Charitable Remainder Trust Attorney in California

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

Who this page is for: California owners of a highly appreciated asset (stock, real estate or a business interest) who already plan to leave something to charity. The sale deferral and the income tax deduction work at every estate size. Moving the asset out of a taxable estate matters only above the 2026 federal exemption of $15 million per person, or $30 million for a married couple (Rev. Proc. 2025-32).

A charitable remainder trust solves a specific problem: you own something worth far more than you paid for it, you want to sell it and live on the proceeds, and the capital gains tax on the sale would take a serious bite out of what is left to reinvest. A CRT lets the sale happen inside a tax-exempt trust instead. The full sale proceeds get reinvested and start generating income for you, rather than the after-tax remainder.

The trade is real and it is permanent. Whatever is left in the trust when your income interest ends belongs to charity, not to your children. If that sentence bothers you, a CRT is the wrong tool and no amount of tax savings will make it the right one. If it does not bother you, because you were going to leave something to your church, your alma mater, or a cause you care about anyway, then the tax treatment is favorable and worth understanding properly.

I am Eric Ridley. I draft charitable remainder trusts for clients throughout California by Zoom or phone, and when the documents are ready, a mobile notary comes to you for the signing. For charitable planning generally, including lead trusts and donor-advised funds, see charitable trusts.

CRAT or CRUT: the choice that shapes everything else

There are two basic forms, and the difference is not a technicality. It determines what you get paid, whether you can add to the trust later, and whether the structure can even accommodate the asset you have in mind.

The annuity trust pays a fixed dollar amount

A charitable remainder annuity trust, or CRAT, pays a fixed dollar figure set as a percentage of the trust’s value on the day you fund it, under IRC § 664(d)(1). Fund it with $2 million at a 5% payout and you receive $100,000 a year, every year, regardless of what the portfolio does. That predictability is the appeal.

The costs of that predictability are worth stating plainly. The payment never rises with inflation, so its purchasing power erodes across a 20-year term. You cannot add assets to a CRAT after it is funded (Treas. Reg. § 1.664-2(b)), so a second liquidity event needs a second trust. And CRATs face a probability-of-exhaustion test that unitrusts do not, which in practice rules them out for younger beneficiaries or higher payout rates. Most of the CRTs I draft are unitrusts for these reasons.

At 2026 rates, younger beneficiaries are no longer ruled out. The test asks whether there’s more than a 5% chance the annuity drains the trust before the charity gets anything. Rev. Proc. 2016-42 explains that when the § 7520 rate at creation is equal to or greater than the payout percentage, and the annuity is paid once a year at year-end, exhaustion never occurs under the test. With the October 2026 rate at 5.6%, a CRAT paying 5% a year at year-end passes regardless of age. Quarterly payments, payments at the start of the year, or a higher payout bring the test back into play, and Rev. Proc. 2016-42 offers an early-termination clause as an alternative. The full annuity trust rules, and the annuity scheme the IRS listed in July 2026, are on my charitable remainder annuity trust (CRAT) page.

The unitrust pays a percentage, revalued every year

A charitable remainder unitrust, or CRUT, pays a fixed percentage of the trust’s value as revalued each year, under IRC § 664(d)(2). At a 5% payout, a $2 million trust pays $100,000 in year one; if the portfolio grows to $2.3 million, the next payment is $115,000, and if it falls to $1.8 million, the payment is $90,000. You carry the investment risk and you get the investment upside. You can also make additional contributions to a CRUT later.

