Estate and Tax Strategy
What Is a Charitable Remainder Trust?
A charitable remainder trust (CRT) is an irrevocable trust that pays income to one or more non-charitable beneficiaries for a defined period, then distributes the remaining assets to a qualified charity. High-net-worth families and founders use CRTs to defer capital gains on appreciated assets, generate an income stream, and receive a partial federal income tax deduction, all while supporting causes they care about.
Schedule a ConsultationHow It Works
How a Charitable Remainder Trust Works
When you transfer appreciated assets into a CRT, the trust sells those assets without triggering an immediate capital gains tax liability to the grantor. Instead, the trust reinvests the proceeds and pays a percentage of its value to your designated income beneficiaries each year. At the end of the trust term, the remaining principal passes to a qualified charity you select.
This structure can serve two purposes simultaneously: it provides an ongoing income stream to you or your family for a set number of years (or for life), and it directs the residual value to a charitable organization. The grantor receives a current-year federal income tax deduction equal to the present value of the charitable remainder interest, calculated under IRC Section 7520 assumptions. However, once assets are transferred to the CRT, the decision is irrevocable, and the assets are no longer under your direct control.
Key CRT Requirements
- 1 The charitable remainder interest must be at least 10% of the initial net fair market value of contributed property, as required under IRC Section 664. Source: IRS
- 2 The annual payout must be at least 5% and no more than 50% of the trust's net fair market value. Source: IRS Form 5227 Instructions
- 3 The trust must be irrevocable, and the charitable beneficiary must be a qualified organization under IRS rules.
- 4 The 2026 federal estate tax exemption is $15,000,000 per individual, which affects how CRTs fit into broader estate plans. Source: IRS Estate and Gift Tax
As of September 2026. Rules and limits may change; consult your advisor and tax counsel before implementing any trust strategy.
Two Structures
CRAT vs. CRUT: Understanding the Difference
There are two primary types of charitable remainder trusts, and the distinction matters for how your income stream behaves over time. For a deeper comparison of CRTs against charitable lead trusts, see our guide on CRT vs. CLT planning for high-net-worth families.
| Feature | CRAT (Annuity Trust) | CRUT (Unitrust) |
|---|---|---|
| Payout type | Fixed dollar amount, determined at funding | Percentage of trust assets, revalued annually |
| Income predictability | Higher, since payout does not change with asset values | Variable; payouts may rise or fall with trust performance |
| Inflation exposure | Fixed payments may lose purchasing power over time | Payouts may adjust with inflation if assets appreciate |
| Additional contributions | Not permitted after initial funding | Generally permitted, allowing ongoing funding |
| Best suited for | Grantors who want stable, predictable income | Grantors who want income that may grow with the portfolio |
Tax Mechanics
Income Tax Deductions and Capital Gains Deferral
A CRT can generate two distinct tax advantages for the grantor, though both come with trade-offs that warrant careful analysis.
Partial Income Tax Deduction
When you fund a CRT, you may claim a federal income tax deduction in the year of funding for the present value of the charitable remainder interest. This deduction is typically a fraction of the total contributed value, not the full amount, because the income beneficiaries retain the right to receive payouts over the trust term. The exact deduction depends on beneficiary ages, payout rate, and the IRS Section 7520 interest rate used for valuation. Deduction limits and carryforward rules apply, and the actual benefit depends on your individual tax situation.
Capital Gains Deferral
When appreciated assets, such as concentrated stock or business equity, are transferred to a CRT and then sold by the trust, the capital gains are not immediately taxed to the grantor. Instead, the full proceeds remain inside the trust and may be reinvested, potentially generating more income for beneficiaries over time. However, the trade-off is significant: the assets are irrevocably committed, the grantor gives up direct ownership, and the charitable remainder ultimately passes to the designated charity rather than to family heirs. This means a CRT reduces the amount available for family wealth transfer.
Benefits and Trade-offs
Potential Benefit
Capital gains deferral on appreciated assets sold inside the trust
Key Trade-off
Assets are irrevocably transferred; family heirs do not receive the remainder
Potential Benefit
Partial federal income tax deduction in the year of funding
Key Trade-off
Deduction is partial, subject to AGI limits, and depends on actuarial assumptions
Potential Benefit
Income stream to beneficiaries for life or a term of years
Key Trade-off
Setup costs, ongoing administration, and irrevocability require careful consideration
For Founders
When CRTs Make Sense Before a Liquidity Event
For founders holding highly appreciated business equity or concentrated stock positions, a CRT established before a sale can help manage the tax consequences of a large capital gain. By transferring appreciated shares to the CRT before the liquidity event, the trust can sell the shares without triggering immediate capital gains tax to the founder, and the proceeds may be reinvested to generate income over the trust term.
