Charitable Remainder Trust (CRT): Tax-Free Exit + Income for $2M–$20M Families

What a charitable remainder trust does

A charitable remainder trust (CRT) is an irrevocable split-interest trust under IRC § 664. You contribute appreciated assets — real estate, concentrated stock, a closely held business interest — to the trust irrevocably. The trust sells those assets free of capital gains tax because the trust itself is a tax-exempt entity. The full proceeds are reinvested, and the trust pays you (or other named non-charitable beneficiaries) an income stream for a term of years or for life. When the trust terminates, whatever remains passes to your designated charitable organization(s).

CRUT vs. CRAT: which structure fits your situation

The vast majority of CRTs are CRUTs. Unless you have a strong need for a predictable fixed payment regardless of trust performance, the CRUT's flexibility and inflation protection make it the better choice for most $2M–$20M families.

The four tax benefits of a CRT

1. Capital gains avoidance

This is the dominant benefit and completely unchanged by recent legislation. When the CRT sells an appreciated asset, the trust owes no federal capital gains tax on that transaction. The full sale proceeds — not the after-tax amount — are available to reinvest and generate the income stream. On a $2M asset with a $400K cost basis:

• Sell directly: $1.6M gain × 23.8% LTCG + NIIT = $380,800 tax. Net to reinvest: $1,619,200.
• CRT: $0 capital gains tax at sale. Full $2,000,000 reinvested.
• Advantage of CRT starting base: $380,800

That gap, compounded over a 10–20 year trust term, is typically the single largest value driver of CRT planning.

2. Income stream for the term of the trust

CRT income is taxed as it's distributed — using a four-tier ordering system under Treas. Reg. §1.664-1(d). Distributions are characterized in this priority order: (1) ordinary income, (2) capital gains, (3) other income (tax-exempt), (4) return of corpus. In practice, for a trust funded with appreciated securities or real estate that generated capital gains at the sale, most early distributions are taxed as capital gains — still at 20%/23.8% rather than ordinary rates.

3. Charitable income tax deduction

In the year you fund the CRT, you receive an income tax deduction for the present value of the remainder interest that will ultimately pass to charity. The deduction uses the IRS §7520 rate (5.00% for June 2026) as the discount rate.¹ For a 5% CRUT with a 10-year term funded with $1M in appreciated stock, the deduction is typically in the $500,000–$650,000 range, depending on the assumed return used in the actuarial calculation.

This deduction is for the charitable remainder — what's expected to reach charity — not for the full asset value. The deduction is limited to 30% of AGI for appreciated capital gain property, with up to 5-year carryforward for any excess.²

4. Estate reduction

Because the CRT is irrevocable, the assets are removed from your gross estate. For families who are not yet at the federal exemption threshold ($15M per person under OBBBA, $30M for couples) but face state estate tax (Oregon: $1M, Massachusetts: $2M, Washington: $3.1M, Minnesota: $3M), this can eliminate a meaningful tax at death.

2026 OBBBA impact on CRT charitable deductions

The One Big Beautiful Bill Act (July 2025) made two changes that affect the deduction portion of CRT planning. Neither affects the capital gains avoidance benefit.

1. The 0.5% AGI floor (effective 2026). Charitable deductions are now deductible only to the extent they exceed 0.5% of your AGI. For a $1.2M AGI, the first $6,000 of your CRT deduction is disallowed — negligible relative to a typical $500K+ CRT deduction.³

2. The 35% effective cap (effective 2026). If you're in the 37% marginal bracket, the effective tax rate applied to your charitable deduction is capped at 35% — not 37%. On a $600,000 CRT deduction, the maximum tax savings is $210,000 (35%) rather than $222,000 (37%). The capital gains avoidance savings are unaffected by this limit.³

Interactive CRUT income and tax calculator

The 10% minimum remainder test

For a CRT to qualify under §664, the present value of the charitable remainder at funding must be at least 10% of the initial trust value.² At the June 2026 §7520 rate of 5.00%, this test creates practical limits on payout rates:

If the 10% test fails, the CRT loses its qualified status — the trust becomes a complex trust, the charitable deduction is disallowed, and the capital gains exemption goes away. Your attorney's actuarial software calculates this precisely at funding.

