Charitable Remainder Trusts: Income, Tax and 2026 Rules

A charitable remainder trust is one of the few arrangements in which the tax code lets you give an asset away and go on drawing payments from it. You transfer property to an irrevocable trust; it pays one or more noncharitable beneficiaries for life or for up to 20 years; what remains then passes to charity. The trust is generally exempt from federal income tax, so a sale of appreciated shares ordinarily does not create current income tax inside the trust, and you may receive a partial income tax deduction when you fund it. Unrelated business taxable income is an important exception.

For a widow with a large, low-basis position and a genuine philanthropic purpose, it can be an elegant structure. It is also permanent, demanding to administer, and easy to oversell. This guide should let you choose between its two forms, anticipate the tax on your payments, estimate the cost of upkeep, and judge whether a gift annuity, outright gift, or bequest would serve as well.

Two forms: a fixed sum or a fixed percentage

A charitable remainder annuity trust pays a sum certain each year: at least 5 percent and no more than 50 percent of the initial net fair market value of the property placed in trust. Rising markets do not raise it; falling markets do not lower it, although a long decline can wear the principal away.

A charitable remainder unitrust pays a fixed percentage, again between 5 and 50 percent, of the trust’s assets revalued every year, so your income moves with the portfolio. The statute also permits a net-income version that pays the lesser of the trust’s income or the stated percentage, with or without a later make-up of shortfalls; the IRS calls these NICRUTs and NIMCRUTs. They can suit an asset that produces little income until it is sold.

The 10 percent remainder test described below applies to each contribution to a unitrust, which may accept later additions if its terms permit. An annuity trust is measured at initial funding and cannot accept additional contributions. Either form can be created during life or at death, and the IRS publishes sample instruments for both.

The payout limits and the 10 percent remainder test

Payments are made at least annually to beneficiaries living when the trust is created, for no more than 20 years or for their lives; the remainder then passes to, or is held for, a qualified charity.

Valued under section 7520 of the tax code when property is contributed, the charity’s remainder must be worth at least 10 percent of that property’s net fair market value. A higher payout, a longer term, or a younger second beneficiary all shrink the remainder; adding a child as a successor life can push a sound design below the line. Ask for the calculation in writing, with a margin.

A lifetime CRAT also faces the probability-of-exhaustion rule: if there is more than a 5 percent chance that its fixed payments will exhaust the assets before the charitable transfer, the charitable deduction and section 664 exemption can fail. Revenue Procedure 2016-42 supplies a sample qualified-contingency clause that can avoid that test by ending payments early under its formula. The 10 percent remainder test still applies. Ask counsel to identify which route the instrument uses; passing one rule does not prove it passes the other.

The same valuation sets your deduction: the present value of the charity’s remainder, not the full value transferred, and section 170(e) can reduce it. For appreciated property given in trust, IRS Publication 526 generally points to ceilings of 30 or 20 percent of adjusted gross income, depending on the charity and on whether the remainder stays in trust, with any excess carried forward for up to five years. Publication 505 for 2026, reflecting the One Big Beautiful Bill Act, adds a floor, allowing itemized charitable deductions only above 0.5 percent of adjusted gross income, and a possible reduction of itemized deductions when taxable income exceeds $640,600 for single filers, or $768,700 for a qualifying surviving spouse. A deduction of more than $5,000 for property other than publicly traded securities generally requires a qualified appraisal.

Selling appreciated assets inside the trust

The trust is not subject to federal income tax, so the trustee can sell a concentrated position and reinvest the full proceeds. The gain is not erased: the trust takes your carryover basis, and the gain it realizes is carried out to you, a slice at a time, through your payments. Gain never carried out passes to the charity with the remainder.

Suppose you transfer shares worth $3,000,000 with a basis of $300,000 to a 5 percent unitrust, and the trustee sells them. The $2,700,000 gain is realized inside the trust rather than on your return, and the full $3,000,000 goes to work. Your first-year payment would be about $150,000.

Three cautions. Let the transfer come before any binding sale obligation; assignment-of-income principles can tax a prearranged sale to you. Be wary of mortgaged real estate or operating businesses: a trust with unrelated business taxable income owes an excise tax equal to 100 percent of that income. And reject any pitch that claims a CRAT can sell appreciated property, buy a single-premium immediate annuity, and then treat the payments as though the trust’s ordinary-income and capital-gain tiers disappeared. Final regulations effective July 9, 2026 identify specified versions of that arrangement, and substantially similar transactions, as listed transactions with disclosure duties and penalties.

