IRC 664 Charitable Remainder Trusts: CRATs, CRUTs, Income Tier Waterfall, and IRC 170 Substantiation

A charitable remainder trust (CRT) allows a donor to contribute appreciated or income-producing property to an irrevocable trust, receive an income stream for a period of years or life, and ultimately deliver the remaining trust assets to one or more qualified charitable organizations. Under IRC 664, two structures govern this planning vehicle: the Charitable Remainder Annuity Trust (CRAT), which pays a fixed dollar amount annually, and the Charitable Remainder Unitrust (CRUT), which pays a fixed percentage of the trust's annually revalued assets. Both structures offer a front-loaded charitable deduction under IRC 170, a mechanism to defer recognition of capital gain on the sale of appreciated assets inside the trust, and a long-term stream of distributions taxed in a prescribed priority order under IRC 664(b).

This guide is written for enrolled agents, CPAs, and tax attorneys. It covers: the structural requirements and differences between CRATs and CRUTs (Sections 1 and 2); the mechanics of the IRC 664(b) income tier waterfall and how it affects the taxability of distributions (Section 3); the IRC 170 charitable deduction, its AGI limitations, and the qualified appraisal substantiation requirement (Section 4); the UBTI 100% excise tax and which assets are unsafe in a CRT (Section 5); Form 5227 annual reporting obligations (Section 6); and common planning scenarios with a practitioner checklist (Section 7). All statutory citations, thresholds, rates, and percentages in this guide must be verified against current law and IRS guidance at IRS.gov before use in any client engagement. This guide is informational and does not constitute legal or tax advice.

Section 1: CRATs -- Structure, Requirements, and Limitations

A Charitable Remainder Annuity Trust (CRAT) is an irrevocable trust from which a fixed dollar amount (or a fixed percentage of the initial fair market value of the trust's assets, computed at inception and never revised) is paid at least annually to one or more non-charitable income recipients for a term of years (up to a maximum of 20) or for the life or lives of the income recipients. At the end of the trust term, the remainder passes to the charitable remainderman. The defining feature of a CRAT is that the payout amount is fixed at the outset: it does not change in response to investment performance, inflation, or fluctuations in asset value. All CRAT mechanics, actuarial requirements, and computation details hedge to IRC 664(d)(1), Treas. Reg. 1.664-2, and IRS.gov.

The 5% minimum and 50% maximum (IRC 664(d)(1)(A) and (B))

Under IRC 664(d)(1)(A), the fixed annuity paid to the non-charitable income recipient must equal at least 5% of the initial net fair market value of the property transferred to the trust. Under IRC 664(d)(1)(B), the annuity amount cannot exceed 50% of that same initial net fair market value. These twin constraints define the permissible payout corridor. Hedge both limits to IRC 664(d)(1)(A) and (B) and IRS.gov before any planning projection; do not state a specific dollar payout figure without verifying against the applicable fair market value and the current statutory requirements.

Under IRC 664(d)(1)(C), no amounts other than the fixed annuity may be paid to the non-charitable income recipient from the CRAT. This prohibition on additional distributions is more restrictive than the comparable rule for CRUTs and is one reason practitioners occasionally prefer the CRUT structure for clients who may need access to additional funds.

The 10% remainder test (IRC 664(d)(1)(D))

Under IRC 664(d)(1)(D), the present value of the remainder interest (determined using the IRC 7520 rate in effect at the time of the transfer, per Treas. Reg. 1.664-2) must be at least 10% of the net fair market value of the property contributed to the trust. If this threshold is not met, the trust does not qualify as a CRT under IRC 664, and the donor receives no deduction. Hedge the 10% requirement, and every step of the actuarial computation, to IRC 664(d)(1)(D), Treas. Reg. 1.664-2, and IRS.gov.

The 10% remainder test is highly sensitive to the IRC 7520 rate, the annuity payout rate, and the age of the income recipient (for life-based CRTs). In a low IRC 7520 rate environment, more of the present value is allocated to the income stream and less to the remainder, making it harder to satisfy the 10% threshold without reducing the payout rate or shortening the trust term. Practitioners must run the actuarial computation before finalizing any CRAT structure. See Section 4 and the related discussion of IRC 7520 rate effects.

