. Before you decide to create one, it’s important to understand the potential drawbacks. These aren’t necessarily deal-breakers, but they are critical factors to discuss with your family and your estate planning attorney. A CRT is a powerful tool, but only when it aligns perfectly with your long-term financial and charitable objectives. Considering these risks upfront ensures you are making a fully informed decision that will serve you and your chosen charity well for years to come.
The Trust is Irrevocable
This is the most important feature to understand: once you transfer assets into a CRT, you cannot take them back. The term “irrevocable” is absolute. This means the principal you contribute is no longer part of your personal net worth and cannot be accessed for emergencies, new business ventures, or unexpected life events. While the income stream provides cash flow, the underlying assets are permanently dedicated to the trust’s purpose. This loss of flexibility is a significant trade-off for the tax advantages. Before moving forward, you must be completely certain you will not need to access the principal of the assets you are donating for the rest of your life.
Setup and Administration Costs
Creating and maintaining a CRT is not a DIY project. It requires a skilled attorney to draft the trust document correctly to comply with IRS regulations. Setting up a CRT involves legal fees that can run into thousands of dollars. Beyond the initial setup, there are ongoing costs for managing the trust’s investments and filing its separate tax return each year. These administrative expenses can eat into the trust’s returns, so it’s crucial to factor them into your calculations. At Lawvex, we believe in transparent, value-based pricing, so you’ll understand the full scope of these costs before you commit, ensuring there are no surprises down the road.
Prohibited Actions and IRS Scrutiny
Because of the generous tax benefits, the IRS closely watches CRTs to ensure they are not being used improperly for tax avoidance or to unfairly benefit individuals. The rules are strict. For example, you cannot take actions that would jeopardize the charitable remainder, and all transactions must be handled at arm’s length. Any misstep in the trust’s administration could lead to significant penalties or even the disqualification of the trust, erasing its tax benefits. This is why working with a law firm experienced in trust administration is so vital. Proper management ensures your trust remains compliant and functions exactly as intended, protecting you and your charitable legacy.
How to Set Up Your Charitable Remainder Trust in California
Creating a CRT involves several steps, and working with an experienced estate planning attorney is important to make sure the trust meets IRS requirements. Here is an overview of the process:
- Define your goals. Decide how much income you need, how long you want the trust to pay out, and which charity (or charities) will receive the remainder.
- Choose between a CRAT and a CRUT. Your attorney will run projections based on your age, the assets you plan to contribute, and different payout rates to help you pick the right structure.
- Select the payout rate. The IRS requires a rate between 5% and 50%, and the present value of the charitable remainder must be at least 10% of the initial contribution. Payout rates between 5% and 8% are most common because higher rates reduce the charitable deduction and may not pass the 10% remainder test.
- Choose a trustee. You can serve as your own trustee, name a family member, appoint a professional trustee (such as a bank or trust company), or name the charitable beneficiary as trustee. Each option has trade-offs in cost, control, and complexity.
- Draft and execute the trust document. The trust agreement must follow IRS model forms and include specific language about payout timing, investment management, charitable beneficiaries, and what happens if a named charity ceases to exist.
- Fund the trust. Transfer the assets into the trust. For real estate, this means executing and recording a new deed. For stocks, it means transferring shares to the trust’s brokerage account.
- File IRS Form 5227. CRTs must file an annual information return (Form 5227) with the IRS, even though the trust itself is generally tax-exempt.
If you are new to trusts, our guide on how to set up a trust in California covers the general process and what to expect.
Schedule your strategy session with Lawvex to get a personalized CRT analysis for your situation.
What Assets Can You Place in a CRT?
The real power of a charitable remainder trust comes from the assets you use to fund it. While you can technically use cash, the most significant tax benefits appear when you contribute assets that have grown substantially in value. Choosing the right asset is a strategic decision that directly impacts your income tax deduction, your capital gains tax savings, and the overall effectiveness of your estate plan. Let’s look at the assets that work best and a few that come with restrictions or should be avoided altogether.
Commonly Used Assets
The best assets for a CRT are those that would trigger a large capital gains tax bill if you sold them. By donating them to the trust instead, the trust can sell them tax-free, preserving the full value for reinvestment. The most popular choices include publicly traded stocks and mutual funds that have appreciated over time. Real estate is also an excellent candidate, especially for Central California residents in areas like Clovis and Madera who have seen their property values climb. You can contribute an investment property, a vacation home, or even a portion of your primary residence. For entrepreneurs, certain private company stocks and business interests can also be used, making a CRT a valuable tool in your business planning strategy.
