A split-interest agreement is a charitable giving arrangement that divides ownership of donated assets between a charity and at least one non-charitable beneficiary, usually the donor or a family member. One side receives income or use of the assets for a set period; the other receives whatever remains when that period ends. The transfer is almost always irrevocable, and the arrangement has to meet specific IRS rules to produce a charitable deduction.
How the Split Works
Every split-interest arrangement has two pieces. The “lead interest” is the right to receive payments or use of the property during the agreement’s term. The “remainder interest” is what passes to the other beneficiary when the term ends. Which side the charity holds is the defining choice.
If the donor or a family member takes the lead interest and the charity waits for the remainder, the structure is a charitable remainder arrangement. Flip that order, and the charity takes the lead payments while the remainder passes to heirs. Both are legitimate; they serve different goals. The first suits a donor who needs income now and wants to benefit charity later. The second suits a donor who wants to move wealth to the next generation with reduced gift or estate tax exposure.
Because the transfer is irrevocable, the donor cannot pull the assets back once the agreement is signed and funded. That permanence is what makes the charitable deduction possible in the first place.
The Main Types of Split-Interest Agreements
Charitable Remainder Trusts
A charitable remainder trust (CRT) is the most common structure. Assets go into an irrevocable trust that pays income to one or more non-charitable beneficiaries for a fixed term of up to 20 years, or for the lifetime of named living beneficiaries. When the term ends, the remaining assets go to a qualified charity.1Internal Revenue Service. Charitable Remainder Trusts
The annual payout has to be at least 5 percent but no more than 50 percent of the trust value, and the projected remainder for charity must be worth at least 10 percent of the property’s initial value.2Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts
CRTs come in two shapes. A charitable remainder annuity trust (CRAT) pays a fixed dollar amount every year, set when the trust is funded. Fund it with $1 million at a 6 percent payout, and you receive $60,000 annually regardless of investment performance. Predictable, but flat against inflation, and no additional contributions are allowed after funding.2Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts
A charitable remainder unitrust (CRUT) pays a fixed percentage of the trust’s value, recalculated each year. If investments grow, payments grow. If they fall, payments fall. A CRUT also accepts additional contributions over time.1Internal Revenue Service. Charitable Remainder Trusts One variation, the net income with makeup charitable remainder unitrust (NIMCRUT), caps annual payouts at the trust’s actual net income when that is less than the fixed percentage, and makes up the shortfall in later years when income runs higher. Donors use it to push income into lower-bracket retirement years.3Internal Revenue Service. Charitable Remainder Trusts – The Income Deferral Abuse and Other Issues
Charitable Lead Trusts
A charitable lead trust (CLT) reverses the order. The charity receives payments for a set term, and the remainder passes to non-charitable beneficiaries, typically the donor’s children or grandchildren. CLTs are estate planning tools, not income tools for the donor.
To qualify for a deduction, the charity’s lead interest has to be either a guaranteed annuity (a CLAT) or a fixed percentage of trust value recalculated annually (a CLUT). That requirement holds under the income, estate, and gift tax rules alike.4Internal Revenue Service. General Explanation of Trusts Subject to Tax Under IRC 4947
A grantor CLT gives the donor an upfront income tax deduction for the present value of the lead interest, but the donor then pays income tax on trust income during the term. A nongrantor CLT gives no personal deduction to the donor; the trust itself deducts what it pays to charity. Most estate-planning CLTs are nongrantor trusts, because the point is transferring the remainder to heirs efficiently, not generating a personal deduction.
Pooled Income Funds
A pooled income fund is run by a public charity and combines contributions from many donors into a single investment pool. Each donor gives an irrevocable remainder interest to the charity and keeps a life income interest for themselves or someone else. Income is distributed in proportion to each donor’s share. When an income beneficiary dies, their share of principal passes to the charity.5eCFR. 26 CFR 1.642(c)-5 – Definition of Pooled Income Fund
Pooled income funds cannot invest in tax-exempt securities, the charity must maintain control of the fund, and neither the donor nor any income beneficiary may serve as trustee.5eCFR. 26 CFR 1.642(c)-5 – Definition of Pooled Income Fund
Charitable Gift Annuities
A charitable gift annuity is a contract, not a trust. The donor transfers assets to a charity, and in exchange the charity agrees to pay the donor a fixed amount for life. The payment depends on the donor’s age when the gift is made and never changes. When the donor dies, the charity keeps what’s left.
Because there is no separate trust entity, payments are backed by the charity’s full asset base rather than only the donated property. The charity’s financial strength matters. The charitable deduction equals the donated amount minus the present value of the lifetime payments, calculated using IRS actuarial tables and the Section 7520 interest rate.