	CRAT (annuity trust)	CRUT (unitrust)
What it pays	A fixed dollar amount, set as a percentage of the trust’s value on the day you fund it (IRC § 664(d)(1))	A fixed percentage of the trust’s value, revalued each year (IRC § 664(d)(2))
Example: $2 million at a 5% payout	$100,000 a year, every year	$100,000 in year one; $115,000 if the trust grows to $2.3 million; $90,000 if it falls to $1.8 million
Add assets later	No (Treas. Reg. § 1.664-2(b))	Yes
Inflation and risk	The payment never rises, so purchasing power erodes over a 20-year term	You carry the investment risk and get the upside
Extra test	Probability-of-exhaustion test, which in practice rules out younger beneficiaries or higher payout rates (less so at 2026 rates; see above)	Does not face that test

The net-income and flip variants, for assets that do not produce cash

Two variants exist because a plain unitrust has a problem when the trust holds something illiquid. If the trust owns raw land or a closely held business interest and owes you $100,000 this year, where does the cash come from?

A net-income unitrust with makeup, a NIMCRUT, pays the lesser of the stated percentage or the trust’s actual income, and tracks the shortfall in a makeup account payable in later years when income allows (Treas. Reg. § 1.664-3(a)(1)(i)(b)). A flip unitrust starts as a net-income trust and converts to a standard unitrust on a defined triggering event, typically the sale of the contributed asset (Treas. Reg. § 1.664-3(a)(1)(i)(c)). The trigger cannot be within the trustee’s or your discretion; it has to be an event outside your control or a fixed date.

The flip structure is the standard answer for a CRT funded with real estate or a business interest. It buys the trustee time to market the property properly instead of dumping it to cover a payment.

The four rules that decide whether your trust qualifies

A CRT that fails any of these is not a CRT. There is no partial credit: you lose the deduction, you lose the exemption from tax on the sale, and the trust is taxed under ordinary trust rules.

The payout must be between 5% and 50%

IRC §§ 664(d)(1)(A) and 664(d)(2)(A) set the band. Below 5% or above 50% disqualifies the trust. In practice almost every CRT lands between 5% and 7%, because higher payouts run into the remainder test below.

The charity’s remainder must be worth at least 10%

This is where most proposed CRTs actually break. Under IRC §§ 664(d)(1)(D) and 664(d)(2)(D), the present value of the charity’s remainder interest, calculated at funding, must be at least 10% of the value of what you contributed. Push the payout rate too high, or name beneficiaries too young, and the projected remainder falls below 10% and the trust fails from inception.

The lever you have is the payout rate and the term. A 7% payout for two lives in their sixties may fail; the same trust at 5.5%, or for a 20-year term instead of two lives, may pass. This is arithmetic done before drafting, not after.

The term is life, lives, or 20 years maximum

Either the lifetime of one or more individuals alive when the trust is created, or a fixed term not exceeding 20 years. There is no 25-year CRT.

The § 7520 rate drives the math, and it changes monthly

The remainder calculation uses the § 7520 rate, an IRS-published rate that resets every month. For October 2026 it is 5.6%, set by Rev. Rul. 2026-19 (see the IRS § 7520 rate table). You may elect to use the rate for the month of the transfer or either of the two preceding months.

Higher rates favor charitable remainder trusts, because a higher assumed growth rate means a larger projected remainder for charity, which means a bigger deduction and more room under the 10% test. This is why timing matters and why the rate has to be checked for the actual month of funding rather than assumed.

What else the IRS checks on a charitable remainder trust

The IRS sample forms are the safest starting point

The IRS has published sample trust instruments: Rev. Procs. 2003-53 through 2003-60 for annuity trusts and Rev. Procs. 2005-52 through 2005-59 for unitrusts. They cover lifetime and testamentary trusts, for one measuring life, two measuring lives, or a term of years. They’re a starting point, and every added term needs checking. In Estate of Block, T.C. Memo. 2023-30, a trust whose terms described it as a CRAT under Rev. Proc. 2003-57 also paid the greater of all net income or $50,000 a year. The Tax Court held it wasn’t a CRAT, and the estate lost its entire $352,085 charitable deduction.

