The short answer
A charitable remainder trust (CRT) lets you sell a highly appreciated asset without paying capital gains tax on the day of the sale. You move the asset into an irrevocable trust, the trust sells it tax-free, and it pays you income for life or up to 20 years. Whatever is left at the end goes to the charity you choose.
You still pay tax, just later and slower: each payment you receive carries out part of the deferred gain. You also get a partial charitable deduction the year you fund the trust.
For Los Angeles investors facing a combined 37.1% tax on a large long-term gain, that deferral is the whole point. Selling $5 million of stock outright leaves roughly $3.15 million to reinvest. Selling inside a CRT leaves all $5 million working for you.
How a CRT works, step by step
The trust sells tax-free, pays you income, and the rest goes to charity
You (the donor)
Own stock or a business with a large built-in gain
The CRT
Irrevocable trust
Sells your stock tax-free
Reinvests, diversified
Your charity
Receives what remains when the term ends
2. income for life or up to 20 years, 5% to 50% a year
You fund the trust. You transfer appreciated stock, real estate or business interests into an irrevocable CRT. You usually serve as trustee or pick one, and you name one or more charities to receive the remainder.
The trust sells, tax-free. A CRT is exempt from income tax, so it can sell the asset and reinvest the full proceeds in a diversified portfolio (26 U.S.C. § 664).
You receive income. The trust pays you, and your spouse if you choose, either a fixed dollar amount or a fixed percentage of trust value each year, for life or for a term of up to 20 years.
You take a deduction now. In the year you fund the trust, you can deduct the present value of what the charity is projected to receive.
The charity gets the rest. When the term ends, whatever remains goes to your chosen charity, which can be a donor-advised fund or your own family foundation.
The math: same $5 million, sold vs. given to a CRT
The biggest benefit is not the deduction. It is keeping the tax money invested for decades.
A CRT keeps the full $5 million working for you on day one
Married LA couple, near-zero basis, top brackets (37.1% combined). Income assumes a 5% payout or yield in both cases.
Illustrative: $5M long-term gain, married filing jointly, top marginal rates; 5% payout or portfolio yield.
Why the gap matters.
Sell outright and roughly $1.86 million goes to the IRS and Sacramento on day one. Inside a CRT, that money stays invested and earns income for you every year of the trust.
What you give up. Your heirs do not inherit the trust assets. Many families close that gap with a “wealth replacement” life insurance policy, often held in an irrevocable life insurance trust and funded with part of the CRT income.
What the chart leaves out. The upfront charitable deduction adds to the CRT's advantage, while taxes on the income you receive narrow it. Both depend on your age, the payout rate and interest rates when you fund the trust.
The IRS rules every CRT must meet
A CRT only works if it qualifies under Section 664 at the moment you fund it. Miss a test and you lose the tax exemption and the deduction.
| Rule | Requirement | Why it matters |
|---|---|---|
| Payout rate | At least 5% and no more than 50% of trust value each year | Sets your income; higher payouts shrink the charity's share (26 U.S.C. § 664) |
| Term | Your life, joint lives, or a fixed term of up to 20 years | Younger donors on a lifetime term can fail the remainder test |
| 10% remainder test | Charity's projected share must be at least 10% of the starting value | The most common reason a proposed CRT gets redesigned (26 U.S.C. § 664) |
| Section 7520 rate | IRS discount rate used in the math; 5.6% for October 2026 | Higher rates make the 10% test easier to pass (IRS Rev. Rul. 2026-19) |
| CRAT 5% exhaustion test | Less than 5% chance the fixed payments drain the trust early | Can block annuity trusts for younger donors; the IRS offers a safe-harbor clause (EY on Rev. Proc. 2016-42) |
| Unrelated business income | Any UBTI is hit with a 100% excise tax | Avoid debt-financed real estate and operating partnerships inside the trust (Journal of Accountancy) |
Rates are your friend right now. With the Section 7520 rate at 5.6%, the IRS assumes the trust earns more, which raises the charity's projected share. That makes it easier for younger donors, and for higher payout rates, to pass the 10% test than it was in the low-rate years.
CRAT vs. CRUT vs. NIMCRUT vs. Flip CRUT
Most donors choose a standard CRUT. The other three versions solve specific problems: needing a fixed check, funding with an asset that produces no income, or waiting for an illiquid asset to sell.
| Type | What you receive | Add more later? | Best for | Watch out for |
|---|---|---|---|---|
| CRUT (unitrust) | A fixed % of trust value, revalued every year | Yes | Most donors; income grows if the portfolio grows | Income falls in down markets |
| CRAT (annuity trust) | A fixed dollar amount every year | No | Older donors who want a predictable check | 5% exhaustion test; inflation erodes the payment |
| NIMCRUT (net income with makeup) | The lesser of trust income or the unitrust %, with shortfalls made up later | Yes | Deferring income to later years, such as retirement | Requires careful investment design to control when income is earned |
| Flip CRUT | Starts as a net income trust, then “flips” to a standard CRUT after a trigger such as selling real estate or private stock | Yes | Real estate, private company shares and other illiquid assets | The flip happens the year after the trigger; unpaid makeup amounts are forfeited (ThinkAdvisor Tax Facts) |
How your CRT income is taxed
The trust pays no tax when it sells, but the deferred gain does not disappear. It comes out in your annual payments, in a fixed order the IRS calls the four-tier system (PG Calc):
Ordinary income first: interest and non-qualified dividends the trust has earned, then qualified dividends.