Restricted Assets
Not every asset is a good fit for a CRT. Some are complicated, while others are flat-out prohibited by the IRS. For example, you cannot use S-Corporation stock to fund a CRT. Another major hurdle is property with a mortgage. Contributing mortgaged real estate can create significant tax problems for the trust and may even disqualify it. It’s also critical to remember that once you transfer an asset to a CRT, the transfer is permanent. You cannot take the asset back. This irrevocable nature means you must be completely sure you won’t need access to the principal in the future. Working through these rules requires careful planning with an attorney who specializes in this area.
Understanding CRT Payout Rules from the IRS
The IRS imposes specific rules on CRT payouts to maintain the trust’s tax-exempt status:
- Payout rate: Between 5% and 50% of the trust’s value (annually).
- 10% remainder test: The present value of the charitable remainder must equal at least 10% of the net fair market value of the assets contributed. If your chosen payout rate and trust term fail this test, the IRS will not recognize the trust as a valid CRT.
- Trust term: A CRT can pay out for a fixed term of up to 20 years, or for the lifetime of one or more named beneficiaries. You can also combine both (the shorter of a term or a lifetime).
- Distribution ordering: CRT distributions follow a four-tier system. Ordinary income is distributed first, then capital gains, then other income (such as tax-exempt interest), and finally a return of principal. This ordering means early distributions from a CRT that sold appreciated assets will often be taxed at capital gains rates.
- Annual filing: The trustee must file IRS Form 5227 each year and provide Schedule K-1 to each income beneficiary.
Can a Charitable Remainder Trust Be Ended Early?
This is a common question, and the short answer is generally no. The “irrevocable” nature of a CRT is a core feature, not a flaw—it’s the very thing that allows you to remove assets from your taxable estate and gain the powerful tax advantages. When you create and fund a CRT, you are making a permanent commitment to the plan. The structure is designed to be binding to ensure the charitable beneficiary ultimately receives its share, a requirement strictly enforced by the IRS.
While there are extremely rare and complex situations where a trust might be terminated with court approval and the consent of all parties, this is not a standard option to plan for. Attempting to unwind a CRT can have serious consequences, including the loss of its tax-exempt status and a sudden, large tax bill on previously deferred capital gains. This is why it’s so important to work with an experienced estate planning team from the very beginning. A CRT should only be created with the full understanding that it is a long-term, binding agreement.
CRT vs. Donor-Advised Fund: Which Should You Choose?
Both CRTs and donor-advised funds (DAFs) provide tax-efficient ways to support charities, but they serve different purposes.
| Feature | Charitable Remainder Trust | Donor-Advised Fund |
|---|---|---|
| Income stream to donor | Yes, annual payouts for life or a term of years | No, funds go entirely to charity |
| Upfront tax deduction | Partial (based on present value of remainder) | Full (up to AGI limits) |
| Capital gains avoidance | Yes, trust sells asset tax-free | Yes, donor avoids capital gains on contributed assets |
| Complexity and cost | High (legal drafting, annual filings, trustee fees) | Low (account opened through a sponsoring organization) |
| Minimum practical amount | Typically $250,000 or more | As low as $5,000 at many sponsors |
| Flexibility to change charities | Limited (must follow trust terms) | High (advise grants to any qualified charity anytime) |
| Best for | Donors who want income and a large charitable gift | Donors who want simplicity and full charitable giving |
Some families use both: a CRT to convert appreciated assets into an income stream with a charitable remainder, and a DAF for ongoing, flexible charitable giving. Your estate planning attorney can help you decide which approach, or which combination, matches your goals.
Using a DAF as Your CRT’s Beneficiary
What if you want the income benefits of a CRT but the giving flexibility of a DAF? You can have both. It’s possible to name a public charity that sponsors a donor-advised fund as the final beneficiary of your charitable remainder trust. This strategy gives you incredible flexibility. Instead of locking in a specific charity when you create your irrevocable trust—a choice that can be difficult to change—the remaining funds simply pour into your DAF when the trust term ends. From there, you or your children can recommend grants to various qualified charities over time, responding to new needs and evolving passions without being tied to a decision made decades earlier.
CRTs vs. Charitable Lead Trusts (CLTs)
A charitable lead trust, or CLT, is essentially the reverse of a CRT. With a CLT, the charity gets the income stream first. The trust makes annual payments to a charity you choose for a set number of years. When the trust term ends, whatever is left—the “remainder”—passes to your non-charitable beneficiaries, such as your children. This tool is often used by very wealthy families as a way to transfer assets to the next generation with potentially significant gift and estate tax savings. While a CRT answers the question, “How can I get income and still give to charity?” a CLT answers, “How can I give to charity now and pass wealth to my heirs more tax-efficiently?” Both are powerful estate planning tools, but they serve opposite goals.
