Charitable Remainder Annuity Trust (CRAT): Rules, 2026 Payout Math and the SPIA Listed Transaction

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

Who this page is for: Californians who want a fixed income from an appreciated asset and plan to leave the rest to charity, at any estate size, and anyone who was sold a charitable trust that bought an annuity. The listed-transaction rules apply whatever your net worth.

What a CRAT does for someone holding a low-basis asset

Say you own a $2 million asset with a low basis, and you want steady income from it, with whatever is left going to charity. You put the asset in an irrevocable trust. The trust pays you a fixed dollar amount, set at 5% to 50% of the initial value of everything placed in it, at least once a year, for the lives of people living when the trust is created or for a term of up to 20 years. Then the remainder passes to charity (IRC § 664(d)(1)). At a 5% payout on $2 million, that’s $100,000 a year, in a good market or a bad one. That fits someone who has a charity in mind and won’t need the principal back.

The sale itself costs the trust no tax. Your payments come out in a fixed order: ordinary income first, then capital gain, then other income, and only then a tax-free return of principal (IRC § 664(b)). The trust itself pays no income tax (IRC § 664(c)(1)), so it can sell the asset and reinvest the full price. You also get an income tax deduction for the present value of the charity’s remainder in the year you fund the trust.

The first decision is whether you want a payment that never moves or one that follows the market. A CRAT’s payment stays the same in a long down market, which suits a retiree who needs a check that doesn’t fall when markets do, and also means payments continue and can drain the trust. A CRAT is one of two kinds of charitable remainder trust. The other, a unitrust, pays a fixed percentage of the trust’s value, revalued each year (IRC § 664(d)(2)(A)), so its payments shrink with the trust.

A unitrust can do things a CRAT can’t. A CRAT takes one contribution, ever, and a second sale needs a second trust, because the governing instrument has to say no additional contributions may be made after the first one (Treas. Reg. § 1.664-2(b)). A unitrust can take later contributions, with the 10% test applying to each one (IRC § 664(d)(2)(D)), and it can be written as an income-only or flip version (IRC § 664(d)(3); Treas. Reg. § 1.664-3(a)(1)(i)(b), (c)). A life-based CRAT also faces a probability-of-exhaustion test that unitrusts don’t. The IRS publishes sample forms for both, Rev. Procs. 2003-53 to 2003-60 for CRATs and Rev. Procs. 2005-52 to 2005-59 for unitrusts. The glossary entry has the short definition; the trust-wide rules, the deduction limits and a worked example of selling a $5 million asset inside a trust are on my main CRT page. Unitrusts get their own page: how a charitable remainder unitrust can pay you for life.

How much a CRAT can pay and still qualify

In the 20-year example below, a high payout runs into the 10% remainder test long before it reaches the 50% ceiling. Interest rates move that test, so the most a CRAT can pay changes from month to month. The annuity has to be a sum certain of at least 5% and no more than 50% of the initial net fair market value of all property placed in the trust, paid at least annually (IRC § 664(d)(1)(A)). The charity’s remainder, valued under § 7520 at funding, also has to be worth at least 10% of that initial value (IRC § 664(d)(1)(D)). The calculation subtracts the present value of the annuity from the amount you put in (Treas. Reg. § 1.664-2(c)).

In October 2026 a 20-year CRAT can pay up to about 7.59% of its starting value and still pass the 10% remainder test. That figure assumes one payment a year at year-end and the October § 7520 rate of 5.6% (Rev. Rul. 2026-19). The numbers below use the regulation’s term-certain formula. The annuity factor for 20 annual year-end payments at 5.6% is (1 minus 1.056 to the minus 20th power) divided by .056, or 11.8519 (Treas. Reg. § 20.2031-7(d)(2)(iv)(A)). The charity’s remainder is the amount funded minus the payout times that factor, and the example funds the trust with $2,000,000.

A 7.5% payout leaves the charity 11.1% and qualifies. At 8% the remainder falls to 5.2% and the trust fails. A lower § 7520 rate shrinks every remainder in this table, and a higher one grows them, so check the rate for the month of funding rather than assuming it. You can elect the rate for the month of the transfer or either of the two months before it (Treas. Reg. § 1.664-2(c)). Term CRATs have more room under the 10% test at 2026 rates than they did when rates were low. Life-based CRATs use the IRS mortality tables instead of a fixed term, so their numbers depend on the ages involved.