Tax Benefits
Income Tax Deduction
Contributing property to a CRT or pooled income fund produces a charitable deduction for the present value of the remainder interest going to charity. Federal law limits the charitable deduction for property placed in trust to three qualifying forms: a CRAT, a CRUT, or a pooled income fund.6Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts Put property in a trust and promise the remainder to charity without following one of those structures, and no deduction is allowed.
The deduction is not the full value of what you put in. It is the present value of what the charity is projected to receive after all payments to the income beneficiary. That figure turns on the payout rate, the term or beneficiary’s life expectancy, and the IRS Section 7520 interest rate, which ran between 4.6 percent and 4.8 percent in early 2026.7Internal Revenue Service. Section 7520 Interest Rates Higher payouts and longer terms leave less for charity and shrink the deduction. The usual adjusted gross income limits on charitable deductions also apply.1Internal Revenue Service. Charitable Remainder Trusts
Capital Gains Deferral
This is the feature that draws donors sitting on highly appreciated stock, real estate, or business interests. A CRT is a tax-exempt entity, so when the trustee sells appreciated assets held in the trust, no capital gains tax is due at the moment of sale. The full proceeds stay invested and generate income.
The tax is not eliminated. As the trust distributes payments, a tiered accounting system characterizes each distribution as ordinary income first, then capital gains, then other income, then return of principal. The capital gains liability comes out over many years instead of all at once.
Estate and Gift Tax Benefits
Charitable lead trusts are the main vehicle. When a CLT is funded during life, the gift tax value of the remainder going to heirs is reduced by the present value of the charity’s lead interest. If the trust outperforms the Section 7520 rate used to value that lead interest, the excess growth passes to heirs free of gift or estate tax. A CLT funded at death through a will or revocable trust reduces the taxable estate by the value of the lead interest.
Rules That Can Disqualify the Arrangement
The 10 Percent Remainder Test
At funding, the present value of the charity’s remainder interest in a CRT has to equal at least 10 percent of the initial fair market value of the property contributed, using the Section 7520 rate for the month the trust is created.2Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts
This is the test that trips up donors most often. A young beneficiary with a long life expectancy, a high payout rate, or a low Section 7520 rate can each push the projected remainder below 10 percent and disqualify the trust outright. Payout rate, term, and interest rate environment have to work together. Any competent trust attorney will run the projections before drafting.
Self-Dealing Restrictions
Split-interest trusts are treated much like private foundations for excise tax purposes, including rules on self-dealing, excess business holdings, jeopardizing investments, and taxable expenditures.8Office of the Law Revision Counsel. 26 USC 4947 – Application of Taxes to Certain Nonexempt Trusts
The self-dealing rules prohibit transactions between the trust and “disqualified persons,” a category that includes the donor, the donor’s family, and entities they control. Sales or leases of property, loans, and provisions of goods or services between the trust and a disqualified person are all barred. Fair terms do not save the transaction; the prohibition is absolute, and the excise taxes for violations are steep.9Internal Revenue Service. IRC 4941 – The Nature of Self-Dealing
Annual Form 5227
Every CRT, pooled income fund, and qualifying CLT has to file IRS Form 5227 each year. The form reports the trust’s financial activity, charitable deductions and distributions, and whether the trust is subject to private foundation excise taxes. For calendar year 2025, the deadline is April 15, 2026.10Internal Revenue Service. 2025 Instructions for Form 5227
Choosing the Right Structure
What you’re trying to accomplish determines the structure, and the wrong choice costs real money.
- If you need retirement income and hold appreciated assets, a CRT sells those assets without an immediate capital gains hit and converts them into an income stream. A CRUT gives inflation protection; a CRAT gives certainty; a NIMCRUT defers most income until retirement.
- If your goal is transferring wealth to heirs with reduced taxes, a CLT pays the charity first and passes the remainder to heirs, potentially with little or no gift or estate tax when investments beat the Section 7520 rate.
- If you want simplicity and guaranteed lifetime payments, a charitable gift annuity avoids trust administration, Form 5227, and trustee selection. The tradeoff is less flexibility and usually a smaller deduction.
- If you want to give a modest amount without paying to set up your own trust, a pooled income fund lets you join a professionally managed fund at a lower entry point than a standalone CRT.
Professional setup for a standalone split-interest trust generally runs from a few thousand dollars for a simple CRT to $25,000 or more for complex arrangements. Ongoing trustee, tax filing, and investment costs continue every year, so the tax benefits need to justify the expense. Most advisors point to $100,000 to $250,000 as a practical floor for CRTs, though no statutory minimum exists.