Capital gains next: short-term gains, then long-term gains, including the big gain from selling your original asset.
Tax-exempt income: such as municipal bond interest.
Return of principal: tax-free.
In practice, after selling a low-basis asset, most of your payments for many years will be taxed as long-term capital gain. You pay that tax a little at a time, while the untaxed money keeps compounding inside the trust.
The California wrinkle. California generally follows the federal CRT rules, and a CRT files Form 541-B with the Franchise Tax Board (FTB Form 541-B instructions). But because California taxes capital gains as ordinary income at up to 13.3%, the tier labels matter only on your federal return. Note one state difference: California taxes a CRT on unrelated business income in the year it occurs, rather than using the federal 100% excise tax.
Your upfront deduction, and the 2026 changes. A gift of appreciated stock to a CRT with a public charity remainder is generally deductible up to 30% of AGI, with a five-year carryforward for any excess (IRS Publication 526). Starting in 2026, itemizers lose the first 0.5% of AGI in charitable deductions, and taxpayers in the 37% bracket can take the benefit at no more than 35% (Sikich). Neither change touches the core benefit: the tax-free sale inside the trust.
Using a CRT before a business or stock sale
A CRT is one of the few tools that can shelter the gain on a company sale, but only if the timing is right. Fund it too late and the IRS taxes you as if you sold the shares yourself.
Fund it before the deal is “virtually certain.” In Estate of Hoensheid (T.C. Memo 2023-34), an owner gave shares to charity two days before the purchase agreement was signed. The Tax Court still taxed him on the gain, because by then the sale was effectively done (Brach Eichler). The safer window is before a letter of intent, and certainly before key contingencies are resolved.
The trust cannot be obligated to sell. The CRT's trustee must be free to keep or sell the asset. Any side agreement requiring a sale undermines the plan.
Private shares need a qualified appraisal. Closely held stock worth more than $10,000 requires a written appraisal from a qualified appraiser, dated no earlier than 60 days before the gift, plus Form 8283 Section B (Moss Adams). Publicly traded stock needs no appraisal.
Watch the asset type. S-corporation stock cannot be held by a CRT, mortgaged real estate can create taxable debt-financed income, and partnership interests can carry unrelated business income. Each needs restructuring before the gift.
Self-dealing rules apply. You, your family and your businesses generally cannot buy from, sell to, or borrow from the trust. Violations trigger excise taxes.
Is a CRT right for you?
A CRT fits best when you have a large gain, want income more than a lump sum, and already intend to leave something to charity.
| Factor | Strong fit | Weak fit |
|---|---|---|
| Size of the gain | $1 million or more of low-basis stock, real estate or a business | Small gains, where setup and annual costs outweigh the benefit |
| What you need from the money | Steady income for retirement or for decades | A large lump sum now, such as for a home or another business |
| Charitable intent | You already give, or plan to fund a foundation or donor-advised fund | You want every dollar to pass to heirs |
| Time horizon | Long life expectancy or a 10- to 20-year term, so deferral compounds | Very short horizon, where deferral adds little |
| Asset type | Public stock, unmortgaged real estate, C-corp shares before an LOI | S-corp stock, mortgaged property, or a sale already under contract |
| Heirs | Willing to pair the CRT with life insurance to replace the remainder | Heirs are counting on inheriting this specific asset |
FAQ
How does a charitable remainder trust work?
You give an appreciated asset to an irrevocable trust. The trust sells it without paying capital gains tax, pays you income for life or up to 20 years, and gives what remains to charity. You also get a partial income tax deduction in the year you fund it.
Do I avoid capital gains tax with a CRT?
You defer it. The trust sells tax-free, but your annual payments carry out the gain over time under the four-tier rules. You pay tax gradually instead of all at once.
What is the difference between a CRAT and a CRUT?
A CRAT pays a fixed dollar amount every year and cannot accept new gifts. A CRUT pays a fixed percentage of the trust's value, recalculated annually, so payments rise and fall with the portfolio, and you can add assets later.
How much income can a CRT pay?
Between 5% and 50% of trust value a year, as long as the charity's projected share is at least 10% of the starting value.
Can I be the trustee of my own CRT?
Often yes, though many donors use an independent or corporate trustee, especially for hard-to-value assets.
Can my children get the money instead of charity?
Not the trust's remainder. Many families buy life insurance in an irrevocable trust so heirs receive a tax-free death benefit that replaces what goes to charity.
Does California recognize charitable remainder trusts?
Yes. California generally follows the federal CRT rules, and the trust files Form 541-B. Your payments are taxed as ordinary income in California, since the state has no lower capital gains rate.
Important Disclosures
Source: Gideon Strategic Partners, Important Disclosures (effective April 1, 2026).
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Sources
Listed in the order they first appear in this article.
- 26 U.S.C. § 664: Charitable remainder trusts (Cornell LII)
- IRS Rev. Rul. 2026-19: Section 7520 rate for October 2026
- EY: IRS sample CRAT provision under Rev. Proc. 2016-42
- Journal of Accountancy: UBTI in CRTs subject to excise tax
- ThinkAdvisor Tax Facts: What are flip unitrusts?
- PG Calc: Four tiers of income
- California Franchise Tax Board: Form 541-B instructions
- IRS Publication 526: Charitable Contributions
- Sikich: OBBBA impacts on charitable contributions
- Brach Eichler: Tax Court guidance on charitable contributions and assignment of income (Hoensheid)
- Moss Adams: Forms 8283 and 8282 for noncash contributions
- Gideon Strategic Partners: Important Disclosures