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Charitable Remainder Trusts in New Jersey: How They Work

A charitable remainder trust splits one gift into two parts.
Here is how the structure works.


Learn how a charitable remainder trust works, including its
payment rules, charitable remainder and federal tax treatment.
This educational overview is not legal or tax advice.

Learn More About Estate & Legacy Planning

What Is a Charitable Remainder Trust?

A charitable remainder trust is an irrevocable trust recognized under Section 664 of the Internal Revenue Code.¹ During its payment term, the trust pays at least one living non-charitable beneficiary.¹ When that term ends, the remainder passes to one or more qualified charitable organizations.¹

The payment term may last for the life of one or more beneficiaries or for a fixed term of no more than 20 years.¹ A charitable remainder trust may be created during the donor's lifetime or established at death.¹

What Are the Two Types of Charitable Remainder Trusts?

What Are the Two Types of Charitable Remainder Trusts?

A charitable remainder annuity trust, or CRAT, pays a fixed dollar amount each year.² The amount is set when the trust is created and does not change with the value of its investments.

A charitable remainder unitrust, or CRUT, pays a fixed percentage of assets revalued annually.² Its dollar payment may therefore rise or fall. Both forms must pay at least annually, and the stated payout must fall between 5 percent and 50 percent.²

What Rules Must a Charitable Remainder Trust Meet to Qualify?

Qualification is technical. A trust must meet each federal requirement to qualify.

  • The trust must be irrevocable.¹
  • Payments must go to at least one person who is not a charitable organization described in Section 170(c).²
  • Payments must be made at least annually, for a term of years not exceeding 20 or for the life or lives of the named individuals.²
  • At the end of the payment term, the remainder must pass to, or be retained for the use of, one or more qualified U.S. charitable organizations.¹
  • The value of the charitable remainder interest, determined under Section 7520, must be at least 10 percent of the initial net fair market value of the property placed in the trust.²

For assets transferred during the donor's lifetime, the trust takes a carryover basis, meaning the same basis the assets had in the donor's hands.¹

How Is the Charitable Deduction Calculated?

How Is the Charitable Deduction Calculated?

A contribution to a charitable remainder trust qualifies for a partial charitable deduction, not a full one.¹ The deduction is limited to the present value of the charitable organization's remainder interest, calculated as the value of the donated property minus the present value of the payments to the non-charitable beneficiaries.¹

The remainder value is determined under Section 7520.² The resulting deduction remains subject to adjusted gross income limits and the limitations of Section 170(e).¹

How Are Payments From the Trust Taxed?

Payments to the non-charitable beneficiaries are taxable and are reported to them on Schedule K-1 (Form 1041).¹ The character of each payment is determined by a four-tier ordering rule rather than by the beneficiary's own circumstances.

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How payments from a charitable remainder trust are characterized for federal income-tax purposes
Tier Character When It Applies
First Ordinary income To the extent of the trust's ordinary income for the year plus undistributed ordinary income from prior years1
Second Capital gain Once ordinary income is exhausted, to the extent of current and undistributed capital gain2
Third Other income Once ordinary income and capital gain are exhausted, to the extent of current and accumulated other income, including tax-exempt income1
Fourth Trust corpus After all income and gain categories are fully distributed; not subject to tax1

Undistributed capital gain is tracked on a cumulative net basis.2

How Is the Trust Itself Taxed?

How Is the Trust Itself Taxed?

A qualifying charitable remainder annuity trust or unitrust is not subject to income tax under Subtitle A of the Internal Revenue Code for any taxable year.²

There is an exception. If the trust has unrelated business taxable income in a year, an excise tax is imposed on the trust equal to the amount of that unrelated business taxable income.² Unrelated business taxable income carries the meaning given in Section 512.²

A charitable remainder trust must file Form 5227, Split-Interest Trust Information Return, every year.¹ That return reports the trust's financial activity and the disposition of its assets, accounts for current-year and accumulated income, documents deductions, characterizes the payments made to each beneficiary, and determines whether the trust owes excise taxes for prohibited transactions.¹ Schedule K-1 is filed as an attachment.¹

What Are the Limits of a Charitable Remainder Trust?