CRT vs. alternatives: when each approach wins

*Business interests: C-corp and partnership interests possible but require careful structuring. S-corp stock is problematic (trust is ineligible S-corp shareholder).

The income tax on CRT distributions: the four-tier rule

CRT distributions aren't automatically tax-free — they're taxed based on what the trust earned. IRS Reg. §1.664-1(d) establishes a four-tier ordering that works against the beneficiary from a tax efficiency standpoint:

1. Tier 1 — Ordinary income (highest tax, distributed first)
2. Tier 2 — Capital gains (long-term at 20%/23.8%; short-term at ordinary rates)
3. Tier 3 — Other income (tax-exempt income, such as municipal bond interest)
4. Tier 4 — Return of corpus (tax-free to beneficiary)

For a trust funded with an appreciated passive investment (rental property, stocks), the sale at funding creates a large capital gains pool at Tier 2. As long as the trust earns income primarily from growth assets (equity appreciation, not high interest), the annual distributions will be taxed mostly as long-term capital gains — far better than ordinary income, and only on distributions rather than on the full gain upfront.

When CRT planning makes sense at $2M–$20M

Strong candidates:

• You own appreciated real estate (cost basis significantly below current value) and want to exit or rebalance
• You hold a large concentrated stock position that has become uncomfortable relative to your overall portfolio
• You're selling a closely held business (C-corp or partnership) and want income after the transition
• You have genuine, consistent charitable intent — a family foundation or community foundation you already support, or causes you plan to fund at death
• Asset value is $500,000 or more (trustee fees, appraisals, and legal costs are $5,000–$15,000 to set up; below $500K the percentage cost becomes high)
• You're in the 35%–37% marginal bracket, making the deduction meaningfully valuable

When CRT is the wrong tool:

• You need all the sale proceeds in hand (the CRT irrevocably commits the remainder to charity — no taking it back)
• The asset is S-corp stock (trust would terminate S-election for the whole company)
• The asset is QSBS (Section 1202 stock) — contributing QSBS to a CRT triggers recognition of the gain, eliminating the §1202 exclusion
• The asset carries mortgage debt exceeding basis (creates UBTI inside the trust)
• Debt-leveraged real estate: the trust must pay tax on unrelated business taxable income (UBTI) if it acquires debt-financed property

Setting up a CRT: what the process looks like

CRTs require coordination between an estate attorney and a CPA — neither alone is sufficient. The process typically takes 3–6 weeks from decision to funding:

1. Actuarial analysis: Attorney or CPA runs the §7520 calculation to confirm the 10% remainder test and estimate the deduction amount
2. Qualified appraisal: For real estate or closely held business interests, a §170(f)(11) qualified appraisal is required to establish FMV — typically adds 2–6 weeks
3. Trust drafting: Attorney drafts and executes the trust document, naming charitable beneficiary(ies) and trustees
4. Asset transfer: Property deed or stock certificate is transferred to the trustee
5. Annual reporting: CRT must file Form 5227 (Split-Interest Trust Information Return) each year — typically handled by the trustee or CPA

Corporate trustees (at a bank trust department or community foundation) charge 0.5%–1.5%/year of trust assets. An attorney or CPA as individual trustee is an option but adds succession complexity.

CRT and charitable lead trust (CLT): the other direction

A charitable lead trust (CLT) is the mirror image: charity gets the income stream first, and the remainder passes to family members at the end of the term. CLTs are primarily an estate-planning tool (removing asset growth from the estate at low gift-tax cost during a low §7520 rate environment) rather than a capital-gains-avoidance tool. The capital gains exemption does not apply to CLTs — if a CLT sells appreciated property, the gain is taxable to the grantor. For most $2M–$20M planning situations, CRTs dominate CLTs for capital-gains-avoidance goals; CLTs are better suited to estate freeze strategies.