A testamentary charitable remainder trust is a split-interest trust written into your will or revocable living trust that only comes into existence when you die. Once funded from your estate, it pays an income stream to the beneficiaries you named for a set period, and whatever remains at the end passes to a charity you chose. Because the trust never exists during your lifetime, the tax benefit is an estate tax charitable deduction rather than an income tax deduction, and every term of the arrangement has to be locked in before death since no one can change it afterward.
How It Differs From a Lifetime CRT
A charitable remainder trust funded while you’re alive is a separate legal entity the moment you sign and fund it. You get an income tax deduction in the year you contribute assets, and you can serve as both the income beneficiary and the trustee. A testamentary version is nothing more than instructions embedded in your estate planning documents. Those instructions sit dormant, and they stay fully revocable until you die.
At death, the provisions become an irrevocable trust, funded with assets transferred out of your estate during probate. Because you are no longer alive, there is no personal income tax deduction. The tax payoff comes through the estate tax charitable deduction under IRC Section 2055, which reduces the size of the taxable estate.1Office of the Law Revision Counsel. 26 US Code 2055 – Transfers for Public, Charitable, and Religious Uses
One practical advantage: assets that pass through the estate generally receive a stepped-up basis to their date-of-death fair market value. The trust starts with a higher cost basis than you originally had, which can reduce the capital gains that flow through to income beneficiaries later.
What the Trust Has to Include to Qualify
The IRS imposes structural tests under IRC Section 664 that the trust must pass. Fail any of them and the estate loses the charitable deduction entirely.
The 10% Remainder Test
The present value of the remainder interest destined for charity must equal at least 10% of the net fair market value of the assets placed in the trust at funding.2Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts That value is calculated using the IRS Section 7520 rate, which is 120% of the applicable federal midterm rate for the month of the valuation date.3Internal Revenue Service. Section 7520 Interest Rates A higher payout rate or longer trust term shrinks the remainder and makes the 10% threshold harder to clear.
Because the calculation depends on the Section 7520 rate in effect at your death, no one drafting a testamentary CRT today can predict exactly where the remainder value will land. The terms need enough flexibility to clear the 10% test across a range of rate environments.
Payout Rate and Term
The annual payout to income beneficiaries must be at least 5% and no more than 50% of the applicable trust value.2Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts Payments must run either for the life of one or more named individuals or for a fixed term of up to 20 years. When multiple beneficiaries are named, payments can continue until the last survivor dies, provided all beneficiaries were living when the trust was created and funded.4Internal Revenue Service. Charitable Remainder Trusts
Qualified Charitable Beneficiary
The organization receiving the remainder must qualify under IRC Section 170(c), which generally means a nonprofit organized for religious, charitable, scientific, literary, or educational purposes and eligible to receive tax-deductible contributions.5Office of the Law Revision Counsel. 26 US Code 170 – Charitable, etc., Contributions and Gifts The governing instrument should name the charity and include a backup in case the primary organization loses its exempt status or ceases to exist before the trust terminates.
CRAT or CRUT: The Basic Design Choice
Every charitable remainder trust must be structured as either a charitable remainder annuity trust or a charitable remainder unitrust. The choice shapes how much beneficiaries receive each year and who bears the investment risk.
A CRAT pays a fixed dollar amount, set at funding as a percentage of the initial net fair market value. If the trust was funded with $1 million and the payout rate is 6%, the beneficiary receives $60,000 every year for the trust’s entire term regardless of investment performance. A CRAT cannot accept additional contributions after the initial funding, and inflation gradually eats the beneficiary’s purchasing power over a long term.
A CRUT pays a fixed percentage of the trust’s net asset value, recalculated every year. When investments grow, the payment grows. When they decline, the payment shrinks. A CRUT can accept additional contributions, and the 10% remainder test applies separately to each one.6Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts Annual revaluation adds administrative work: for publicly traded securities that’s simple, but real estate or closely held business interests require appraisals every year.
How Payments Are Taxed to Beneficiaries
The trust itself is tax-exempt and pays no income tax on its earnings. When money flows out to the income beneficiaries, though, IRC Section 664(b) forces the highest-taxed income out first. Distributions are characterized in this order:2Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts
- Ordinary income first, drawing from current-year and accumulated interest, rents, and dividends taxed at ordinary rates.
- Capital gains next, once ordinary income is exhausted, taxed at the applicable capital gains rate.
- Other income after that, including tax-exempt income such as municipal bond interest.
- Trust corpus last, distributed as a tax-free return of principal only after all three income tiers are depleted.
