Charitable Trusts: How the Wealthy Give Strategically (CRT vs. CLT)
Charitable trusts explained: how a charitable remainder trust (CRT) and charitable lead trust (CLT) work, their tax deductions, payout rules, capital gains savings, estate tax benefits and who should use them.
Charitable trusts let wealthy donors give to charity while keeping control over timing, income and what their heirs receive. Done well, they can turn a highly appreciated stock or business interest into lifetime income, a charitable tax deduction and a smaller taxable estate. The two main structures are the charitable remainder trust (CRT), which pays you first and charity last, and the charitable lead trust (CLT), which pays charity first and your family last. This guide explains how charitable trusts work, compares CRATs, CRUTs, CLATs and CLUTs, shows the tax rules and the numbers behind them, flags the risks and helps you decide whether one fits your plan. It focuses on the United States, and tax rules change often.
Quick Answer: What Are Charitable Trusts?
- Definition: irrevocable trusts that split the benefit between a charity and a person, a structure the Wealth Enhancement Group calls a split-interest trust.
- Charitable remainder trust (CRT): pays income to you or your beneficiaries for life or up to 20 years, then the remainder goes to charity.
- Charitable lead trust (CLT): pays charity for a set term, then the remainder goes to your heirs.
- Main tax benefits: a partial income tax deduction, deferral or avoidance of capital gains tax inside the trust and removal of assets from your taxable estate.
- Key trade-off: the trusts are irrevocable, so the assets cannot be taken back.
How Do Charitable Trusts Work?
GiveDirectly’s guide describes the basic mechanics: you transfer assets to a trust, a trustee manages them, and the trust pays out to the people and charities you name over the term. Cherry Bekaert’s tax partners note that charitable remainder trusts follow strict rules similar to those for charities and private foundations, with significant penalties for violations, and that charitable trusts suit philanthropically minded clients rather than people who want to give little to charity.
Charitable Remainder Trust (CRT)
Empower defines a CRT as an irrevocable trust that pays income to one or more living noncharitable beneficiaries for life or a term of up to 20 years. When the term ends, the remaining assets pass to one or more qualified charities. Schwab says a CRT is best for deferring capital gains on highly appreciated assets, because the trust can sell them without triggering capital gains tax. Avior Wealth Management gives the logic: the trust sells the asset, reinvests the full proceeds and pays income, so more money works for you than after an outright sale.
CRAT vs. CRUT
| Feature | CRAT (annuity trust) | CRUT (unitrust) |
|---|---|---|
| Payout | Fixed dollar amount each year | Fixed percentage of assets, revalued annually |
| Income variability | Does not change with performance | Rises and falls with investments |
| Additional contributions | Generally not allowed | May be allowed |
| Payout range | 5% to 50% of initial value | 5% to 50% of annual value |
The payout range and the 10% rule come from Schwab, Empower and GiveDirectly. Under the 10% test, at least 10% of the value placed in the trust must be projected to pass to charity at the end.
CRT Tax Benefits
| Benefit | How it works | Source |
|---|---|---|
| Upfront deduction | Partial income tax deduction based on the projected charitable remainder, subject to AGI limits | Empower, Avior |
| No current capital gains tax | Growth and gains inside the trust are generally not taxed currently | Empower, GiveDirectly |
| Estate reduction | Assets placed in the trust may be removed from the taxable estate | Empower, Avior |
| Income stream | Payments to you or your beneficiaries | GiveDirectly |
Beneficiary payments are taxed in a set order: ordinary income first, then capital gains, other income and finally corpus, which is not taxed, according to Empower. CRTs file Form 5227 annually, and beneficiaries report payments on Schedule K-1 (Form 1041), per GiveDirectly.
CRT Example: Selling Appreciated Property
Schwab’s illustration shows why donors use these trusts. A property worth $2 million with a $200,000 basis would produce about $428,400 in tax on a $1.8 million gain at 23.8% if sold outright. Through a CRAT paying $100,000 a year for 20 years, the trust can sell without that tax and the donor receives a $794,980 charitable deduction usable over up to five consecutive years. These are 2024 figures from one illustration, so run your own numbers with a tax advisor.