The trust has to run like a CRT every year

A trust that’s drafted correctly can still fail in operation. In Estate of Atkinson, 115 T.C. 26 (2000), a woman put about $4 million of stock into a CRAT that was supposed to pay her 5% a year. No payments were made from the trust during her life. The IRS denied the estate’s charitable deduction and determined a $2,654,976 deficiency. The Eleventh Circuit affirmed in 2002, holding that the trust didn’t qualify because it didn’t follow the CRAT rules throughout its existence (309 F.3d 1290).

Drafting mistakes can sometimes be fixed, on a deadline

IRC § 2055(e)(3) lets a trust that misses the CRT form be reformed. When the payout isn’t expressed as an annuity or unitrust amount at all, a judicial proceeding has to start no later than the 90th day after the estate tax return is due, including extensions. In Estate of Tamulis, 509 F.3d 343 (7th Cir. 2007), the trustee never filed one, and the court refused to treat good-faith administration as substantial compliance. The $1.5 million deduction the estate claimed was lost. A reformation that qualifies is retroactive for all purposes. In Shriners Hospitals for Crippled Children v. United States, 862 F.2d 1561 (Fed. Cir. 1988), a will’s split-interest trust was treated as reformed under § 2055(e)(3), and the court held that the interest paid on the disallowed tax had to be refunded too.

How the tax treatment actually works

The deduction is for the charity’s share, not the whole gift

You get an income tax charitable deduction equal to the present value of the remainder interest, computed with the § 7520 rate. Not the full value of what you contributed. On a $2 million contribution the deduction might be $400,000 or $700,000 depending on payout, term, ages, and the rate.

Federal AGI limits apply and depend on what you gave and to whom. Long-term appreciated property to a public charity is capped at 30% of AGI under IRC § 170(b)(1)(C), which is the common CRT case. Cash is capped at 60%. Starting in 2026, itemizers can also deduct charitable gifts only to the extent the total exceeds 0.5% of AGI (IRC § 170(b)(1)(I)). If the remainder beneficiary is a private foundation instead of a public charity, those ceilings drop to 20% and 30% respectively. Unused deduction carries forward five years.

Starting in 2026, IRC § 68 also reduces itemized deductions for people in the 37% bracket by 2/37 of the lesser of those deductions or their income above where the 37% bracket starts. For a donor well inside the top bracket, a dollar of deduction saves about 35 cents of federal tax (37% × 35/37). The change applies to taxable years beginning after December 31, 2025. And if a private foundation can receive the remainder, the deduction for appreciated property is cut by the long-term gain, leaving roughly your basis, unless the property is publicly traded “qualified appreciated stock” (IRC § 170(e)(1)(B)(ii), (e)(5)).

California conforms to the federal itemized deduction rules under Rev. & Tax. Code § 17201 “except as otherwise provided,” and California’s conformity date for these years is January 1, 2025 (Rev. & Tax. Code § 17024.5), which predates the July 2025 federal act, so the new federal 0.5% floor does not carry over automatically. Your California deduction may be smaller than your federal deduction in the same year. Run the actual numbers with your CPA rather than assuming the federal figure carries over.

The capital gains deferral is the main event

Because the trust is exempt from income tax under IRC § 664(c)(1), it can sell the appreciated asset without paying capital gains tax at the time of sale. The entire pre-tax proceeds get reinvested and start working for you.

Deferred, though, not erased. The gain comes back to you gradually through the payments, under the four-tier ordering rule in IRC § 664(b) and Treas. Reg. § 1.664-1(d). Each distribution is characterized first as ordinary income, then as capital gain, then as other income, and only last as tax-free return of principal. Within the capital gain tier, the highest-taxed categories come out first. The rule is deliberately worst-in-first-out, so the early years of payments tend to be fully taxable.

The benefit is therefore the use of the money in the meantime: a larger principal balance compounding for you over a longer period than you would have had after writing a capital gains check at closing.

California has no estate tax, which changes the pitch

Assets in a CRT are out of your taxable estate. For a California resident that matters only at the federal level, since California imposes no state estate or inheritance tax. With the federal exemption at $15 million per person for 2026, estate tax is not the reason most Californians set up a CRT. Income tax on a concentrated, low-basis asset is.