Within the first two tiers, amounts taxed at the highest rates come out before amounts taxed at lower rates. The trustee tracks each category from the date the trust is funded and reports the character of each distribution on a Schedule K-1, which the beneficiary uses to prepare their personal return.
One trap: if the trust earns unrelated business taxable income, that income is hit with a 100% excise tax instead of ordinary tax treatment.7Office of the Law Revision Counsel. 26 US Code 664 – Charitable Remainder Trusts Certain partnership interests and debt-financed property can trigger it, so investment planning should steer around them.
The Estate Tax Deduction
The core tax benefit is the estate tax charitable deduction under IRC Section 2055. The estate deducts the present value of the remainder interest that will eventually pass to charity, and unlike the income tax charitable deduction, this one has no percentage-of-AGI cap.8Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses
The deduction does not shelter the full value of assets placed in the trust. The income interest going to non-charitable beneficiaries stays in the taxable estate. If the present value of the charitable remainder equals 40% of the trust’s funding value, the estate deducts 40%, not 100%. A lower payout rate, a shorter trust term, or an older income beneficiary all push the remainder value up.
Higher Section 7520 rates increase the present value of the remainder, producing a larger deduction. Starting in 2026, the federal estate tax exemption is projected to drop to roughly $7 million per individual after the temporary Tax Cuts and Jobs Act increase expires. Estates that previously would have owed no federal estate tax may now face a taxable amount, which makes the deduction from a testamentary CRT worth more than it has been in recent years.
How the Trust Gets Created and Funded
A testamentary CRT lives inside a will or revocable living trust until you die. Getting the drafting right is everything, because no one can fix it later.
The IRS publishes sample trust language through a series of Revenue Procedures covering both CRATs and CRUTs in various configurations.9Internal Revenue Service. Revenue Procedure 2016-42 Using those templates as a starting point helps ensure the document includes the required elements: the payout rate, the trust term, identification of the charitable remainder beneficiary, and language prohibiting transactions that would disqualify the trust.
The trust doesn’t exist as a legal entity until the will is admitted to probate or the revocable trust becomes irrevocable at death. The executor handles debts, administration expenses, and specific bequests first. Then the designated assets are transferred to the new CRT. The trustee obtains an Employer Identification Number from the IRS, since the trust is now a separate tax-exempt entity that files its own returns.10Internal Revenue Service. Taxpayer Identification Numbers
Because funding is tied to probate, there is an inherent delay. The income beneficiary may wait months before the trust is funded and payments begin. An estate plan that pairs a testamentary CRT with interim support provisions can keep a surviving spouse or other beneficiary from facing a cash-flow gap.
Ongoing Administration
The trustee’s duties run in two directions at once: generating income for the non-charitable beneficiary now while preserving enough principal to deliver a meaningful remainder to charity later. That tension sits at the center of every investment decision.
Because a CRT is a split-interest trust, IRC Section 4947(a)(2) subjects it to several private foundation excise tax rules even though it isn’t actually a private foundation.11Office of the Law Revision Counsel. 26 USC 4947 – Application of Taxes to Certain Nonexempt Trusts The trust cannot engage in self-dealing with disqualified persons, which includes substantial contributors, their family members, and entities they control. Violations trigger an initial excise tax and a much larger tax if the transaction isn’t corrected.12Office of the Law Revision Counsel. 26 US Code 4941 – Taxes on Self-Dealing Excess business holdings, jeopardizing investments, and taxable expenditures are all restricted as well.
The trustee files Form 5227, the Split-Interest Trust Information Return, with the IRS each year.13Internal Revenue Service. Split-Interest Trust: Annual Return (Form 5227) The return reports income, assets, distributions, and compliance with payout and valuation rules. It is due by April 15 following the close of the trust’s tax year, with an extension available on Form 8868.14Internal Revenue Service. Return Due Dates – Other Returns and Reports Filed by Exempt Organizations The trustee also issues a Schedule K-1 to each income beneficiary breaking down the character of the year’s distributions across the four tiers. Sloppy tracking of those tiers from the trust’s inception is one of the most common compliance failures, and it can leave beneficiaries paying the wrong amount of tax for years before anyone catches it.
When the Trust Ends
The trust terminates when the income interest expires, either at the end of the fixed term or on the death of the last surviving income beneficiary. The trustee’s final duty is to transfer the remaining principal to the named charitable organization. Once that distribution is complete, the trust ceases to exist and its reporting obligations end.
If the named charity has lost its tax-exempt status or ceased to exist by that point, the governing document should allow the trustee to select an alternate qualifying organization. Without that language, the distribution can require court intervention, which costs time and money the charitable remainder doesn’t need to lose.