Charitable Trusts: How CRTs and CLTs Work, What They Save, and Where Their Limits Lie

Charitable remainder trusts and charitable lead trusts are mirror images of each other. This discussion walks through both, with the 2026 numbers.

The Big Picture

A charitable trust lets a donor do three things with the same dollars: support causes they care about, keep meaningful benefits for themselves or their family, and reduce taxes, including income tax, capital gains tax, and, for larger estates, estate and gift tax. Federal law permits this through two mirror-image structures. A charitable remainder trust (CRT) pays the donor (or beneficiaries the donor names) first, for life or a term of years, with whatever remains passing to charity. A charitable lead trust (CLT) pays charity first, for a set term, with whatever remains passing to children or other heirs.

Both are irrevocable “split-interest” trusts: once funded, the assets cannot be taken back, and the trust must follow rigid federal requirements to preserve its tax benefits. Indeed, the Internal Revenue Code recognizes income, estate, and gift tax charitable deductions for split-interest gifts only when they take one of the prescribed forms; sections 170(f)(2), 2055(e)(2), and 2522(c)(2) require the annuity trust or unitrust format (or a pooled income fund). The tax law tolerates the generous results described below only because the format is strict. That trade-off, real tax savings in exchange for real commitment and precise compliance, runs through everything that follows.

Choosing Among Four Basic Designs

When a charitable trust is under consideration, the threshold choice is among four basic designs, and that choice drives everything: the size of the deduction, who is paid what and when, and which taxes are reduced.

§7520 refers to the IRS's published monthly interest rate used to value split interests.

Three requirements, drawn from section 664 of the Code, apply to every CRT: the payout must be at least 5% and no more than 50%; any term of years cannot exceed 20 (lifetime payouts are measured by the beneficiaries' actual lives); and the charity's remainder interest must be worth at least 10% of the contribution, valued at funding using the IRS's published interest rate under section 7520 (5.2% for July 2026, per Rev. Rul. 2026-12; the rate changes monthly). A donor may retain the right to change which charities receive the remainder, and may serve as trustee if the trust is properly administered.

The Charitable Remainder Trust: Income First, Charity Later

How it works

The donor transfers assets, ideally highly appreciated, low-basis assets such as concentrated stock or investment real estate, to the CRT. The CRT is exempt from income tax, so it can sell those assets and reinvest 100 cents on the dollar, with no immediate capital gains tax. The trust then pays the donor the annuity or unitrust amount for life or for the term. The donor receives an immediate income tax deduction for the actuarial value of charity's remainder interest. When the trust ends, the remainder passes to the charities named in the document (a designation the donor can typically retain the power to change).

Payments received are taxable under a “worst-first” four-tier system: ordinary income earned by the trust comes out first, then capital gain, then tax-exempt income, then untaxed return of principal. The capital gains tax is deferred and spread over the payout years rather than eliminated, a point worth being clear-eyed about.

A hypothetical illustration: selling a $2,000,000 zero-basis asset

Consider a married couple, both mid-60s and in the top bracket, holding $2,000,000 of stock with negligible basis, who want retirement income plus a charitable legacy. Compare an outright sale with a 6% charitable remainder unitrust. (Assumptions: July 2026 §7520 rate of 5.2%; 23.8% combined federal capital gains/net investment income tax; hypothetical 7% annual total return; a 25-year payout used to approximate the couple's joint life expectancy; annual year-end payments. Figures are rounded illustrations, not predictions or advice; actual deductions are computed from IRS actuarial tables at funding.)

Hypothetical, rounded illustration based on the stated assumptions only. The 25-year term is an approximation of a joint life expectancy; actual deductions for life interests are computed from IRS actuarial tables at funding.

The table shows the essential trade: the CRUT couple enjoys larger lifetime cash flow, a six-figure deduction, and a substantial gift to charity, but the remaining assets go to charity, not to their children. Families who want both sometimes pair the CRT with a life insurance “wealth replacement” trust funded from part of the increased cash flow, so heirs receive insurance proceeds outside the taxable estate. That adds cost and requires insurability, and it deserves its own analysis.