Written as a CRAT and run as one every year

A life-based CRAT has one more test, and at October’s 5.6% a 5% payout paid once a year at year-end clears it at any age. The test asks whether the annuity could exhaust the trust before the charity’s turn. Rev. Proc. 2016-42 describes the test the IRS applies under Rev. Rul. 70-452 and Rev. Rul. 77-374: if there’s more than a 5% probability that the annuity will exhaust the trust before the charity’s turn, the remainder doesn’t qualify for a deduction and the trust isn’t exempt. The same revenue procedure says exhaustion never occurs under the test when the § 7520 rate at creation equals or exceeds the payout percentage on annual year-end payments. A 5% CRAT paid once a year at year-end therefore passes. For other designs, Rev. Proc. 2016-42 offers a sample early-termination clause that takes the trust out of the test.

Passing the numbers at funding doesn’t finish the job, because the losses in this area come from the document or from how the trust was run. One way to lose is a document that departs from the IRS sample forms. In Estate of Block, T.C. Memo. 2023-30, a trust meant to be a CRAT under Rev. Proc. 2003-57 paid the greater of all net income or $50,000, and the trustees amended it after the audit began, without a court. The IRS won: the trust wasn’t a CRAT, there was no qualified reformation, and the full $352,085 deduction was denied. Drafting from the IRS sample forms avoids that problem.

Once the document is right, the annuity has to be paid, or the charitable deduction goes. In Estate of Atkinson, 115 T.C. 26 (2000), a CRAT funded with $3,999,974 of stock owed its creator a 5% annuity, and nothing was paid during her life. The IRS won, and the estate got no estate tax charitable deduction; the Eleventh Circuit affirmed, 309 F.3d 1290 (11th Cir. 2002).

A defective trust can sometimes be rescued by reformation, and when it is, the rescue reaches back to the start, as Shriners Hospitals, 862 F.2d 1561 (Fed. Cir. 1988), shows. A will’s split-interest trust was treated as reformed under § 2055(e)(3), the taxpayer won, and because reformation is retroactive for all purposes, the interest paid on the disallowed tax was refunded. Block, by contrast, had no qualified reformation: the trustees amended the trust on their own after the audit began.

Funding the trust before the sale is settled

If a sale is already in motion, the order of events matters. Two cases about outright gifts, not CRATs, raise the same funding-before-a-sale question. In Rauenhorst, 119 T.C. 157 (2002), donors assigned stock warrants to charities before a sale the charities weren’t legally bound to join, and the taxpayer won on summary judgment. In Ferguson, 174 F.3d 997 (9th Cir. 1999), stock went to charities after more than 50% of the company’s shares had been tendered in a buyout, and the gain was taxed to the donors. If you’re planning a sale, the trust has to be funded before the deal is effectively done. See selling a business in California.

The annuity arrangement the IRS has now listed

One version of the CRAT pitch is now a listed transaction. Since July 9, 2026, a CRAT that sells appreciated property, buys an annuity with the proceeds, and reports the trust’s payments as annuity income under § 72 instead of under the § 664(b) tiers is a listed transaction (Treas. Reg. § 1.6011-15, announced in IR-2026-82). The regulation covers a trustee who uses some or all of the proceeds, and a beneficiary who treats the payments, in whole or part, as annuity payments on a federal return instead of carrying out the trust’s ordinary income and capital gain under § 664(b) (Treas. Reg. § 1.6011-15(b)). The listed-transaction rules apply whatever your net worth.

The Tax Court had rejected the pitch twice before Treasury listed it, and both times the payments were taxed as ordinary income under the tiers. In Furrer v. Commissioner, T.C. Memo. 2022-100, Indiana farmers gave corn and soybeans to two CRATs. The trusts sold the crops for $469,003 and $691,827 and bought SPIAs, and the couple reported most of the payments as tax-free. The IRS won. The crops were ordinary income property with a zero basis, so the deduction was zero (IRC § 170(e)(1)(A)), and the payments were taxed as ordinary income under § 664(b). The § 72 argument failed. In Gerhardt v. Commissioner, 160 T.C. No. 9 (2023), family members put real estate and other property worth far more than its basis in CRATs, which sold it and bought five-year SPIAs. They reported the payments as tax-free except for small amounts of interest. The IRS won in a precedential opinion: the payments were ordinary income under §§ 664 and 1245, and an accuracy-related penalty was sustained against two of the taxpayers. Transactions that are the same or substantially similar to the listed one are covered too (§ 1.6011-15(a)).

The ordinary income portion of each SPIA payment goes into the trust’s ordinary income tier, the sale adds to its capital gain tier, and the beneficiary is taxed on those tiers before any principal comes out, so the § 72 treatment doesn’t hold. The 2024 proposed regulations, adopted as final without change, explain it (89 FR 20569; T.D. 10051). The contributed property also keeps the grantor’s basis under § 1015; the transfer to the trust isn’t a sale that steps up basis. The preamble adds that these trusts often contain terms the IRS sample forms don’t, such as an annuity equal to the greater of the § 664 amount or the SPIA payments, or a current cash payment to the charity of at least 10% of the initial value in place of the remainder. Either provision violates the CRAT requirements, so the trust may not be a CRAT at all.