Pre-Sale Funding
Transferring appreciated shares before a sale may allow the trust to sell without immediate capital gains recognition to the grantor.
Income Replacement
The CRT pays a percentage of its assets to the founder or family annually, replacing income that might otherwise come from the sale proceeds.
Philanthropic Legacy
The remainder passes to a charity of the founder's choosing, creating a structured philanthropic legacy alongside personal financial goals.
However, CRTs are not the right fit for every founder. The irrevocable nature of the trust means assets are permanently committed, and the charitable remainder is no longer available for family wealth transfer. Founders should coordinate CRT planning with other structures, such as QSBS stacking trusts and CLT strategies, to determine which approach aligns with both personal and philanthropic objectives. For a broader view of charitable strategies in Pennsylvania, see our guide on charitable giving strategies for tax reduction.
Pennsylvania Context
Pennsylvania-Specific Considerations
Pennsylvania does not levy a state-level estate tax, but it does impose an inheritance tax that applies to transfers to most beneficiaries, with rates ranging from 4.5% for direct descendants to 15% for other heirs. Transfers to qualified charities are exempt from the Pennsylvania inheritance tax, which means the charitable remainder passing through a CRT generally avoids this state-level tax.
Pennsylvania also applies a flat 3.07% personal income tax to trust income. The interplay between federal CRT rules and Pennsylvania's trust taxation means the state treatment of CRT income, deductions, and distributions should be reviewed carefully alongside the federal framework. For families in Pittsburgh and surrounding communities, coordinating CRT planning with Pennsylvania trust and tax planning may help ensure the structure performs as intended across both federal and state layers.
Pennsylvania CRT Quick Reference
- PA No Pennsylvania estate tax, but inheritance tax applies at 4.5% to 15% depending on beneficiary relationship
- PA Charitable transfers are exempt from Pennsylvania inheritance tax
- PA Flat 3.07% state income tax applies to trust income
- PA Coordination with federal CRT rules requires review of both state and federal trust treatment
Common Questions
Frequently Asked Questions
What are the downsides of a charitable remainder trust?
The primary downsides are irrevocability, loss of direct control over contributed assets, the fact that the charitable remainder passes to charity rather than family heirs, setup and administrative costs, and the complexity of ongoing tax filings. Additionally, if the trust's investment performance is poor, income beneficiaries may receive less than expected.
How much does a charitable remainder trust pay out?
A CRT must pay at least 5% and no more than 50% of its net fair market value annually. In a CRAT, the payout is a fixed dollar amount established at funding. In a CRUT, the payout is a percentage of the trust's assets revalued each year, so the actual dollar amount fluctuates with investment performance. Source: IRS Form 5227 Instructions
Do you pay taxes on income from a charitable remainder trust?
Yes. Income distributed to non-charitable beneficiaries is generally taxable to the recipient. The trust itself files an annual return (IRS Form 5227), and the taxation of distributions follows a tier system that separates ordinary income from capital gains and principal. The specific tax treatment depends on the character of the income earned by the trust during the year.
How long can a charitable remainder trust last?
A CRT can last for the lifetime of one or more income beneficiaries, or for a fixed term of up to 20 years. The term is set when the trust is established and cannot be changed afterward, given the irrevocable nature of the structure.
What is a charitable remainder annuity trust (CRAT)?
A CRAT is a type of CRT that pays a fixed dollar annuity amount to its income beneficiaries each year. The amount is determined when the trust is funded and does not change regardless of how the trust's investments perform. This provides income predictability but also means the payout may lose purchasing power to inflation over time.
Get Started
Is a Charitable Remainder Trust Right for Your Family?
A CRT involves irrevocable decisions that affect your tax position, income stream, and estate plan for years to come. Our team at Defiant Capital Group helps founders, business owners, and affluent families evaluate whether a CRT, a CLT, or another trust structure aligns with both personal and philanthropic goals. Coordinate your charitable planning with integrated tax, estate, and investment strategy to make informed decisions before committing assets.
Schedule a ConsultationCall us at 412-697-1435 or email defiant@defiantcap.com