The deduction is subject to the percentage-of-income limits described in the 2026 table below (30% of AGI for appreciated stock given to a public-charity remainder), with a five-year carryforward. Much of the income tax value lives in timing: contributions are often aligned with a high-income year, such as a business sale, a large Roth conversion, or a deferred-compensation payout.

CRT drawbacks and cautions

• Irrevocable. The principal cannot be taken back, and except for swapping charitable beneficiaries, changes generally require court involvement.
• Heirs receive nothing from the trust. The remainder is charity's; wealth replacement, if desired, must be planned separately.
• Payments are taxable when received, mostly as ordinary income and capital gain under the four-tier rules. The deduction is a fraction of the contribution, not the whole.
• Deferral, not forgiveness. The capital gain is recognized over time through the payments; the benefit is time-value and full reinvestment, plus whatever passes to charity.
• Strict compliance. The 5%/50%, 10%-remainder, and payout rules must be met on paper and in operation; a trustee who fails to administer the trust by its terms can forfeit the charitable deduction, a lesson from the reported cases. Self-dealing and other private-foundation excise rules also apply to these trusts under section 4947(a)(2); the trust generally cannot transact with the donor or the donor's family.
• Promoted schemes are a recognized warning sign. The Tax Court has rejected marketed CRAT arrangements claiming that appreciated assets receive a basis step-up and that annuity payments come out tax-free. Pitches built on claims like those have not fared well.
• Costs. Drafting, annual fiduciary income tax returns (Form 5227), valuations for unitrusts, and trustee and investment fees continue for the life of the trust.

The Charitable Lead Trust: Charity First, Family Later

How it works

The CLT reverses the flow: the trust pays charity a fixed annuity (CLAT) or unitrust amount (CLUT) for a chosen term, and at the end the remaining assets pass to the donor's heirs. The gift to the heirs is valued today at a discount: the present value of charity's payment stream, computed at the §7520 rate, is subtracted from the value of the contribution. If the trust's investments outperform the §7520 rate, all excess growth passes to the family free of gift and estate tax. A CLAT can even be “zeroed out,” with the annuity set so the taxable gift is approximately zero.

One structural choice controls the income tax result. A grantor CLT gives the donor an upfront income tax deduction for charity's interest, but the donor then pays tax on the trust's income each year. A non-grantor CLT gives no upfront deduction, but the trust pays its own tax and deducts its charitable payments without the percentage-of-AGI limits. Most wealth-transfer CLATs are non-grantor; grantor CLATs tend to appear where a donor is seeking a large deduction in one unusually high-income year.

A hypothetical illustration: a $2,000,000 zeroed-out 20-year CLAT

Same assumptions as above (5.2% §7520 rate, annual year-end payments, hypothetical growth rates shown; rounded illustration only). The annuity is set at $163,218 per year, the level at which the present value of charity's 20-year stream equals the full $2,000,000, so the taxable gift to heirs is approximately zero and effectively none of the donors' $15,000,000-per-person exemption is used.

Hypothetical, rounded illustration based on the stated assumptions only. Investment returns are not guaranteed.

If growth merely equals the 5.2% assumed rate, essentially nothing is left for heirs; the technique is, at bottom, a bet that the trust's assets will beat the IRS's assumed rate. Testamentary CLATs (created at death under a will or revocable trust) work similarly, and the value of charity's payment stream can qualify for an estate planning charitable deduction.

CLT drawbacks and cautions

• A frank threshold point. With the federal exclusion now $15,000,000 per person ($30,000,000 per married couple) and portability available, most families face no federal estate tax. The CLT's transfer-tax magic matters chiefly for estates above those levels, for donors who have used their exemptions, or as a hedge against future law changes. Charitable intent should lead; tax mechanics follow.
• Heirs wait. Children typically receive nothing until the term ends, often 15 to 25 years.
• The grantor/non-grantor trade-off is real. Non-grantor CLTs produce no upfront income tax deduction; grantor CLTs tax the donor on trust income for the whole term, and the upfront deduction is recaptured if the donor dies during the term.
• CLATs fit grandchildren poorly. GST exemption generally cannot be leveraged against a CLAT, because the exemption allocation is determined at the end of the term. That is why CLUTs, or entirely different tools, tend to come up where generation-skipping goals are involved.
• Underperformance risk. No 10% remainder requirement applies to CLTs, but charity's annuity is paid regardless, and a bad decade can leave little for heirs.
• Same operational discipline. Irrevocability, annual filings, and private-foundation excise rules apply, including self-dealing and, for some CLTs, excess business holdings limits that complicate funding with closely held business interests.