No additional contributions to a CRAT

Unlike CRUTs, CRATs do not permit additional contributions after the initial funding. Each new contribution of property would require a new trust instrument or would disqualify the existing CRAT. Hedge this restriction to IRS.gov and Treas. Reg. 1.664-2. Donors who expect to contribute assets incrementally over time should consider a CRUT structure instead, which generally allows additional contributions subject to applicable documentation requirements.

When to use a CRAT

CRATs are most appropriate for donors who want certainty of income: a fixed dollar distribution that does not fluctuate with trust investment performance. This profile often fits older donors who need a predictable cash flow, who are not primarily motivated by an inflation hedge, and who will not need to add additional assets to the trust. The trade-off is that a CRAT does not benefit from trust growth (the annuity amount is fixed regardless of appreciation) and does not allow additional contributions. Younger donors and donors holding illiquid assets that will require time to monetize often find CRUT variations more suitable.

Section 2: CRUTs -- Structure, Variations, and Requirements

A Charitable Remainder Unitrust (CRUT) is an irrevocable trust from which a fixed percentage (not a fixed dollar amount) of the net fair market value of the trust's assets, revalued annually on a specified valuation date, is paid at least annually to one or more non-charitable income recipients. The trust term may be a period of years (up to a maximum of 20) or the life or lives of the income recipients. Because the payout is a percentage of annually revalued assets, the dollar amount distributed each year fluctuates with the value of trust assets: distributions increase if assets appreciate and decrease if assets decline. All CRUT mechanics, the annual revaluation requirement, and the 10% remainder test hedge to IRC 664(d)(2), Treas. Reg. 1.664-3, and IRS.gov.

The 5% minimum and 50% maximum (IRC 664(d)(2)(A) and (B))

Under IRC 664(d)(2)(A), the fixed percentage paid to the income recipient must be at least 5% of the net fair market value of the trust assets as revalued each year. Under IRC 664(d)(2)(B), the percentage cannot exceed 50% of that annually revalued net fair market value. Under IRC 664(d)(2)(C), no amounts other than the stated percentage may be paid to the non-charitable income recipient (except as provided in NI-CRUT and similar variations approved under Treas. Reg. 1.664-3). Hedge all percentage limits to IRC 664(d)(2)(A) and (B) and IRS.gov.

The 10% remainder test (IRC 664(d)(2)(D))

The 10% remainder test for CRUTs, under IRC 664(d)(2)(D), mirrors the CRAT requirement: the present value of the remainder interest must equal at least 10% of the net fair market value of the property contributed to the trust at the time of contribution, computed using the applicable IRC 7520 rate. Unlike the CRAT, the CRUT test is applied separately to each contribution (since additional contributions are allowed), and a contribution that fails the test on its own would not qualify. Hedge all actuarial computations for the 10% remainder test to IRC 664(d)(2)(D) and IRS.gov.

Additional contributions to a CRUT

Unlike CRATs, CRUTs generally permit additional contributions of property to the trust during the trust term. Each additional contribution is valued on the date of the contribution and is folded into the trust's asset base for future unitrust calculations. Hedge all additional contribution mechanics, documentation requirements, and any valuation timing rules to applicable IRS guidance and IRS.gov; the trust instrument must be drafted to permit additional contributions, and each contribution must satisfy applicable substantiation requirements.

CRUT variations: NI-CRUT, NIM-CRUT, and FLIP-CRUT

The IRS has approved three principal variations of the standard CRUT, each suited to different planning situations. All three hedge to Treas. Reg. 1.664-3 and IRS.gov for their specific requirements and limitations.

