Irrevocable Trusts · Charitable
Give it away and keep the income.
Split-interest trusts divide an asset between you and a charity across time. The tax code rewards it heavily.
A charitable trust splits an asset in two along the axis of time. Somebody gets the income for a period, and somebody else gets what is left at the end. Point it one way and you receive payments for life with charity taking the remainder — a charitable remainder trust. Point it the other and charity is paid first with your family receiving the remainder — a charitable lead trust. Because the two halves are valued separately using an IRS interest rate, the arithmetic can produce an immediate income tax deduction, avoid capital gains on a highly appreciated asset, and move wealth to your children at a fraction of its transfer tax cost. All at once, legitimately.
The single best use case: a highly appreciated asset you cannot afford to sell. A stock position bought decades ago, farmland, a rental building. Sell it and you pay capital gains on nearly the whole proceeds. Contribute it to a charitable remainder trust instead, and the trust — which is tax-exempt — sells it with no immediate capital gains tax, reinvests the full pre-tax amount, and pays you an income stream from the larger base. You also get an immediate income tax deduction for the present value of the charitable remainder. This is the closest thing to a free lunch in the code, and it only works if the asset goes into the trust before a sale is negotiated.
Charitable remainder trusts
You first, charity last.
A charitable remainder trust under IRC § 664 pays you — or you and your spouse, or another named person — for life or for a term of up to twenty years. Whatever remains passes to charity.
The CRAT pays a “sum certain” fixed at the outset: the same dollar amount every year regardless of investment performance. Predictable, and no additional contributions are permitted after funding. § 664(d)(1).
The CRUT pays a fixed percentage of the trust’s assets revalued annually — so the payment rises when the portfolio does and falls when it does not. Additional contributions are allowed. § 664(d)(2). The CRUT is far more common, because it hedges inflation and accommodates later gifts.
Three statutory limits apply to both. The payout must be at least 5 percent and no more than 50 percent of the initial value (or, for a CRUT, of the annually revalued assets). And the present value of the charitable remainder must be at least 10 percent of the value contributed — §§ 664(d)(1)(D) and (d)(2)(D). That 10 percent floor is what limits how young the income beneficiaries can be and how high the payout can go.
Variants worth knowing. A net income CRUT pays the lesser of the stated percentage or actual trust income — useful when the trust holds an asset that produces no cash yet. A NIMCRUT adds a makeup provision so shortfalls are paid later. A flip CRUT starts as a net income trust and converts to a standard unitrust on a triggering event, typically the sale of the contributed asset — the standard structure for contributing illiquid real estate or closely held stock.
What you get. An immediate income tax charitable deduction for the present value of the remainder; no capital gains tax when the trust sells the appreciated asset; the asset removed from your taxable estate; and an income stream. What you give up is the principal, permanently.
Charitable lead trusts
Charity first, your family last.
The structure
The trust pays a charity for a term of years — a guaranteed annuity (CLAT) or a fixed percentage of annually revalued assets (CLUT) — and at the end the remainder passes to your children or to a trust for them.
Why it moves wealth cheaply
The taxable gift is the value transferred minus the present value of the charity’s payment stream. Set a long enough term and a high enough payout and the remainder gift approaches zero — while any growth above the § 7520 rate passes to your family entirely free of transfer tax.
The grantor CLAT
Only a grantor lead trust produces an income tax deduction, and the statute is explicit: IRC § 170(f)(2)(B) allows the deduction only where the lead interest is a guaranteed annuity or fixed-percentage unitrust interest and the grantor is treated as the owner under § 671. You take a large deduction now, then report the trust’s income annually thereafter.
The non-grantor CLAT
No income tax deduction for you, but the trust deducts its own charitable payments and the structure is cleaner for pure wealth transfer. This is the usual choice where the goal is moving assets to children rather than sheltering a spike in your own income.
The transfer tax authorities
§ 2522(c)(2) governs the gift tax deduction and § 2055(e)(2) the estate tax deduction. Both allow a split-interest charitable deduction only where the interest takes the form of a guaranteed annuity or an annually revalued fixed percentage — which is why these trusts have such rigid payout formats.
