Charitable Trusts That Pay You Back: CRTs and CLATs Explained

A charitable remainder trust (CRT) pays you, or family members, an income stream for life or up to 20 years, with whatever remains passing to charity; in exchange you receive a partial income tax deduction now and can sell appreciated assets inside the trust without immediate capital gains tax. A charitable lead annuity trust (CLAT) reverses the order: charity is paid first for a term of years, and what remains passes to your heirs, often with little or no gift tax. Which structure works better depends heavily on interest rates and on what you are trying to accomplish.

How does a charitable remainder trust work?

You transfer assets, ideally highly appreciated ones, to an irrevocable trust. The trust sells the assets and pays no immediate capital gains tax because a CRT is tax-exempt under Section 664. The full pre-tax proceeds are reinvested, and the trust pays you a defined stream for life or a fixed term of up to 20 years. At the end, the remainder goes to the charities you named, which can include a donor-advised fund or family foundation.

Federal law imposes guardrails, per IRS rules under Section 664. The annual payout must be at least 5 percent and no more than 50 percent of trust value, and the projected remainder passing to charity must be worth at least 10 percent of what you contributed, calculated using the IRS Section 7520 rate. You receive an upfront income tax deduction equal to the present value of that charitable remainder.

The income you receive is not tax-free. Distributions carry out the trust's income under a four-tier system: ordinary income first, then capital gains, then tax-exempt income, then principal. In effect, the capital gains tax you avoided at sale is paid gradually as distributions arrive, while the deferred balance keeps compounding.

CRUT, CRAT, and the useful variations

A charitable remainder unitrust (CRUT) pays a fixed percentage of trust value, revalued annually, so payments rise and fall with the portfolio and you can add assets later. A charitable remainder annuity trust (CRAT) pays a fixed dollar amount set at funding, which suits beneficiaries who want certainty but cannot accept additions and is harder to qualify when rates are unfavorable. Variations such as the NIMCRUT and flip CRUT allow payments to be deferred while the trust holds illiquid assets, such as pre-sale business interests or real estate, and switch on after a liquidity event.

A hypothetical example with numbers

Consider a hypothetical 65-year-old couple holding $2,000,000 of stock with near-zero basis. Selling outright at a combined federal capital gains and net investment income tax rate of 23.8 percent would cost roughly $476,000, leaving about $1,524,000 to reinvest.

Instead, they fund a 6 percent lifetime CRUT. The trust sells the stock tax-free and reinvests the full $2,000,000. Year-one income is $120,000, recalculated annually on trust value. They also receive an immediate charitable deduction for the present value of the remainder; at the IRS Section 7520 rate of 5.0 percent published for June 2026 (Rev. Rul. 2026-11), a trust of this design would generate a six-figure deduction, with the exact amount depending on ages, payout, and timing. The structure must pass the 10 percent remainder test at funding. At their deaths, the remaining balance passes to their donor-advised fund. This example is hypothetical, simplified, and not a projection of returns.

How does a charitable lead annuity trust work?

A CLAT flips the sequence. The trust pays a fixed annuity to charity for a term, say 15 or 20 years, and the remainder passes to children or trusts for them. The taxable gift is the funded amount minus the present value of charity's annuity, valued at the 7520 rate. In a "zeroed-out" CLAT, the annuity is sized so that present value equals the full contribution, making the taxable gift approximately zero. If the trust's investments outperform the 7520 rate over the term, the excess passes to heirs free of gift and estate tax.

CLATs come in two tax flavors. A grantor CLAT gives the donor an upfront income tax deduction but taxes trust income to the donor each year thereafter. A non-grantor CLAT gives no upfront personal deduction; instead the trust deducts its annual charitable payments, which makes it a strong vehicle for shifting wealth while supporting charity from pre-tax trust income.

Why do interest rates matter so much?

Both structures are valued against the Section 7520 rate, which the IRS publishes monthly at 120 percent of the federal midterm rate; it stands at 5.0 percent for June 2026. The two vehicles respond in opposite directions.

Higher rates favor CRTs: the charitable remainder is assumed to grow faster, so the upfront deduction is larger and the 10 percent test is easier to pass. Lower rates favor CLATs: the hurdle the portfolio must beat for wealth to pass tax-free to heirs is lower. At a mid-single-digit 7520 rate, CRTs are comparatively attractive, while a zeroed-out CLAT must outperform a meaningful hurdle to deliver for heirs. Families with flexibility can hold each tool for the rate environment that suits it.

Who fits, and what does it cost?

A CRT fits a holder of concentrated, highly appreciated assets who wants diversification, lifetime income, and a charitable legacy, and who can accept that the remainder is irrevocably committed to charity. A CLAT fits a family with estate tax exposure above the $15,000,000 per-person exemption, or strong charitable intent, that wants to pass upside to heirs at little gift tax cost.

Neither is free or simple. Expect legal drafting costs, annual trustee and administration work, a required annual information return (Form 5227 for CRTs), annual valuations for unitrusts, and investment management. These trusts are irrevocable; payout terms cannot be redrawn if circumstances change. Below roughly seven figures of funding, the overhead often argues for simpler tools such as a donor-advised fund or outright gifts of appreciated stock.

Key numbers

Frequently asked questions

Does a CRT eliminate capital gains tax?No, it defers it. The trust sells without immediate tax, but gains are carried out to you over time within your distributions under the four-tier rules. The benefit is full pre-tax reinvestment and deferral, not elimination.

Can my children be the income beneficiaries of a CRT?Yes, but payments to others are gifts, and a long stream to young beneficiaries can fail the 10 percent remainder test. Term trusts of up to 20 years are a common compromise.

What happens if a CRT runs out of money?Payments simply stop; there is no recourse to other assets. This risk is higher with aggressive payout rates, which is one reason payouts are capped at 50 percent and most are set far lower.

Can the charity be my own donor-advised fund or foundation?Generally yes. Naming a donor-advised fund or family foundation as remainder beneficiary preserves family involvement in directing the eventual charitable dollars, though it can affect the deduction calculation for a private foundation remainder.

Is a CLAT better than just gifting assets to my children?They solve different problems. An outright gift uses exemption immediately; a zeroed-out CLAT uses little or none but requires charity to be paid first and the portfolio to outperform the 7520 hurdle for heirs to benefit.

Are CRT distributions guaranteed income?No. A CRUT's payments vary with trust value, a CRAT's fixed payments depend on the trust staying solvent, and nothing about either structure guarantees investment results.