Net Income CRUT (NI-CRUT)

A NI-CRUT pays the lesser of the stated unitrust percentage or the trust's net income for the year. In years when the trust has little or no income (for example, because the trust holds an illiquid real estate investment or an early-stage business interest that has not yet generated distributable income), the trust distributes only what it earns and is not required to liquidate assets to fund the payout. This feature makes the NI-CRUT well suited for donors contributing illiquid assets that will take time to sell or reposition. Once the asset is monetized and the trust generates income, distributions catch up with the stated percentage. Hedge to Treas. Reg. 1.664-3 and IRS.gov.

Net Income with Makeup CRUT (NIM-CRUT)

A NIM-CRUT is a NI-CRUT that also maintains a makeup account: a running record of the cumulative shortfall between the stated percentage and the actual distribution in years when the trust's income was below the percentage. In subsequent high-income years, the trust can distribute the current year's stated percentage plus amounts from the makeup account, effectively catching up on the deferred distributions. The NIM-CRUT is commonly used in retirement planning: the donor contributes assets during working years (when the trust earns little or no distributable income and the makeup account accumulates); after retirement, the trust is repositioned to higher-income assets, triggering both the current percentage payout and catch-up distributions from the makeup account. Hedge to Treas. Reg. 1.664-3 and IRS.gov.

FLIP-CRUT

A FLIP-CRUT begins as a NI-CRUT (or NIM-CRUT) and then "flips" to a standard CRUT upon the occurrence of a specified triggering event. After the flip, the trust pays the full stated percentage regardless of trust income. The FLIP-CRUT is particularly useful when the contributed asset is illiquid (such as closely held real estate or restricted securities) and the donor expects a liquidity event: the trust operates as a NI-CRUT while the asset is held, avoiding forced liquidations to fund the payout, and then flips to a standard CRUT after the asset is sold and the proceeds are reinvested in income-producing assets.

Permitted triggering events include: the sale of an unmarketable asset, marriage, divorce, death of an income recipient, or reaching a specific age. Not all triggering events qualify; the specific events that trigger a permissible flip are governed by Treas. Reg. 1.664-3(a)(1)(i)(c). Practitioners must confirm that the proposed triggering event qualifies under the applicable regulations and any subsequent IRS guidance before incorporating a flip provision in the trust instrument. Hedge all FLIP-CRUT mechanics and triggering event requirements to Treas. Reg. 1.664-3(a)(1)(i)(c) and IRS.gov.

Section 3: The IRC 664(b) Income Tier Waterfall -- How Distributions Are Taxed

A charitable remainder trust is a tax-exempt entity: the trust itself does not pay income tax on its earnings (except for UBTI, addressed in Section 5). However, distributions from the CRT to the non-charitable income recipient are taxable, and they carry the tax character of the trust's income in a specific priority order prescribed by IRC 664(b). This ordering rule, commonly called the "tier system" or "tier waterfall," determines how each dollar of CRT distribution is taxed in the hands of the recipient.

A critical point: the waterfall governs the taxation of the distribution, not the source of the distribution. The character of the distribution is determined by what income is sitting in the highest available tier of the trust's accumulated income pools, regardless of which assets the trust actually sold in the current year. A distribution from a trust holding only municipal bonds may still be characterized as ordinary income if the trust has accumulated ordinary income from prior years. Hedge all tier ordering and characterization to IRC 664(b) and current IRS guidance and Form 8960 instructions at IRS.gov.

The four tiers

The long-term effect: locked-in capital gain pools

When a CRT sells highly appreciated assets (the most common funding scenario), the capital gain from the sale accumulates in the trust's Tier 2 pool. All future distributions to the income recipient carry out capital gain until the accumulated pool is fully exhausted. For a large CRT with significant appreciated securities, this can mean years or decades of Tier 2 distributions before any Tier 3 or Tier 4 amounts are reached.

Practitioners must model this effect before recommending a CRT structure. In some situations, a donor may prefer an alternative charitable vehicle (such as a donor-advised fund, direct contribution, or qualified opportunity zone investment) depending on the long-term capital gain tax profile of the income stream. The tier waterfall is not a penalty -- it is a predictable system, and understanding its mechanics allows practitioners to set accurate client expectations about the taxability of the annual distributions they will receive.