Interest rates matter, in reverse
A low § 7520 rate favors lead trusts, because the charity’s payment stream is valued more highly and the taxable remainder gift shrinks. A high rate favors remainder trusts. At 5.2 to 5.4 percent in late 2026, the environment currently tilts toward CRTs.
The alternatives
Frequently the right answer is not a trust at all.
Donor advised fund
An account at a sponsoring charity. You contribute, take the deduction immediately, and recommend grants over time. Appreciated stock can be contributed with no capital gains tax. Almost no cost, no separate return, no trustee. For most charitable families this delivers the great majority of the benefit of a private foundation with none of the administration.
Pooled income fund
IRC § 642(c)(5). Your gift is commingled with other donors’ in a fund maintained by the recipient charity, and you receive a share of the fund’s income for life. Property must be irrevocably committed, the fund cannot hold tax-exempt securities, and no donor or income beneficiary may be a trustee. A sensible option for a gift too small to justify a private CRT.
Charitable gift annuity
A contract, not a trust. You transfer assets to a charity in exchange for its promise to pay you a fixed sum for life. Simpler and cheaper than a CRAT, and backed only by the charity’s own credit — which is why the institution’s financial strength matters.
Private foundation
Real control, family involvement across generations, and a permanent institution bearing your name — at the cost of an excise tax on investment income, a 5 percent minimum annual distribution requirement, self-dealing rules, and an annual Form 990-PF. Lower deduction limits than a public charity too. Worth it for substantial, ongoing philanthropy; heavy for anything less.
Qualified charitable distribution
If you are over 70½, transferring IRA funds directly to charity satisfies required minimum distributions without the distribution appearing in your income at all — better than a deduction for most taxpayers. Simple, annual, and widely underused.
A charitable bequest
The simplest option of all: name a charity in your will or trust, or as beneficiary of an IRA. Naming a charity as IRA beneficiary is particularly efficient — the charity pays no income tax on it, while your children would.
We have written at greater length on the split-interest structures — see charitable remainder and lead trusts: how they work and how they save you taxes.
Meet Derek Haake
He administered charitable trusts, including the ones that stopped working.
Derek spent three years as a Vice President and Estate Settlement Officer at Bank of America Private Bank — the country’s largest provider of managed personal trust services — where charitable remainder and lead trusts were ordinary inventory. Calculating unitrust amounts, handling the four-tier income characterization, dealing with a NIMCRUT whose makeup account had grown unmanageable, and telling a family what a charitable remainder trust would actually pay them.
These structures are sold on the arithmetic and lived through the administration, and the two look different. A CRT with an illiquid asset and no flip provision, or a payout set too high for the portfolio to sustain, becomes a decades-long problem for the beneficiary it was built for.
He holds an MBA alongside his law degree and litigates trust and fiduciary disputes. Where charitable structures matter to your plan, they are drafted here by someone who has run them.
Common questions
Charitable trusts, answered.
What is the actual difference between a remainder trust and a lead trust?
Which end of the timeline you take. In a charitable remainder trust, you or someone you name receives payments first — for life or a term up to twenty years — and charity receives whatever is left. In a charitable lead trust, charity is paid first for a term, and your family receives the remainder.
The purposes differ accordingly. A CRT is for a person who wants income, an immediate income tax deduction, and to avoid capital gains on an appreciated asset — it converts an illiquid, low-basis holding into a diversified income stream. A CLT is a wealth transfer tool: it moves assets to your children at a heavily discounted transfer tax cost, at the price of the family waiting for the term to run.
Interest rates push in opposite directions. Low § 7520 rates favor lead trusts; high rates favor remainder trusts.
How much income will a CRT actually pay me?
Whatever payout rate you choose, subject to two statutory constraints. The rate must be at least 5 percent and no more than 50 percent under IRC § 664(d). And the present value of the charitable remainder must be at least 10 percent of the value contributed.
That 10 percent floor is the real limit. The younger the income beneficiaries and the higher the payout, the smaller the projected remainder — and a two-life CRT for a couple in their fifties at a high payout will simply fail the test. In practice most CRTs land between 5 and 7 percent.