Worked example: a $5 million low-basis asset, sold outright or inside a CRUT

Here’s a hypothetical. A California couple owns stock worth $5,000,000 with a basis of $500,000, so a sale produces a $4,500,000 long-term gain. The assumptions are stated so you can change them: federal tax of 20% plus the 3.8% net investment income tax (IRC §§ 1(h), 1411), California’s 12.3% top rate plus the 1% surcharge on income over $1 million (FTB 2025 rate schedules; Rev. & Tax. Code § 17043), for a combined 37.1% with no benefit from deducting state tax. Both portfolios earn an assumed 7% a year, fully realized, and pay out 5% of their value at the start of each year for 20 years. The outright portfolio pays tax on its return each year. The CRUT pays no tax, and every payment is taxed to the couple at 37.1%, because under the tier rules of IRC § 664(b) the trust’s gain and income always exceed what it pays out in this example.

The deduction uses the regulation’s term-of-years formula. With a payment on the valuation date each year, the Table F adjustment factor at 5.6% is 1.000000, and the Table D remainder factor for 20 years at 5% is .358486 (Treas. Reg. § 1.664-4(e)). That gives a deduction of $1,792,430, which is worth about $627,350 of federal tax if the couple has enough other income taxed in the 37% bracket to use all of it, within the 30% AGI cap, in the year of the gift and the five carryforward years, before the 0.5% floor. Used against income taxed at capital gain rates, it’s worth much less. These are illustrations, not projections.

The CRUT produces about $606,192 more after-tax spending money over 20 years, plus a deduction worth up to about $627,350 in federal tax. In year one the outright sale actually leaves slightly more spending money, because the CRUT payment is taxed in full when it comes out. The family gives up the $2,826,449 the outright portfolio would still hold, and charity receives $6,936,137. In numbers, a CRT makes giving cheaper. It doesn’t leave your children more.

A married couple holding the stock as community property should run one more comparison before funding anything. At the first death, both halves of community property get a new basis (IRC § 1014(a), (b)(6)), which can erase the gain without giving anything away. The tradeoffs are on my page about the community property step-up.

Who this actually fits

The pattern that works nearly every time: someone in their sixties or seventies holding an asset with a very low basis and a very large gain, who wants to convert it to income, and who was already planning to leave something meaningful to charity.

• Low-basis concentrated stock. Shares from a long career or an early investment, now a large share of net worth, where selling means a substantial tax bill and holding means concentration risk.
• A rental property with depreciation recapture. Decades of depreciation deductions produce recapture taxed at a higher rate than ordinary capital gain. A flip unitrust lets the property sell inside the trust.
• A business sale. Contributing an interest before a sale, so long as no binding sale agreement is already in place. A pre-arranged sale invites the IRS to collapse the steps and tax the gain to you.
• Someone with charitable intent and an income gap. The asset is valuable but yields little. The CRT converts it to a payment stream and produces a deduction.

Who it does not fit:

• Anyone without genuine charitable intent. The remainder is permanently gone. A CRT is not a way to park money and retrieve it later.
• Anyone who may need the principal. It is irrevocable. There is no provision for changing your mind because a medical event or a business reversal creates a need for cash.
• Anyone who needs the whole estate to reach their children. Some families solve this by using part of the income stream to fund life insurance in a separate irrevocable trust, replacing the value going to charity. That works, but it is a second structure with its own cost.
• Smaller asset values. Drafting, appraisal, trustee, and annual tax filing costs do not scale down. There is no statutory minimum, but below a certain size the administration outweighs the benefit. That is a business judgment I will give you at the consultation.

A lottery win can fit this profile, since the charitable deduction is worth the most in the one very large income year. The win-year giving rules are in how lottery winnings are taxed in California.

Charitable remainder trust, donor-advised fund, or an outright gift?

If you need income from the asset, a CRT is the only one of the three that pays you; if you don’t, a donor-advised fund or a direct gift is simpler and produces a larger deduction.