The CRT's capital gain deferral benefit

While the CRT's income beneficiary will ultimately pay capital gain tax on the accumulated Tier 2 pool (as each year's distribution carries out some portion of the gain), the CRT itself pays no tax when it sells the appreciated asset. The gain recognition is deferred and spread across the distribution years, rather than recognized in a single year as it would be if the donor sold the asset outright. This deferral benefit (often called the CRT "spigot") is the primary capital gain planning rationale for the CRT structure. The economic value of the deferral depends on the donor's tax rate, the trust payout rate, the term, and the investment return on the undistributed gain inside the trust. Practitioners should model this specifically for each client engagement rather than assuming the CRT is always superior to an outright sale.

Section 4: The IRC 170 Charitable Deduction and Substantiation

When a donor contributes property to a qualifying CRT, the donor is entitled to a charitable deduction under IRC 170(f)(2)(A) for the present value of the charitable remainder interest. This is the front-loaded benefit of the CRT: the deduction is taken in the year of contribution, not when the trust term ends and the charity actually receives the assets. All aspects of the IRC 170 deduction computation, AGI limitations, and substantiation requirements must be verified against current law and IRS guidance at IRS.gov.

Computing the deduction: IRC 170(f)(2)(A) and the IRC 7520 rate

Under IRC 170(f)(2)(A), the deduction equals the present value of the charitable remainder interest at the time of the contribution. The computation uses the IRC 7520 rate in effect for the month of the contribution (or either of the two immediately preceding months, if the taxpayer elects the more favorable rate; hedge the applicable rate selection to IRS.gov). The actuarial factors are derived from tables prescribed by Treas. Reg. 20.2031-7. Practitioners must use the tables and factors applicable to the month of the transfer and must confirm the current month's IRC 7520 rate at IRS.gov before performing any deduction calculation.

The effect of the IRC 7520 rate on the deduction amount is direct and material. In a high-rate environment, the present value of the charitable remainder is larger (future assets are discounted more steeply, leaving a larger imputed remainder), and the deduction is correspondingly larger. In a low-rate environment, the present value of the income stream is larger, leaving a smaller imputed remainder and a smaller deduction. Practitioners must also verify that the 10% remainder test is satisfied before finalizing the structure; if the computed remainder is below 10% of the contributed value, the trust does not qualify.

AGI limitations under IRC 170(b)

The charitable deduction for a CRT contribution is subject to the percentage-of-contribution-base limitations of IRC 170(b). The applicable limit depends on the type of property contributed and the type of qualifying charity designated as the remainderman. The general framework:

• Cash contributed to a public charity: the deduction is generally limited to 60% of the donor's contribution base (hedge to IRC 170(b)(1)(G) and IRS.gov; OBBBA may have made changes to this limitation, and practitioners must verify current law at IRS.gov).
• Long-term capital gain property contributed to a public charity: the deduction is generally limited to 30% of the donor's contribution base (hedge to IRC 170(b)(1)(C) and IRS.gov). Amounts exceeding the 30% limit carry forward for up to 5 succeeding taxable years.

Hedge all percentage limits, the definition of "contribution base," carryforward rules, and any OBBBA changes to the itemized deduction rules to IRC 170(b) and IRS.gov. The One Big Beautiful Budget Act (OBBBA) may have modified certain itemized deduction limitations, and the charitable deduction landscape may have changed. Practitioners must confirm the current applicable limits before relying on any historical rule.

Substantiation: the qualified appraisal requirement (IRC 170(f)(11))

For noncash charitable contributions above a specified threshold (hedge the specific threshold to IRC 170(f)(11)(A) and IRS.gov; do not state a dollar figure without a hedge, as this threshold can change), the taxpayer must obtain a "qualified appraisal" from a "qualified appraiser" and attach the required documentation to the return. For CRT contributions of property, this means completing and filing Form 8283 (Noncash Charitable Contributions), signed by three parties: the qualified appraiser, the trustee of the CRT (as the donee organization), and the donor.