CRTs vs. Private Foundations
For families interested in large-scale, long-term philanthropy, a private foundation might come to mind. A private foundation offers the most control over your charitable giving and can be designed to last for generations. However, that control comes with a high price tag, including complex setup, strict IRS rules, and significant ongoing administrative costs. A CRT, by contrast, is a much simpler and more cost-effective vehicle. Its primary focus is providing an income stream back to you, with the charitable gift happening at the end. For most families who want to make a meaningful gift without the burden of running a separate non-profit, a CRT or a DAF offers a more practical path to achieving their charitable and financial goals.
How a CRT Works with Your Other Estate Planning Tools
Yes. A CRT often works alongside other trust structures as part of a larger estate plan. Common combinations include:
- CRT + Wealth Replacement Trust: One concern with a CRT is that the assets go to charity instead of your heirs. A common solution is to use a portion of the CRT income to fund an irrevocable life insurance trust (ILIT) that holds a life insurance policy. The policy replaces the donated assets for your family, so your heirs receive a tax-free death benefit roughly equal to what you contributed to the CRT.
- CRT + Generation-Skipping Trust: For families focused on multi-generational wealth transfer, combining a CRT with a generation-skipping trust can reduce both estate and generation-skipping transfer taxes while supporting charitable goals.
- CRT + Family Limited Partnership: Business owners sometimes contribute partnership interests to a CRT to diversify concentrated holdings and generate retirement income while supporting a charity.
Each combination adds complexity, so working with an experienced estate tax planning attorney is important to get the structure right.
Frequently Asked Questions
What happens to a charitable remainder trust when the grantor dies?
If the trust pays income for the grantor’s lifetime, the trust terminates at the grantor’s death and the remaining assets are distributed to the named charity. If the trust names a surviving spouse or another beneficiary, payouts continue to that person until the trust term ends or the last beneficiary dies, depending on the trust terms.
Can you change the charity in a charitable remainder trust?
It depends on how the trust was drafted. Many CRTs include a provision that allows the grantor (or trustee) to change the charitable beneficiary, as long as the new beneficiary is a qualified charity under IRS rules. If the trust does not include this flexibility, the original charity designation is permanent.
What is the minimum amount to fund a charitable remainder trust?
There is no IRS-mandated minimum, but the practical minimum is typically $250,000 to $500,000. Below that amount, the legal, administrative, and trustee costs of maintaining a CRT may outweigh the tax benefits. For smaller charitable gifts, a donor-advised fund is usually more cost-effective.
Are charitable remainder trust distributions taxable?
Yes. Distributions from a CRT are taxable to the income beneficiary, but the tax rate depends on the character of the trust’s income. The IRS uses a four-tier system: ordinary income first, then capital gains, then other income, then return of principal. The trust itself is tax-exempt and does not pay income tax on its earnings.
How long can a charitable remainder trust last?
A CRT can last for a fixed term of up to 20 years, for the lifetime of one or more beneficiaries, or the shorter of a fixed term or lifetime. Most CRTs are structured as lifetime trusts, especially when the income beneficiaries are a married couple.
Ready to Plan Your Charitable Legacy?
A charitable remainder trust can help you turn appreciated assets into retirement income, reduce your tax burden, and leave a lasting charitable legacy. But a CRT is a complex legal instrument with strict IRS rules, and it needs to fit within your overall estate plan to work the way you intend.
At Lawvex, we have completed over 6,400 estate plans for California families and help clients build strategies that address taxes, income, charitable goals, and family protection all at once. Whether you are considering a CRT, a donor-advised fund, or a combination of tools, our team can run the numbers and help you decide what makes sense for your situation.
Contact Lawvex today to schedule your estate planning strategy session.
Key Takeaways
- Create an income stream and a charitable legacy: A CRT lets you transform an appreciated asset into regular payments for yourself, with the remaining balance going to a charity you love after the trust term ends.
- Unlock major tax savings: Funding a CRT provides three key tax benefits: an immediate deduction for your charitable gift, the ability to sell the asset without paying initial capital gains tax, and a reduction in your overall taxable estate.
- Recognize that CRTs are irrevocable and complex: Once you fund a CRT, you cannot get the principal back, so it is a permanent decision. These trusts have strict rules and require professional guidance to set up and manage correctly, making it vital to work with a specialized attorney.
