The greater your assets grow, the greater your need for a cogent plan for what to do with your wealth, both now and in the future.
Charitable remainder annuity trusts (CRATs) can factor significantly into those plans.
A CRAT is a type of trust that allows you to accomplish numerous financial goals at once. You can provide regular income for yourself and/or those you love. You can set aside money for the causes that matter most to you. And if your wealth is highly concentrated in one or two assets, a CRAT can even help you diversify in a tax-advantaged way.
Today, I’ll introduce you to charitable remainder annuity trusts. I’ll cover what they are, how they work, the tax break associated with CRATs, and how they compare to another closely related trust.
What Is a Charitable Remainder Annuity Trust?
A charitable remainder trust (CRT) is an irrevocable trust that provides income to one or more living beneficiaries for a predetermined amount of time, then distributes the remainder to one or more charitable organizations when the trust expires.
There are two types of CRTs:
- Charitable remainder annuity trusts (CRATs)
- Charitable remainder unitrusts (CRUTs)
CRATs and CRUTs largely work the same way, but they have a few noteworthy differences that might make them more or less appealing to you depending on your goals.
How Do CRATs Work?
When you establish a CRAT, you make an initial, partially tax-deductible contribution of cash, property, or other assets.Â
You assign one or more living noncharitable beneficiaries to receive income from the trust on a regular basis. When the CRAT expires (either after a predetermined number of years, or upon the death of one or more of the noncharitable beneficiaries), the remainder will be given to one or more qualified U.S. charitable organizations.
Among other things, you’ll need to determine:
- The living noncharitable beneficiary(ies): You can select one or more beneficiaries. These typically include individuals (family, friends, even yourself), but they can also include private, noncharitable entities.
- The amount of income that will be distributed: You must select a specific dollar amount to be paid each year to the noncharitable beneficiaries. The trust must pay at least 5%, but no more than 50%, of the fair market value of the trust’s property when the trust is established.
- The frequency of the payments: CRATs typically distribute payments annually, though they can also be structured to pay semiannually, quarterly, even monthly.
- The term of the trust: You can choose a term of up to 20 years or the life of one or more noncharitable beneficiaries.
- The charity(ies) you’ll donate to: You can donate to one or more qualified U.S. charitable organizations. Generally, these must be 501(c)(3) organizations.
The amount you ultimately donate has to be a minimum of 10% of the initial net fair market value of everything placed in the trust. Also, you can make only one contribution—once the initial funding is complete, you can no longer add assets to the CRAT.
And because a CRAT is an irrevocable trust, you generally can’t take out any of the assets you put in.
Example
Gertrude is a 60-year-old single filer who creates a 20-year term CRAT in August 2026 and funds it with $1.5 million in cash. She names herself a noncharitable beneficiary and opts for $75,000 annual payments, or 5% of the initial value. Her payments would not change from one year to the next.
When the term is over, the remainder is donated to the charity of her choice.
Related: Do I Need a Financial Advisor? 7 Questions to Ask Yourself
Make sure you sign up for The Weekend Tea, our free weekly newsletter that over 10k monthly readers use to level up their money know-how.
CRAT Tax Deduction
Contributing to a charitable remainder trust of any sort provides you with a partial but immediate tax deduction. A few things to note about the deduction:
- The deduction is based on the expected charitable remainder.
- The deduction is subject to AGI limits based on how the CRT is funded—generally, it’s 60% of AGI for cash, 30% for long-term appreciated property.
- Starting in 2026, you can only claim charitable deductions on donations that exceed 0.5% of your annual AGI. (So, if your AGI is $100,000, you can only deduct amounts over $500.)
- Unused charitable deductions can carry forward for up to five consecutive years before expiring.
- The maximum tax benefit of your deduction is limited to 35% if you’re in the top 37% tax bracket.
Example
What would Gertrude’s deduction look like?Â
Like I mentioned above, Gertrude is a 60-year-old single filer who has contributed $1.5 million in cash to a 20-year term CRAT in August 2026. She has decided to make herself the sole noncharitable beneficiary and collect annual payments of $75,000 (5% of the initial value).
Also, Gertrude has $750,000 in AGI, putting her in the 37% tax bracket. And because we can’t deduct contributions until they exceed 0.5% of her AGI ($3,750), I’ll use $1,496,250 as the contribution basis for our calculations.Â
Let’s run through the steps of calculating Gertrude’s deduction together:
- We get the Section 7520 rate for August 2026, which is 5.2%.