All three follow the same timing rule. If you give an asset after its sale is effectively locked in, the gain is taxed to you anyway. In Ferguson v. Commissioner, 174 F.3d 997 (9th Cir. 1999), donors who transferred stock to charities after more than half the company’s shares had been tendered in an agreed buyout were taxed on the gain. In Estate of Hoensheid, T.C. Memo. 2023-34, a gift to a donor-advised fund two days before closing was taxed the same way, and the deduction was lost for lack of a qualified appraisal. Selling a company? Read my guide to selling a business in California before you sign a letter of intent.

The problems people do not hear about until later

Unrelated business taxable income is taxed at 100%

If a CRT has any unrelated business taxable income in a year, IRC § 664(c)(2) imposes a 100% excise tax on that UBTI. Debt-financed real estate is the usual culprit. Contribute a rental property with a mortgage on it and the rental income can become debt-financed income, triggering the problem. An interest in an operating partnership or LLC can do the same. This gets checked before funding, not after.

The rule used to be harsher. Before 2007, any UBTI made all of a CRT’s income taxable for that year. In Leila G. Newhall Unitrust v. Commissioner, 105 F.3d 482 (9th Cir. 1997), a unitrust with Wells Fargo Bank as trustee held units in publicly traded partnerships, and the Ninth Circuit agreed that its entire income was taxable in the years it had that income. Congress replaced that rule with the current excise tax for taxable years beginning after December 31, 2006 (Pub. L. 109-432). California went its own way: it doesn’t apply the federal excise tax and instead taxes a CRT’s UBTI under its own rules (Rev. & Tax. Code § 17755).

Self-dealing rules apply

Under IRC § 4947(a)(2), a CRT is a split-interest trust subject to the private foundation prohibited transaction rules. You cannot buy the property back from the trust, lease it, borrow against it, or transact with it through a related party without risking substantial excise taxes. The asset leaves your control for good.

Appraisal and annual filings

Anything other than cash or publicly traded securities requires a qualified appraisal to substantiate the deduction, under IRC § 170(f)(11), reported on Form 8283 for noncash gifts over $5,000. Every CRT then files Form 5227 annually for as long as it exists. This is real ongoing administration, and it is a cost that continues after the year of the exciting tax deduction.

Registration with the California Attorney General

California requires trustees holding property for charitable purposes to register with the Attorney General’s Registry under the Supervision of Trustees and Fundraisers for Charitable Purposes Act, Gov. Code § 12580 et seq. For a CRT, the timing is favorable: Gov. Code § 12585(a) says a trustee “is not required to register as long as the charitable interest in a trust is a future interest, but shall do so within 30 days after any charitable interest in a trust becomes a present interest.” While you are alive and receiving payments, the charity holds a future interest and no registration is required. The 30-day clock starts when that interest becomes present, generally at termination.

Cases won and lost

Most CRT cases are lost on form or operation. The ones that matter for a California family are below. Ferguson and Rauenhorst involved outright gifts to charities, not CRTs, but they decide when a gift made before a sale still works, and that’s the same question a CRT funded before a sale has to answer. In Rauenhorst the Tax Court held the IRS to Rev. Rul. 78-197, which looks at whether the charity was legally bound to sell.

What changes in California

California has no estate tax, so the California questions for a CRT are about income tax, property tax and marital property.

