Charitable Remainder Trust: CRUT vs. CRAT Mechanics

Selling Appreciated Assets Without Paying Capital Gains Immediately

An investor holds $2 million in stock with a cost basis of $200,000. A direct sale triggers approximately $342,000 in federal capital gains tax (at the 20% long-term rate plus the 3.8% net investment income tax), leaving only $1,658,000 to reinvest. The same investor transferring that stock to a charitable remainder trust (CRT) sells it inside the trust, pays no capital gains at the point of sale, and receives income payments from the full $2 million over a defined period — while also receiving an immediate partial charitable income tax deduction. This is the core financial engineering behind the charitable remainder trust, and it explains why CRTs are a favored tool for donors with highly appreciated low-basis assets.

A CRT is an irrevocable split-interest trust: it pays income to one or more non-charitable beneficiaries (typically the donor, a spouse, or children) for a term of years or for life, and then distributes the remaining trust corpus to one or more qualified charities. The trust itself is tax-exempt under Section 664 of the Internal Revenue Code, which is what allows the appreciated asset sale to proceed without immediate capital gains recognition inside the trust. However, the income distributed to beneficiaries is taxed as it is received, following a four-tier ordering rule: ordinary income first, then capital gains, then tax-exempt income, then return of principal.

CRUT vs. CRAT: The Structural Difference

The CRUT is by far the more commonly used structure. Most donors prefer the inflation-adjustment feature, and the ability to make additional contributions (in a standard CRUT) provides flexibility that a CRAT lacks entirely. A NIM-CRUT (Net Income with Makeup Charitable Remainder Unitrust) is a variant that pays the lesser of the stated percentage or actual net income, with a provision to make up shortfalls in later years — commonly used for illiquid assets like real estate or private business interests where the asset cannot generate immediate cash.

Calculating the Charitable Deduction

The donor receives a charitable income tax deduction at the time of transfer equal to the present value of the charitable remainder interest — i.e., what the charity is actuarially projected to receive after the income period ends. This is not the full value of the donated asset. The IRS uses tables in Treasury Regulation 1.664 and the Section 7520 rate to calculate this value.

• The Section 7520 rate is published monthly by the IRS; it equals 120% of the applicable federal mid-term rate
• A higher 7520 rate produces a larger charitable deduction (the trust discounts future charity distributions less aggressively)
• A lower 7520 rate produces a smaller deduction (low interest environment shrinks the present value of the remainder)
• For a 20-year CRUT with a 5% payout rate, the charitable deduction is typically 25%–45% of the donated value, depending on the 7520 rate at the time of transfer

The deduction is limited to 30% of adjusted gross income for transfers of appreciated capital gain property to a private foundation-type remainder, or 50% for public charity beneficiaries, with five-year carryforward for unused amounts.

The 10% Remainder Requirement

The IRS requires that the present value of the charitable remainder interest — the deductible portion — must equal at least 10% of the initial value of transferred property at the time of the contribution. This "10% test" limits the use of very high payout rates or very short charitable remainder interest periods. A 70-year-old donor with a high payout rate over their expected lifetime might fail the test; in practice, planners run actuarial calculations in advance to confirm compliance before funding the trust.

Charitable Gift Annuity: The Simpler Alternative

A charitable gift annuity (CGA) achieves some of the same goals with dramatically less complexity. The donor makes an irrevocable gift to a charity in exchange for a fixed annuity payment for life. No trust is created; no trustee is appointed; no annual accounting is required. The American Council on Gift Annuities publishes recommended payout rates by age — a 70-year-old donor can expect approximately 6.3% (as of 2024 ACGA rates). The partial charitable deduction is immediate, and a portion of each annuity payment is treated as a tax-free return of basis during the donor's expected lifetime.

• CGA pros: Simple, low-cost, fixed payment guaranteed by the charity's assets
• CGA cons: No capital gains bypass; the full gain is recognized ratably over the annuitant's life expectancy
• CRT pros: Capital gains bypass on appreciated assets, larger deduction potential, flexibility in asset management
• CRT cons: Legal and trustee fees, 10% remainder test constraints, irrevocability

This article is for informational purposes only and does not constitute financial advice.