A CRAT pays the same dollars every year. A CRUT pays a percentage of assets revalued annually, so the payment moves with the portfolio — more in good years, less in bad. Most people choose the CRUT for inflation protection, accepting the variability.
Can I put my highly appreciated stock or real estate into a CRT?
Yes, and it is the best reason to use one. The trust is tax-exempt, so when it sells the contributed asset there is no immediate capital gains tax — the full pre-tax proceeds are reinvested and generate income for you from a larger base than a taxable sale would have left.
The timing rule is absolute. The asset must be contributed before a sale is negotiated or effectively committed. Contribute stock after signing a merger agreement, or real estate after accepting an offer, and the IRS will treat the gain as yours under the assignment of income doctrine. This is the single most common way a CRT is ruined.
Real estate and closely held business interests need extra care: mortgaged property can create unrelated business taxable income and self-dealing problems, and an illiquid asset paying no cash cannot fund a straight unitrust payment. The standard answer is a flip CRUT — a net income trust that converts to a standard unitrust when the asset is sold.
How large is the income tax deduction?
The present value of the charitable interest, computed with IRS actuarial tables using the § 7520 rate for the month of the transfer or, at your election, either of the two preceding months.
For a CRT that means the value of the remainder, which depends on the payout rate, the term or the beneficiaries’ ages, and the rate. A lower payout, a shorter term and older beneficiaries all produce a larger deduction.
Deduction limits then apply. Gifts of cash and gifts of appreciated property carry different percentage-of-AGI ceilings, and the ceiling is lower for gifts to a private foundation than to a public charity. Any excess carries forward five years. Model this with your accountant before funding — a deduction you cannot use in the carryforward window is worth far less than the headline number.
How is the income from a CRT taxed to me?
Under a four-tier system that is worse for the beneficiary than most people expect. Distributions carry out, in order, first ordinary income, then capital gain, then tax-exempt income, then principal — and each tier is exhausted before the next is reached.
The practical effect: the capital gain the trust avoided on sale is not eliminated, it is stored in the trust and distributed to you over time as the tiers are worked through. The benefit is deferral and the use of pre-tax dollars in the meantime, not permanent forgiveness.
The trust files its own annual return, and if it has any unrelated business taxable income it faces an excise tax on it — which is why debt-financed real estate inside a CRT is a problem. Anyone presenting a CRT as tax-free income is misdescribing it.
What is a NIMCRUT and when would I want one?
A net income with makeup charitable remainder unitrust. It pays the lesser of the stated unitrust percentage or the trust’s actual income, and tracks any shortfall in a makeup account paid out in later years when income exceeds the percentage.
It solves the problem of an asset that produces no cash. Contribute raw land or non-dividend-paying stock to a straight CRUT and the trustee must sell part of it every year to make the payment. A net income structure simply pays what the trust earns.
It is also used deliberately as a retirement vehicle: invest for growth rather than income during your working years, accumulating a large makeup account, then shift to income-producing investments at retirement and draw the accumulated shortfall. That works, and it requires a trustee willing to manage it and drafting that permits the investment shift. A flip CRUT is usually simpler where the goal is just to get past the sale of an illiquid asset.
Can I change my mind or change the charity?
Not about the trust itself — it is irrevocable, and the assets are gone. That is what supports the deduction.
You can usually retain the right to change the charitable beneficiary among qualifying organizations, and it is worth drafting in. Charities merge, dissolve, change direction, or lose their exempt status, and a trust locked to one named organization can become awkward decades later. Retaining a power to substitute among public charities does not jeopardize the deduction.
You cannot get the principal back, cannot change the payout rate, and cannot add income beneficiaries. For a CRAT you cannot even add assets. A CRUT does accept additional contributions if the document permits, which is one more reason unitrusts dominate.
Should I use a private foundation or a donor advised fund?
A donor advised fund, for the great majority of families. You contribute, take the deduction immediately, and recommend grants over any timeframe you like. Appreciated securities can be contributed with no capital gains tax. There is no separate tax return, no trustee, no excise tax, no minimum distribution requirement, and essentially no ongoing cost.