The appraisal must also be obtained before the due date (including extensions) of the tax return on which the deduction is first claimed. Hedge all timing requirements, form requirements, and current thresholds to IRC 170(f)(11)(A), Treas. Reg. 1.170A-17, Form 8283 instructions, and IRS.gov.

Qualified appraisal (IRC 170(f)(11)(E)(i))

Under IRC 170(f)(11)(E)(i), a "qualified appraisal" must: be conducted and signed by a qualified appraiser; be prepared, signed, and dated no earlier than 60 days before the date of contribution and no later than the due date of the return claiming the deduction (hedge timing to IRC 170(f)(11)(E)(i) and current regulations); meet specified content requirements (including description of the property, the date of the appraisal, the appraiser's qualifications, the fair market value, the methodology, and the basis for the valuation); and must not involve a prohibited fee arrangement. A fee contingent on the appraised value of the property, or any fee tied to the value of the deduction, disqualifies the appraisal. Hedge all requirements to IRC 170(f)(11)(E)(i), Treas. Reg. 1.170A-17, and IRS.gov.

Qualified appraiser (IRC 170(f)(11)(E)(ii))

Under IRC 170(f)(11)(E)(ii), a "qualified appraiser" must have verifiable education and experience in valuing the specific type of property being contributed. The appraiser cannot be the donor, the donee (the CRT or its trustee), a party employed by the donor or the donee, or any person related to the donor or donee within the meaning of applicable regulations. Hedge all qualified appraiser requirements to IRC 170(f)(11)(E)(ii), Treas. Reg. 1.170A-17, and IRS.gov.

Section 5: UBTI and the 100% Excise Tax (IRC 664(c)(2))

One of the most severe rules governing CRTs is the UBTI excise tax. Under IRC 664(c)(2), if a charitable remainder trust has any unrelated business taxable income (as defined under IRC 512) during a taxable year, the trust is subject to an excise tax equal to 100% of that UBTI. This is not a deduction disallowance, not a penalty, and not a partial tax: it is a full, confiscatory excise tax that eliminates the UBTI entirely. The rule is designed to prevent donors from exploiting the CRT's tax-exempt status by using it to hold assets that would generate taxable income if held directly.

Why the 100% UBTI excise tax is unusually harsh

Most tax-exempt entities that earn UBTI pay tax on it at ordinary corporate or trust rates. CRTs are different: under IRC 664(c)(2), even a single dollar of UBTI triggers a 100% tax on the entire UBTI for the year. There is no de minimis exception, no blending with the trust's other income, and no mechanism to recover the tax in a subsequent year. This asymmetry means that a single asset generating UBTI inside a CRT can cause a materially disproportionate economic loss to the trust. Hedge the UBTI definition to IRC 512 and IRS.gov; the technical definition of UBTI, and what activities and income fall within it, is governed by IRC 512 and associated regulations.

Common UBTI triggers in CRTs

The following asset types are commonly associated with UBTI risk in a CRT. Practitioners must conduct a careful UBTI analysis before recommending that a client contribute any of these assets to a CRT:

• Debt-financed property: Under IRC 514 (governing debt-financed income), income from property acquired with acquisition indebtedness is UBTI in proportion to the debt-to-asset ratio. Even a small mortgage on contributed real estate can cause a portion of the rental income and gain to be UBTI. Practitioners should require the donor to pay off any mortgage before contributing real estate to a CRT, or confirm the property is free and clear. Hedge all debt-financed income mechanics to IRC 514, IRC 512, and IRS.gov.
• S-corporation stock: A CRT is not a qualifying S-corporation shareholder (S-corporations may be owned only by individuals, estates, and certain trusts). Hedge the current IRS position on S-corp stock held in CRTs to IRS.gov. The practical effect is that a donor generally cannot contribute S-corp stock to a CRT without triggering a termination of the S election or restructuring the ownership. Practitioners must analyze any S-corp interest before contributing it to a CRT.
• Master limited partnership (MLP) interests: MLPs frequently generate UBTI from operating activities passed through to partners. A CRT holding an MLP interest may receive UBTI on the Schedule K-1, triggering the 100% excise tax. Hedge all MLP-UBTI analysis to IRC 512, IRC 514, and IRS.gov.
• Operating businesses and active trade or business income: Income from an operating business conducted by the CRT (or through a pass-through entity) is UBTI. CRTs are not suitable vehicles for operating business interests unless the business can be converted to a passive investment structure before funding. Hedge to IRC 512 and IRS.gov.