Charitable Lead Trust (CLT)
The Wealth Enhancement Group describes a CLT as the inverse of a CRT: it pays an income stream to charity for a “lead” period, then distributes the remainder to non-charitable beneficiaries, usually family. The lead period can be a set number of years or an individual’s lifetime, and, unlike CRTs, the page says CLTs have no restrictions on term length or payment rate.
CLAT vs. CLUT
| Feature | CLAT (annuity trust) | CLUT (unitrust) |
|---|---|---|
| Payment to charity | Fixed sum set at creation | Percentage of annual fair market value |
| Variability | Constant | Moves with performance |
GiveDirectly illustrates the difference with $500,000 contributed. A 10% CLAT pays $50,000 every year. A 10% CLUT invested at 5% growth pays $50,000 in year one and $52,500 in year two.
Grantor vs. Non-Grantor CLT
| Type | Income tax deduction | Who pays tax on trust income |
|---|---|---|
| Grantor CLT | Upfront deduction for the present value of the charitable payments | The grantor |
| Non-grantor CLT | No upfront income tax deduction for the donor; a gift tax deduction instead, and the trust deducts its charitable payments each year | The trust |
Schwab and the Wealth Enhancement Group agree on these rules. Schwab adds that the deduction is generally limited to 30% of AGI, with up to five years of carryover for any excess.
CLT Estate and Gift Tax Benefits
Avior explains that the gift tax value is set at creation using IRS interest rate assumptions, so growth above the assumed rate passes to heirs gift-tax-free. Cherry Bekaert’s partners add that assets can pass to heirs at a lower gift tax cost if they grow faster than the Section 7520 rate, and that a low interest rate environment favors CLTs. Schwab’s example: a 10-year, $1 million CLT paying $100,000 a year to charity, using a 5.4% rate (factor 7.5739), produces a $757,390 deduction and a $242,610 remainder subject to gift tax, which usually reduces the lifetime exemption.
CRT vs. CLT: Side-by-Side Comparison
Cherry Bekaert’s tax partners compare the two structures in their podcast.
| Feature | Charitable remainder trust | Charitable lead trust |
|---|---|---|
| Who gets paid first | You or another noncharitable beneficiary for a set term or life | Charity for a set term |
| Who gets the remainder | Charity | Your heirs or the donor |
| Income tax status | Tax-exempt except for unrelated business taxable income | Not tax-exempt; grantor or nongrantor |
| Upfront deduction | Taken in the funding year | Grantor trust: to the grantor; nongrantor: none to the donor |
| Best use | Selling low-basis appreciated assets | Passing fast-growing assets to heirs at a low gift tax cost |
| Best interest-rate setting | Not addressed in the episode | Low interest rates |
Cherry Bekaert adds that for a nongrantor CLT the deduction limit is 30% of AGI for cash gifts, with a 20% limit in some situations and a five-year carryforward.
2026 Rules That Affect Charitable Trusts
Avior notes that starting in 2026, high-income itemizers face a 0.5% AGI floor on charitable deductions and a 35% cap on the value of the deduction. It adds that IRS interest rates change monthly and a few percentage points in the assumed rate can shift deduction or transfer tax savings by thousands of dollars. Avior’s article also describes the federal estate tax exemption as roughly $14 million per person, but the 2026 figure used in other current guides is $15 million, so confirm the current amount with an advisor.
Who Should Use Charitable Trusts?
| If you… | Consider… | Why |
|---|---|---|
| Own highly appreciated stock or property | CRT | The trust can sell without immediate capital gains tax (Schwab) |
| Want lifetime income and a charitable legacy | CRT | Income goes to you, remainder to charity |
| Have a year with unusually high income | CLT | Schwab says a CLT suits years with a large Roth conversion or a business sale |
| Want to pass appreciating assets to heirs | CLT | Growth above the assumed rate passes with little gift tax (Avior) |
| Plan a family business sale | CLT | Avior says it can defer and reduce capital gains |
| Want to give little to charity | Neither | Cherry Bekaert says these are not a good fit |
Risks and Drawbacks of Charitable Trusts
- Poor performance. Schwab warns that weak asset returns inside a CLT may leave nothing for the noncharitable beneficiaries.