A private foundation buys three things a DAF does not: legal control rather than advisory privileges, the ability to employ family members and involve them formally across generations, and a permanent named institution. The cost is real — an excise tax on net investment income, a 5 percent minimum annual distribution, strict self-dealing prohibitions, an annual Form 990-PF that is public, and lower deduction ceilings than gifts to a public charity.
The rough threshold is whether the philanthropy is large and ongoing enough to justify running an institution. Many families start with a DAF and never find a reason to graduate.
What is the 10 percent remainder test and why did my plan fail it?
IRC §§ 664(d)(1)(D) and (d)(2)(D) require that the present value of the charitable remainder be at least 10 percent of the value contributed. Fail it and the trust is not a qualified charitable remainder trust at all — no deduction, and the tax-exempt treatment disappears.
It fails for a predictable reason: too much value projected to reach the income beneficiaries. Beneficiaries who are young, a payout rate set high, a two-life measuring period, and a low § 7520 rate all push the projected remainder down.
The fixes are equally predictable — lower the payout, use a fixed term instead of lives, use one life rather than two, or wait for a month with a more favorable rate, since you may elect the rate for the month of transfer or either of the two preceding months. Run the calculation before drafting, not after.
Do charitable trusts still make sense now that the estate exclusion is $15 million?
The estate tax motivation weakened considerably. With a permanent $15 million per person exclusion under IRC § 2010(c), far fewer families need a charitable lead trust purely to reduce transfer tax.
The income tax and capital gains case did not weaken at all. A CRT remains an excellent answer for anyone holding a highly appreciated, concentrated or illiquid asset who wants to diversify without a large immediate tax bill — and that has nothing to do with the size of the estate.
And for people who intend to give to charity anyway, these structures simply give more to everyone: more to the charity, more to you in current tax benefit, more to your family in a lead trust. The honest filter is whether you have real charitable intent. If you do not, no tax result makes it worth giving your principal away.
What does a charitable trust cost to set up and run?
Setup involves drafting, actuarial calculations, coordination with your accountant and the charity, and for real estate or business interests a qualified appraisal — which is required for the deduction on non-cash gifts above the statutory threshold. It is materially more than a simple trust.
Annual costs are ongoing and real: a trust tax return every year, the annual valuation a unitrust requires, trustee compensation if a professional or the charity serves, investment management, and for a NIMCRUT the makeup accounting.
Because of that, these structures need a certain scale to make sense — and below it a donor advised fund, a charitable gift annuity, or a pooled income fund under § 642(c)(5) delivers most of the benefit at a small fraction of the cost. You will get a straight answer about which side of that line you are on.
Who can serve as trustee?
You can, in many cases — a CRT does not require an independent trustee the way some structures do. But there are good reasons not to.
Self-dealing and prohibited transaction rules apply, and a grantor-trustee handling annual valuations, four-tier income accounting and unitrust calculations is a compliance risk to themselves. Many charities will serve as trustee at no cost where they are the named remainder beneficiary, which is efficient but ties you to that organization. A corporate trustee charges a fee and brings the systems.
A common middle path is a corporate or charity trustee for administration with an independent investment advisor, and a retained power to remove and replace the trustee. Whatever you choose, the annual obligations are real and unglamorous, and they are the part that determines whether the structure works twenty years from now.
Holding something you cannot afford to sell?
Bring it in before you negotiate the sale.
Twenty minutes, no commitment. Bring the asset, your basis in it, and what you would want the income to look like. You will get an honest read on whether a charitable structure helps, which one, and whether a donor advised fund would do the same job for a tenth of the cost.
Schedule a Free Consultation(314) 732-1547
Email derek@haakelawgroup.com · Offices in Wildwood, MO & St. Louis, MO (by appointment)
This page is general information about federal and Missouri law, not legal or tax advice, and does not create an attorney-client relationship. Charitable deductions, actuarial values and the § 7520 rate change; verify current figures before relying on them, and model any charitable structure with a qualified tax professional. Consult a licensed attorney about your situation.