Assets that are generally safe from UBTI

The following asset types are generally appropriate for CRT funding because they do not typically generate UBTI (hedge each asset type to IRC 512 and current IRS guidance at IRS.gov, as the characterization of specific income can depend on facts and circumstances):

• Publicly traded stocks and bonds: Dividends, interest, and capital gain from publicly traded securities are generally not UBTI (hedge to IRC 512(b) passive income exclusions and IRS.gov). This is the most common and cleanest asset class for CRT funding.
• Non-debt-financed real estate: Real estate owned free and clear of debt can generally be held in a CRT without generating UBTI, though management and valuation issues add operational complexity. Hedge to IRC 512 and IRS.gov.
• Mutual funds and ETFs: Generally do not generate UBTI unless they invest in assets that themselves generate UBTI. Hedge to IRC 512 and fund disclosures.

Section 6: Form 5227 and Trustee Compliance

All charitable remainder trusts -- both CRATs and CRUTs -- must file Form 5227 (Split-Interest Trust Information Return) annually. This filing requirement applies regardless of whether the trust received any income during the year, had any distributions, or otherwise had any taxable activity. The filing is mandatory as long as the CRT is in existence. Hedge the Form 5227 filing requirement, due dates, extension rules, and all other compliance details to the current Form 5227 instructions and IRS.gov, as these requirements can change.

What Form 5227 reports

Form 5227 collects the following categories of information from the CRT:

• Trust income, deductions, and expenses for the year.
• The income tier characterization of distributions under IRC 664(b): how much of each distribution was ordinary income, capital gain (by rate category), tax-exempt income, and corpus.
• The identity of each non-charitable income recipient and the amount distributed to each recipient during the year.
• The current fair market value of the trust assets and the value of the charitable remainder interest.
• Whether the trust had any UBTI during the year (triggering the IRC 664(c)(2) excise tax).

Penalties for failure to file (IRC 6652)

Failure to file Form 5227 by the applicable due date subjects the trustee to penalties under IRC 6652. Hedge the specific penalty amounts, the reasonable cause exception, and the procedures for penalty abatement to IRC 6652 and IRS.gov; the penalty structure and amounts can change, and the specific amount per day (or per year) of delinquency must be confirmed against current statutory and regulatory text before advising a client on the cost of non-compliance.

A reasonable cause exception is available: a trustee who can demonstrate that the failure to file was due to reasonable cause and not willful neglect may be able to have the penalty abated. Hedge the availability, standard, and procedure for the reasonable cause exception to IRC 6652 and IRS.gov.

Schedule A of Form 5227 and the IRC 664(b) tracking requirement

Because the IRC 664(b) tier waterfall depends on the trust's accumulated income pools across all prior years, the trustee must maintain detailed records of every year's income by character and of the cumulative pool balances in each tier. Form 5227 requires this information and provides the mechanism to track it. Errors in tier tracking can result in mischaracterization of distributions to income recipients, which flows through to incorrect income reporting on the recipient's Form 1040. Practitioners who take on CRT trustee work should establish a tier-tracking spreadsheet or use a qualified CRT accounting software tool, and should reconcile the balances annually before filing Form 5227.

Section 7: CRT Planning Scenarios and Practitioner Checklist

The following scenarios illustrate common CRT planning situations and the key practitioner analysis points for each. In all cases, confirm current law, rates, thresholds, and IRS guidance at IRS.gov before advising clients; the examples below are illustrative only and do not constitute legal or tax advice.