How your payments are taxed: the four tiers

Each payment takes its character from the trust’s income, in the order section 664(b) sets:

1. Ordinary income, to the extent of the trust’s ordinary income for the year and undistributed ordinary income from earlier years.
2. Capital gain, to the extent of current and undistributed past gain, measured on a cumulative net basis.
3. Other income, including tax-exempt income.
4. A tax-free distribution of principal.

Within the tiers, the Form 5227 instructions draw out the more heavily taxed classes first: other ordinary income before qualified dividends, short-term gain before long-term. Character within a tier still matters: a qualified dividend in the first tier can retain its preferential rate. You receive the result each year on Schedule K-1 (Form 1041).

In the hypothetical, if the trust earns $60,000 of interest and dividends in its first year, the first $60,000 of your $150,000 payment is ordinary income and the other $90,000 is capital gain drawn from the $2,700,000 realized on the sale. At that pace, the sale gain alone would fill the second tier for about 30 years. One consequence is easy to miss: municipal bonds bought inside the trust do not make your payments tax-free while gains remain, because tax-exempt income sits in the third tier.

Irrevocable means irrevocable

The IRS puts it plainly: assets that go into the trust cannot be taken back. You receive the stated payment and nothing more. Trust funds may not pay your personal expenses or be lent to you, and the IRS says it examines these trusts closely.

Place in the trust only what you are prepared never to see again as principal.

Keep reserves for health, housing, and family outside it. If you could plausibly need the principal, the trust is the wrong vessel, however attractive the arithmetic.

What it costs to keep: trustee, valuation and Form 5227

Every charitable remainder trust files Form 5227 annually, reporting its activity and characterizing your payments by tier. For calendar year 2025, it was due April 15, 2026; Form 8868 requests an automatic extension. The first return includes a copy of the trust instrument, and the form is open to public inspection, though Schedule A, the K-1s, the trust instrument, and donor information are not. Under the 2025 instructions, late or incomplete filing costs $25 a day up to $13,000 per return, or $130 a day up to $65,000 when the trust’s gross income exceeds $327,000.

Add drafting, trustee and investment fees, tax preparation, and, for a unitrust, annual valuation, with appraisals for anything lacking a market price. Ask for a written estimate; a small trust can spend a meaningful share of its payout on upkeep.

A charitable gift annuity, the simpler alternative

A charitable gift annuity is a contract, not a trust. You transfer cash or property to one charity in exchange for its promise of fixed payments for life. There is no trustee and no Form 5227 of your own, but the payments are only as secure as the charity that promises them, and the gift cannot later be redirected. Many states also regulate the charities that issue gift annuities, and the rules differ, so ask whether the charity meets your state’s requirements.

Appreciated property is treated differently. Treasury regulations treat a gift annuity funded with property as partly a gift and partly a sale, so part of your gain is recognized; if the annuity is nonassignable and you alone, or you and a designated survivor, are the annuitants, that gain can be spread over your life expectancy rather than reported at once. A remainder trust instead defers the gain on the whole position, allows a unitrust payment that can grow, and can benefit several charities.

When a remainder trust fits, and when it does not

It fits when four conditions meet: a large holding with substantial embedded gain you want to diversify, a charitable intention you would act on anyway, a wish for lifetime income, and enough other assets that you will never need this principal. If the shares came to you at your husband’s death, confirm their basis before assuming a large gain; our guide to a concentrated holding you did not choose explains how.

It fits poorly when the asset has little gain, the principal may be needed, the property carries debt or business income, you want the asset itself to pass to your children, or the sum is too small to carry annual costs. A direct gift of appreciated shares, weighed within a broader charitable giving plan, may do the same work more simply. If you mean to benefit a charity only at death, a charitable bequest in your will may be the cleaner instrument; a remainder trust created by will is the variant that pays a family member first.

Questions to ask before you sign

1. Why an annuity trust or a unitrust, and why this payout rate?
2. What is the remainder’s section 7520 value, and what margin does it leave above 10 percent?
3. What is my documented basis, and has any sale been discussed or arranged?
4. Could the asset produce unrelated business taxable income?
5. How will the four tiers characterize my payments in the first decade?
6. What deduction will I actually use in 2026, after the floor and income ceilings?
7. Who will be trustee, and what will administration cost each year?
8. Which charities receive the remainder, and can I change them later?
9. Would a gift annuity, an outright gift, or a bequest meet the same aims more simply?

This article provides general U.S. educational information and is not legal, tax, investment, or accounting advice. Trust terms, valuations, and state law vary; confirm current rules with the IRS and a qualified professional who knows your facts.