• No capital gains rate. California taxes all capital gains as ordinary income (FTB), up to 12.3% plus a 1% surcharge on taxable income over $1 million (Rev. & Tax. Code § 17043). The tax a CRT defers is larger here than in a state with a low or no income tax.
• Annual California return. A CRT files Form 541-B with the Franchise Tax Board, in addition to the federal Form 5227.
• Unrelated business income. California doesn’t use the federal 100% excise tax. It taxes a CRT’s UBTI under its own rules instead (Rev. & Tax. Code § 17755).
• The deduction. California follows the federal itemized deduction rules “except as otherwise provided” (Rev. & Tax. Code § 17201), tied to the Internal Revenue Code as of January 1, 2025 (§ 17024.5(a)(1)(Q)). The 2026 federal changes to § 170 and § 68 came later, so the California deduction can differ from the federal one.
• Prop 13. A transfer of real property into a trust isn’t a change in ownership “for so long as” the transferor is the present beneficiary (Rev. & Tax. Code § 62(d)). When the trust sells, the buyer’s purchase is a change in ownership (§ 60), so the property is reassessed for the buyer either way. Confirm the county assessor’s position before funding a CRT with real estate the trust will hold for years. Prop 19’s parent-child exclusion doesn’t come into it, because the property isn’t going to your children.
• Community property. Both halves of community property get a new basis at the first death (IRC § 1014(a), (b)(6)). For an older couple, that can beat a CRT. Run both numbers.
• Attorney General registration. 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)).

What works and what fails

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

Can I change my mind after funding a charitable remainder trust?

No. A CRT is irrevocable. You can retain the power to change which charity receives the remainder, which is a common and useful drafting choice, but you cannot unwind the trust or recover the principal. This is the single most important thing to be certain about before signing, and it is why I will not draft one for someone who is ambivalent about the charitable component.

How much of a tax deduction will I actually get?

The deduction equals the present value of the charity’s remainder interest, not the full contribution. It depends on your payout rate, the term or the ages of the income beneficiaries, and the § 7520 rate for the month of funding, which is 5.6% for October 2026 per Rev. Rul. 2026-19. Lower payout rates and shorter terms produce larger deductions. Federal AGI limits then cap what you can use in one year, generally 30% of AGI for appreciated property given to a public charity, with a five-year carryforward.

Does a charitable remainder trust avoid capital gains tax entirely?

It defers rather than eliminates. The trust is tax-exempt under IRC § 664(c)(1), so no tax is due when the trust sells the contributed asset, and the full proceeds get reinvested. The gain then flows back to you through the payments under the four-tier rule of IRC § 664(b), which distributes ordinary income first, then capital gain, then other income, then principal. The real benefit is a larger principal compounding for you over a longer period.

What happens if my trust fails the 10% remainder test?

It is not a qualified CRT from inception, which means no charitable deduction and no exemption from tax on the sale. That is why the calculation happens before drafting. Judicial reformation to fix a defective trust is possible in some circumstances, but it is a court proceeding with tight deadlines and it is far cheaper to run the numbers correctly the first time.

Can I name my children as the income beneficiaries?

Yes, though it changes the tax analysis. Naming someone other than yourself or your spouse as income beneficiary is a taxable gift of the income interest, which uses part of your lifetime gift tax exemption, and younger beneficiaries make the 10% remainder test harder to satisfy. It can be done well; it needs to be planned rather than assumed.

Is a donor-advised fund simpler than a charitable remainder trust?

Much simpler, and for many people it is the better answer. A donor-advised fund gives you an immediate deduction and lets you recommend grants over time, with no trust to draft, no annual Form 5227, and no trustee. What it does not do is pay you an income stream. If you want a deduction and charitable flexibility, use a fund. If you need income from the asset for the rest of your life, that is what the CRT is for. See our guide on donor-advised funds.

Do I have to register the trust with the California Attorney General?

Not at funding. Gov. Code § 12585(a) exempts a trustee from registering while the charitable interest is only a future interest, and requires registration within 30 days after that interest becomes a present interest. For a typical CRT paying you for life, that means no registration during your lifetime and a filing obligation when the remainder passes to the charity.

Can a charitable remainder trust buy an annuity?

A trustee can invest in one, but the payments to you are still taxed under the tier rules of IRC § 664(b). Reporting them as annuity income under § 72 is what the IRS made a listed transaction on July 9, 2026 (IR-2026-82). If you’re already in one of these arrangements, read my CRAT page and talk to your CPA about disclosure.