The structure carries constraints that are part of the definition, not drawbacks to be weighed.

Irrevocability is the central one. Assets contributed to the trust cannot be recovered.¹ The payment percentage is fixed at creation and cannot later be adjusted.² The remainder must go to charity, and the 10 percent minimum remainder requirement means the payment stream cannot be set so high that little is left for the charitable beneficiary.²

Administration is ongoing. The trust is a separate filing entity with an annual federal return, annual valuations in the case of a unitrust, and trustee responsibilities that continue for the length of the payment term.¹

Charitable remainder trusts are drafted by an attorney. The tax consequences of a contribution, of the resulting deduction, and of the payments received depend on facts specific to each situation and should be reviewed with qualified legal and tax professionals before any action is taken.

How Is a Medicaid Asset-Protection Trust Different?

A Medicaid asset-protection trust is also irrevocable, but it has a different purpose and follows different rules. It is used in long-term-care and Medicaid planning rather than to divide a gift between non-charitable and charitable beneficiaries. One structure does not substitute for the other.

Learn More About Medicaid Asset-Protection Trusts

Our advisors are licensed in New Jersey and in multiple additional states, and coordinate with clients' attorneys and tax professionals.

Genesis Wealth Advisor Group does not draft trusts or provide legal or tax advice. Anyone considering a charitable remainder trust should consult a qualified estate planning attorney and tax professional.

Common Questions About Charitable Remainder Trusts

Is a charitable remainder trust revocable?

No. A charitable remainder trust is irrevocable, and assets placed in the trust cannot be taken back.¹

Can a charitable remainder trust be named as the beneficiary of an IRA?

Yes. An IRA beneficiary may be a person or an entity, including a properly drafted trust.³ A charitable remainder trust may be named as the beneficiary so that, after the IRA owner's death, the IRA assets pass to the trust. The trust then makes payments under its terms for one or more lifetimes or for a fixed term of no more than 20 years, with the remainder passing to charity.¹ Payments to the non-charitable beneficiaries remain taxable under the four-tier ordering rules.¹ This requires coordination among the estate planning attorney, tax professional and IRA custodian.

How long can a charitable remainder trust last?

A charitable remainder trust may make payments for the lifetime of one or more beneficiaries, even when that lasts longer than 20 years. If the trust instead uses a fixed term, that term cannot exceed 20 years.¹ Naming the trust as an IRA beneficiary does not change these duration rules.

What is the minimum payout from a charitable remainder trust?

The annual payment must be at least 5 percent and no more than 50 percent, measured against the initial net fair market value for a CRAT and against the annually revalued assets for a CRUT.²

What is the 10 percent rule for charitable remainder trusts?

The value of the charitable remainder interest, determined under Section 7520, must be at least 10 percent of the initial net fair market value of the property placed in the trust.²

Does a charitable remainder trust pay income tax?

A qualifying charitable remainder trust is not subject to income tax under Subtitle A. An excise tax applies if the trust has unrelated business taxable income in a given year.²

What tax form does a charitable remainder trust file?

Form 5227, Split-Interest Trust Information Return, is filed annually, with Schedule K-1 attached.¹

Can a charitable remainder trust be established through an estate plan?

Yes. A charitable remainder trust may be created and funded during life. It may also be written into a will or revocable trust as a testamentary trust. In that form, its terms are put in place during the person's lifetime, and the charitable remainder trust takes effect and is funded at death.¹

Who can serve as the income beneficiary?

At least one beneficiary must not be a charitable organization described in Section 170(c), and an individual beneficiary must be living at the time the trust is created.²

  1. Source: Internal Revenue Service, Charitable Remainder Trusts
  2. Source: 26 U.S. Code § 664, Charitable remainder trusts
  3. Source: Internal Revenue Service, Publication 590-B, Distributions from Individual Retirement Arrangements

Date Updated: September 3, 2026

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