Highly appreciated publicly traded stock

The classic CRT use case: a donor holds stock purchased years ago at a low cost basis. If sold outright, the sale would trigger a substantial long-term capital gain in a single tax year. By contributing the stock to a CRT, the donor (1) avoids immediate capital gain recognition at the trust level (the trust is tax-exempt and can sell the stock and reinvest the full proceeds), (2) receives an IRC 170 deduction for the present value of the charitable remainder interest, and (3) receives an annual income stream for the trust term. The accumulated capital gain from the stock sale sits in the Tier 2 pool and is carried out to the income recipient gradually over the distribution years, deferring and spreading the capital gain recognition rather than triggering it all in year one.

Key practitioner checklist for this scenario: confirm the stock is publicly traded (no UBTI concern); compute the IRC 170 deduction using the current IRC 7520 rate (confirm at IRS.gov); verify the 10% remainder test; confirm the payout rate satisfies the 5% minimum; determine whether a CRAT (fixed payout) or CRUT (percentage payout) better serves the donor's income planning needs; obtain a qualified appraisal if required by IRC 170(f)(11) (verify the threshold at IRS.gov); ensure Form 5227 is calendared for annual filing.

Real estate with debt: NOT appropriate for a CRT

Debt-financed real estate contributed to a CRT generates UBTI from the acquisition indebtedness rules of IRC 514, triggering the 100% excise tax under IRC 664(c)(2). This is one of the most common and costly mistakes in CRT planning. If a donor wants to contribute real estate to a CRT, the mortgage must be paid off before the contribution occurs. Hedge the debt-financed income rules to IRC 514, IRC 512, IRC 664(c)(2), and IRS.gov before advising on any real estate contribution.

For real estate that is free and clear of debt, the FLIP-CRUT is often the preferred structure: the trust holds the real estate as a NI-CRUT (making little or no distribution while the property is being marketed), and flips to a standard CRUT after the sale closes and the proceeds are reinvested. Confirm that the sale of the property qualifies as a permissible triggering event under Treas. Reg. 1.664-3(a)(1)(i)(c) and IRS.gov before including the flip provision in the trust instrument.

S-corporation stock

As noted in Section 5, CRTs are not qualifying S-corporation shareholders. Hedge the current IRS position on S-corp stock in CRTs to IRS.gov. Contributing S-corp stock to a CRT would terminate the S-election unless the ownership is restructured before or concurrent with the contribution. Practitioners must analyze any S-corp interest carefully before advising a client to contribute it to a CRT; the income tax consequences of a terminated S election can be severe. Alternative structures (such as an IRC 338(h)(10) election in a sale context, or a direct contribution of the economic value of the stock after conversion) should be modeled against the CRT option.

Comparison to direct gifts and donor-advised funds

For a donor holding the same appreciated asset who does not need a retained income stream, a direct contribution to a public charity or a donor-advised fund (DAF) often produces a larger upfront charitable deduction (since the deduction is for the full fair market value of the contributed asset, not just the present value of the remainder interest). The CRT is superior when the donor needs income, wants to spread the capital gain recognition across distribution years, and has a meaningful charitable intent for the remainder. Practitioners should not recommend a CRT solely for the charitable deduction if the donor has no genuine interest in retaining the income stream: the complexity, annual Form 5227 filing requirement, and UBTI risk make the CRT a poor fit for purely deduction-driven planning without a true income need.

Combination with an irrevocable life insurance trust (ILIT)

Hedge to applicable estate planning guidance and IRS.gov.

A common wealth-replacement strategy pairs a CRT with an irrevocable life insurance trust (ILIT): the donor uses some or all of the annual CRT distribution to fund premium payments on a life insurance policy held inside the ILIT, replacing for the donor's heirs the economic value of the assets that will ultimately pass to charity. The ILIT receives the death benefit income tax-free and outside the donor's taxable estate. This strategy requires careful coordination among the CRT trustee, the ILIT trustee, the insurance carrier, and the estate planning attorney. The life insurance component introduces separate estate planning analysis (IRC 2042 estate inclusion risk, Crummey withdrawal rights under IRC 2503, and the three-year rule of IRC 2035 if the donor applies for the policy themselves). Hedge all ILIT mechanics to applicable estate planning guidance, IRC 2042, IRC 2503, IRC 2035, and IRS.gov.