Holding the remainder doesn’t put the charity in trouble. It isn’t treated as a participant, or as a party for the § 4965 excise tax, solely because it holds the remainder (§ 1.6011-15(c)(2), (d)). Treasury estimated that 50 to 100 taxpayers a year are affected (T.D. 10051).

The listing targets a reporting position, and a trustee may still own an annuity as an investment. The regulation’s fifth element is the beneficiary’s § 72 reporting, so a trust that reports by the tiers isn’t the transaction described in § 1.6011-15(b). Because “substantially similar” is read broadly in favor of disclosure (Treas. Reg. § 1.6011-4(c)(4)), have the trust’s reporting reviewed before buying one.

If you’re already in one: disclosure and penalties

A taxpayer has participated if their return reflects the tax consequences or strategy the regulation describes, including consequences that would affect a gift tax return whether or not one was filed (§ 1.6011-15(c)(1)). Participants file Form 8886 with the return for each year they participate (Treas. Reg. § 1.6011-4(d), (e)). For returns already filed while the assessment period is still open, the disclosure was due to the IRS Office of Tax Shelter Analysis within 90 calendar days after the transaction became listed (Treas. Reg. § 1.6011-4(e)(2)(i)). Counting from July 9, 2026, by my count that window closed on October 7, 2026. Missing it doesn’t end the exposure; it keeps the assessment period open, as the table shows. The 2024 preamble also says taxpayers who claimed these benefits “should consider filing amended returns or otherwise ensure that their transactions are disclosed properly.”

California follows the federal listing. It applies § 6011 and treats as listed any transaction the U.S. Treasury identifies, so the arrangement has to be reported on the California return too (Rev. & Tax. Code § 18407(a)(4)).

What else California changes for a CRAT

California adds its own income tax and filing steps to the federal result. It taxes all capital gains as ordinary income (FTB), up to 12.3% plus 1% on taxable income over $1 million (Rev. & Tax. Code § 17043), so the payments a California resident receives are taxed here as they come out. The trust files Form 541-B with the Franchise Tax Board. California taxes a CRAT’s unrelated business taxable income under its own rules instead of the federal 100% excise tax (Rev. & Tax. Code § 17755), and the trustee registers with the Attorney General within 30 days after the charity’s interest becomes a present interest, not while it’s still a future interest (Gov. Code § 12585(a)).

Prop 13 can change whether a CRAT is the right tool for real estate. A transfer of real property into a trust isn’t a change in ownership under Prop 13 “for so long as” the transferor is the present beneficiary (Rev. & Tax. Code § 62(d)), but when the trust sells, the buyer’s purchase is a change in ownership (§ 60). Confirm the county assessor’s position before funding a CRAT with real estate it will hold. Community property can change it for an older couple, because both halves get a new basis at the first death (IRC § 1014(a), (b)(6)), which can beat a CRAT. See the community property step-up. California families above the federal exemption should read this page alongside high-net-worth estate planning in California.

Working with Ridley Law

I work alongside your CPA and, where the matter calls for it, co-counsel. Work at this level is built for each family and quoted in writing before any drafting starts. The first call is free and runs 30 minutes, by phone or Zoom. Book my 30-minute call or call 805-244-5291.

Frequently asked questions

What is a CRAT?

A charitable remainder annuity trust: an irrevocable trust that pays a fixed dollar amount of 5% to 50% of its starting value at least once a year for life or up to 20 years, then gives the rest to charity (IRC § 664(d)(1)).

Is a CRAT a listed transaction now?

No. Only the arrangement where the trust sells appreciated property, buys an annuity and the beneficiary reports the payments under § 72, or something substantially similar, is a listed transaction, effective July 9, 2026 (Treas. Reg. § 1.6011-15).

Can I add money to a CRAT later?

No. The trust instrument has to bar additional contributions (Treas. Reg. § 1.664-2(b)). A unitrust can take them.

Does the probability-of-exhaustion test still matter in 2026?

Less than it did. When the § 7520 rate is at or above the payout rate and payments are annual at year-end, exhaustion never occurs under the test (Rev. Proc. 2016-42). The October 2026 rate is 5.6%.

What if I’m already in a CRAT that bought an annuity?

Talk to your CPA and tax counsel now. For returns already filed, the 90-day disclosure window ran from July 9, 2026 (Treas. Reg. § 1.6011-4(e)(2)(i)), and without disclosure the assessment period stays open (IRC § 6501(c)(10)).

Is the charity in trouble too?

Not for being the remainder beneficiary alone. The regulation says it isn’t a participant or a party for § 4965 purposes on that basis alone (Treas. Reg. § 1.6011-15(c)(2), (d)).