- We plug Gertrude’s Section 7520 rate (5.2%) and the annuity term (20 years) into Table B (2010CM), which gives us an annuity factor of 12.2536.
- We then plug Gertrude’s Section 7520 rate (5.2%) and the payment frequency (annually) into Table K to get her adjustment factor, which is 1.0.
- We then multiply the annual dollar amount ($75,000) by the annuity factor (12.4622), then multiply that result by the Table K adjustment factor (1.0), to get the present value of the annuity, which is $934,665.
- We subtract the present value of the annuity ($934,665) from the initial contribution less the 0.5% in AGI ($1,496,250) to get the charitable deduction amount of $561,585.
- Because it’s a cash gift, the deduction is limited to 60% of Gertrude’s AGI. So we would multiply her AGI ($750,000) by 60% (0.60), which is $450,000.Â
- Because the charitable deduction amount of $561,585 is greater than that, her actual 2026 deduction will be $450,000, and she can carry the remaining $111,585 over into 2027.
Now that we have the tax deduction amount, here’s what we know about Gertrude’s tax benefit:
- Because Gertrude is in the 37% tax bracket, her maximum tax benefit is capped at 35%. So we multiply the deduction ($450,000) by 35% (0.35) to get her actual tax reduction for 2026, which is $157,500.
- If Gertrude made no other charitable contributions in 2027, she would multiply the carryover deduction ($111,585) by 35% (0.35) to get her 2027 tax benefit, which is $39,054.75.
Empower Advisory Group offers a comprehensive wealth management service known as Personal Strategy Investment Services.
This managed account solution provides clients with discretionary investment management, personalized portfolio construction, and access to financial planning support.
Related: How Much Should I Save Each Month?
How Do CRATs Differ From CRUTs?
Like I mentioned above, charitable remainder annuity trusts and charitable remainder unitrusts share a lot of similarities, but there are a few key differences:
| Charity Remainder Unitrusts (CRUTs) | Charity Remainder Annuity Trusts (CRATs) | |
|---|---|---|
| Payment type | Fixed percentage of the value of the trust | Fixed dollar amount |
| Payment valuation | At least 5%, but no more than 50%, of the fair market value of the assets, valued annually | At least 5%, but no more than 50%, of the fair market value of the trust's property when the trust is established |
| Contributions | Initial contribution, additional contributions | Initial contribution |
| 5% probability test | No | Yes* |
| Calculation tables | Table S (2010CM), Table K | Table F, Table U(1) (2010CM) |
| * Lifetime CRATs only | ||
The “5% exhaustion probability test” applies to lifetime CRATs. Because CRATs pay out a fixed dollar amount, the 5% exhaustion probability test is used to ensure there’s less than a 5% chance that the designated level of payments will completely exhaust the corpus (principal) before the trust terminates and sends its remainder to the designated charity(ies).
The test doesn’t apply to term CRATs. And because CRUTs always pay out a percentage of the trust, they don’t need to pass the 5% exhaustion probability test, either.
Related: 10 Common Social Security Mistakes You Should Know
Are CRATs Better Than CRUTs?
CRUTs are generally viewed as superior to CRATs because they allow you to make additional contributions down the road, which in turn can increase the size of the regular income payment.
Whether being paid a fixed percentage is better than being paid a fixed dollar amount largely boils down to what’s important to you. If you value a consistent level of income to your beneficiaries, a CRAT provides that—the performance of the trust’s assets won’t alter the distribution from one year to the next.Â
A CRUT can’t necessarily provide that kind of stability, especially if you own aggressive assets within the trust. On the flip side, strong market performance and/or additional contributions will result in greater income payments.
It’s generally best to talk to a financial advisor to determine which kind of CRT is best for you.
Want to talk more about your financial goals or concerns? Our services include comprehensive financial planning, investment management, estate planning, taxes, and more! Schedule a call with Riley to discuss what you need, and what we can do for you.
Related: 5 Social Security Moves Every High-Net-Worth Individual Should Know
A Tax Note on All CRTs
If you establish a lifetime CRT, whether it’s a CRAT or a CRUT, and you name a noncharitable beneficiary other than you or your spouse, your contribution may be considered a gift for federal gift tax purposes.
For 2026, the annual federal gift tax exclusion is $19,000 per recipient. Spouses can combine exclusions to gift up to $38,000 per recipient, though this requires electing gift-splitting on IRS Form 709.
The lifetime gift and estate tax exemption, meanwhile, is currently $15 million per individual (or $30 million for married couples).