Key 2026 Federal Numbers for Charitable Planners

The 2026 charitable-deduction changes were enacted by Pub. L. 119-21 (July 4, 2025).

The 2026 changes cut both ways for donors: the new deduction floor and the cap on the value of itemized deductions modestly reduce the value of deductions for high earners, while the permanent 60% cash limit and the large exclusion reward concentrated, well-timed giving. That dynamic tends to favor bunching charitable deductions into high-income years, which is exactly what a CRT (or a grantor CLAT) accomplishes.

Florida Considerations

Florida law is hospitable to charitable trusts. The Florida Trust Code expressly authorizes trusts for charitable purposes, including relief of poverty; advancement of arts, sciences, education, or religion; promotion of health; and governmental purposes, and gives the settlor standing to enforce the trust they created (Fla. Stat. § 736.0405, as amended in 2025). The Attorney General may enforce charitable trusts administered principally in Florida, and named charities have rights to notice, information, and accountings as qualified beneficiaries (§§ 736.0110, 736.0813). If a charitable purpose later becomes unlawful, impracticable, or impossible, Florida's cy pres statute lets a court redirect the trust consistent with the settlor's original intent (§ 736.0413). And because Florida imposes no individual income tax, the federal analysis above is generally the whole income tax story for Florida residents.

Situations and the Structures Commonly Discussed for Them

Common patterns for discussion purposes only; whether any structure fits a particular person requires individual analysis.

Timing Considerations Often Discussed

Timing determines most of the benefit. The CRT must own the appreciated asset before any binding commitment to sell it exists; where a trust is funded after a deal is effectively done, the IRS may tax the gain to the donor anyway under assignment-of-income principles. The deduction lands in the year of funding, which is why contributions are often aligned with a high-income year.

Interest rates matter too, and in opposite directions: the current relatively high §7520 rate (5.2%) increases CRAT and CRT deductions but makes zeroed-out CLATs more expensive, and if rates fall, the CLAT math improves. The rate for the funding month or either of the two preceding months may be used, which creates a modest planning window. Finally, these trusts take weeks, not days, to design, draft, and fund properly, and a trust created at death (a testamentary CRT or CLAT) requires the planning documents to be in place during life.

Topics That Often Come Up in Conversations with Counsel

When a charitable trust is under consideration, several recurring themes tend to shape the discussion between a donor and counsel:

• Which assets might fund the trust, and whether any pending sale, contract, or letter of intent could raise assignment-of-income concerns.
• Whether income comes first or charity first; and if income, whether fixed (CRAT) or percentage (CRUT, flip, or NIMCRUT), and what payout rate passes the 10% test at current rates while meeting income needs.
• Grantor or non-grantor CLT, and how either interacts with the donor's bracket and the new deduction floor and cap in a projected high-income year.
• Whether heirs would be made whole through a wealth-replacement life insurance trust, and what coverage costs at the donors' ages.
• Who will serve as trustee, who prepares the annual Form 5227 and valuations, and how self-dealing rules constrain dealings with family businesses.
• Whether the numbers actually beat simpler alternatives: a donor-advised fund, QCDs, or outright gifts of appreciated stock.

This overview is general information about federal tax law and Florida trust law current as of July 2026. The projections are hypothetical illustrations based on stated assumptions, including a 5.2% IRS discount rate that changes monthly and investment returns that are not guaranteed, and they are not predictions, opinions, or advice for any particular person. Charitable trusts are irrevocable and fact-sensitive; whether one fits, and which design, requires individual analysis. Reading this document does not create an attorney-client relationship.