- Less for heirs. The Wealth Enhancement Group says heirs receive less if more goes to charity.
- Complexity and cost. The same source cites administrative cost and complexity, and notes that a CLT may not eliminate all tax liability.
- Tax treatment. The IRS does not treat a charitable trust as tax-exempt, GiveDirectly says, and CRT distributions may be taxed as ordinary income.
- Professional help needed. Schwab recommends an estate planning attorney and tax advisor for both types.
Step-by-Step: How to Set Up a Charitable Trust
- Set your goals: income, estate reduction, tax savings or heirs.
- Choose the structure: CRAT, CRUT, CLAT or CLUT, grantor or non-grantor.
- Pick the assets, such as appreciated stock, real estate or business interests.
- Select the charity and the trustee.
- Draft the trust with an attorney and run the deduction calculation with a tax advisor.
- Fund the trust by transferring the assets.
- File annually. CRTs file Form 5227, according to GiveDirectly.
Common Mistakes With Charitable Trusts
- Funding with assets that do not match the goal. Only appreciated assets create the capital gains benefit.
- Missing the 10% remainder test for a CRT.
- Ignoring the deduction limits based on AGI.
- Overlooking the interest rate. The Section 7520 rate affects CLT value.
- Treating the trust as a way to give very little. It is built for real charitable intent.
- Skipping advice. The rules are technical and penalties apply.
Frequently Asked Questions
What is a charitable trust?
It is an irrevocable trust that pays part of its benefit to a charity and part to a person. The two main types are the charitable remainder trust and the charitable lead trust.
What is the difference between a CRT and a CLT?
A CRT pays you first and charity last. A CLT pays charity first and your heirs last.
Do charitable trusts avoid capital gains tax?
A CRT can sell appreciated assets without current capital gains tax inside the trust, according to Schwab, but you pay income tax on distributions.
How much must a CRT pay out?
Between 5% and 50% of the trust’s value each year, per Schwab, Empower and GiveDirectly.
How long can a charitable remainder trust last?
For your lifetime or up to 20 years.
Is a charitable trust irrevocable?
Yes. Assets generally cannot be taken back, though you may sometimes change the charitable beneficiaries.
Who should consider a charitable trust?
Philanthropic donors with appreciated assets or a large income event who also want income, estate savings or a way to pass wealth to heirs.
This text is general information, not tax or legal counsel. Charitable trust rules, interest rates and deduction limits change, and several examples use older figures, so ask a qualified estate planning attorney and tax advisor to model your own numbers.
Sources
- Schwab, Austin Jarvis, “Which Charitable Trust Is Right for You?” (August 16, 2024) – https://www.schwab.com/learn/story/which-charitable-trust-is-right-you
- Avior Wealth Management, “Plan Now, Benefit Later: How Charitable Trusts Can Reduce Future Tax Burdens” (December 21, 2025) – https://avior.com/insights/economic-and-market-commentary/charitable-trusts-reduce-future-tax-burdens/
- Wealth Enhancement Group, David Carlson, “Explaining Charitable Lead Trusts” (February 5, 2026) – https://www.wealthenhancement.com/s/blog/explaining-charitable-lead-trusts-MCH3CEYFCRLNFY3PPL3MRNYU2YHM
- Cherry Bekaert, “Differences Between and Benefits of Charitable Remainder Trusts and Charitable Lead Trusts” (December 8, 2022) – https://www.cbh.com/insights/podcasts/charitable-remainder-trusts-vs-charitable-lead-trusts/
- GiveDirectly, “Guide to Charitable Trusts” (undated) – https://www.givedirectly.org/guide-to-charitable-trusts
- Empower, “Charitable remainder trust” (September 23, 2026) – https://www.empower.com/node/17521