Practitioner pre-contribution checklist

• Confirm the proposed trust term satisfies IRC 664(d)(1) (CRAT) or IRC 664(d)(2) (CRUT): maximum 20 years for a term-certain trust, or life/lives of individuals.
• Verify the payout rate satisfies the 5% minimum and 50% maximum (IRC 664(d)(1)(A)-(B) or IRC 664(d)(2)(A)-(B)); hedge to the statute and IRS.gov.
• Run the 10% remainder test using the current IRC 7520 rate (confirm the rate at IRS.gov); if the test is not met, adjust the payout rate, term, or asset to achieve compliance.
• Conduct a UBTI analysis on the proposed contributed asset: is it debt-financed? Does it generate active business income? Is it an S-corp interest or an MLP? Hedge to IRC 512, IRC 514, and IRS.gov.
• Determine whether a qualified appraisal is required for the contribution (hedge the threshold to IRC 170(f)(11)(A) and IRS.gov); if so, engage a qualified appraiser who meets the requirements of IRC 170(f)(11)(E)(ii) and Treas. Reg. 1.170A-17.
• Confirm the appraisal will be obtained, signed, and dated before the due date of the return on which the deduction is claimed (including extensions); confirm timing with the appraiser in writing before the contribution date.
• Complete Form 8283, obtain signatures from the appraiser, the CRT trustee (as donee), and the donor, and attach to the return; hedge Form 8283 requirements to current form instructions and IRS.gov.
• Compute the IRC 170 charitable deduction and model the AGI limitation under IRC 170(b) for the contribution type and charity type; confirm any carryforward years needed (up to 5); hedge all percentage limits and any OBBBA changes to IRC 170(b) and IRS.gov.
• Model the IRC 664(b) tier waterfall: estimate the accumulated capital gain pool, project the income tier characterization of expected distributions, and set client expectations for the taxability of annual distributions.
• Calendar the annual Form 5227 filing obligation; identify the responsible party (trustee or their delegate); confirm the due date and extension rules with the current Form 5227 instructions and IRS.gov.
• Determine whether the CRUT or CRAT structure, and which variation (NI-CRUT, NIM-CRUT, FLIP-CRUT), best fits the client's income timing needs, asset liquidity, and charitable intent.
• Review the GST implications if any income recipient or remainder beneficiary is a skip person; hedge all GST interaction with CRTs to IRC 2601, IRC 2612, IRC 2642, and IRS.gov. See the related GST guide linked below.

Frequently Asked Questions

The following questions and answers address the most common practitioner-level inquiries on CRATs, CRUTs, the IRC 664(b) income tier waterfall, IRC 170 substantiation, UBTI, and Form 5227. Hedge all citations to current law and IRS.gov before relying on any answer in a client engagement.

Related Guides

The following guides address topics that intersect with IRC 664 CRT planning: the IRC 7520 rate used to value the remainder interest, retained interest rules that affect complex plans, generation-skipping tax interaction, and the gift and estate tax filing obligations that arise when a CRT is part of a larger estate plan.

Disclaimer

This guide is published by America's Tax Professionals for informational purposes only. It does not constitute legal, tax, or financial advice and does not create an attorney-client, accountant-client, or advisor-client relationship. All IRC citations, regulatory references, statutory thresholds, percentages, and tax rates must be verified against current law and IRS guidance at IRS.gov before use in any client engagement. Laws cited in this guide, including any provisions modified by the One Big Beautiful Budget Act (OBBBA), may have changed since publication. America's Tax Professionals makes no representation that the information in this guide is current, complete, or free from error. Enrolled agents, CPAs, and tax attorneys are responsible for independently confirming all information and for compliance with Circular 230 and applicable professional standards.