Charitable split-interest trusts divide an asset into an income interest and a remainder interest between charitable and noncharitable beneficiaries, generating a partial charitable deduction. Charitable remainder trusts (CRTs) pay a noncharitable beneficiary first with the remainder to charity; charitable lead trusts (CLTs) reverse the order — charity leads, family takes the remainder.
A CRT pays a beneficiary an annuity (CRAT) or a fixed percentage of annually revalued assets (CRUT) for life or a term up to 20 years; the remainder passes to charity. The donor gets an immediate income-tax deduction for the present value of the remainder (which must be at least 10%), and the CRT is tax-exempt — so it can sell appreciated assets without immediate capital-gains tax, an ideal exit for low-basis, highly appreciated property.
- CRAT: fixed dollar annuity; no additional contributions; fails if it flunks the 5% probability-of-exhaustion test.
- CRUT: fixed percentage of revalued assets; permits additional contributions and inflation-hedged payouts; NIMCRUT/flip variants defer income.
- Distributions carry out income under the four-tier ordering system (ordinary income first), so beneficiaries are taxed as amounts come out.
A CLT pays charity a lead annuity (CLAT) or unitrust amount (CLUT) for a term; the remainder passes to family. A grantor CLT gives the donor an upfront income-tax deduction (but taxes trust income back to the donor); a nongrantor CLT gives no income-tax deduction but removes the remainder from the estate at a discounted gift value. Zeroed-out CLATs shift appreciation to heirs like a charitable GRAT and thrive in low-7520-rate environments.
Practice tip
Rule of thumb: CRTs suit donors who want income now and a deduction from appreciated assets; CLTs suit donors who can defer family benefit and want to leverage low interest rates and reduce transfer tax.
Key takeaways
- CRTs pay the family first, charity the remainder — tax-exempt sale of appreciated assets plus an upfront remainder deduction (10% minimum).
- CLTs pay charity first, family the remainder — a zeroed-out nongrantor CLAT shifts appreciation at low 7520 rates.
- Choose CRAT vs. CRUT and grantor vs. nongrantor CLT based on payout flexibility and deduction timing.
Authorities
- IRC 664 (CRTs), 170(f), 2055, 2522, 7520; Treas. Reg. 1.664-1 to -4
- Rev. Rul. 77-374 (CRAT 5% exhaustion test)