Charitable Remainder Trust (CRT) Administration: Trustee Duties, Form 5227, and Four-Tier Income

Most successor trustees take over a revocable living trust that became irrevocable at a parent's death. But some step into a different, more specialized arrangement: a charitable remainder trust (CRT) that the parent created during their lifetime. CRTs look like trusts on the surface, but the rules differ from everything else in this guide library. There is no Form 1041. There is no familiar beneficiary accounting. Instead, there is a mandatory annual payout, a four-tier income system, a 100% excise tax on the wrong investment, and a final distribution that goes entirely to charity. If you have been named trustee of a CRT — or if the estate you are settling includes a CRT with an ongoing income interest — this guide explains the rules that govern you.

What a CRT is — and when you encounter one as a successor trustee

A charitable remainder trust is a split-interest trust authorized under IRC § 664.¹ "Split-interest" means the trust serves two types of beneficiaries with different claims: a non-charitable income beneficiary (typically the grantor, a spouse, or children) who receives annual distributions for a fixed term or for life, and a charitable remainder beneficiary (a 501(c)(3) organization) that receives whatever is left in the trust when the income interest ends.

CRTs are created during the grantor's lifetime, not at death. A parent who donated appreciated stock or real estate to a CRT got an immediate charitable deduction, avoided capital gains tax on the donated asset, and retained a stream of income. When the parent named you as successor trustee, they were designating someone to continue administering that ongoing stream — making the required annual payments, filing annual returns, and eventually closing the trust and delivering the remainder to charity.

The two situations where you encounter a CRT as successor trustee:

• You were named successor trustee of a standalone CRT document. The CRT is its own legal entity, separate from the parent's revocable living trust. You take over when the original trustee — typically the grantor — can no longer serve due to death or incapacity.
• The estate includes a CRT income interest that terminates at death. If the CRT was a life-income trust and the grantor's death ends the income interest, your role is limited: confirm the termination, obtain a final valuation, and assist the charitable beneficiary in claiming the remainder. No ongoing administration is required.

This guide focuses primarily on the first scenario — ongoing CRT administration where distributions continue after the original trustee's death or resignation.

CRAT vs. CRUT: which type are you administering?

The trust document will specify which type of CRT you have. This distinction drives everything about the annual distribution calculation.

Charitable Remainder Annuity Trust (CRAT). Under IRC § 664(d)(1), a CRAT pays a fixed dollar amount each year — the amount is set at trust creation and never changes, regardless of what happens to the trust's asset value.¹ If your parent created a CRAT with $1,000,000 of Apple stock and set a 6% annuity rate, the trust must pay $60,000 each year until it terminates — whether the trust is now worth $1.5M or $800,000. No additional contributions to a CRAT are permitted after the initial funding.

The required payout rate must be at least 5% and not more than 50% of the net fair market value of the trust assets at creation.¹ At a 6% payout rate, the trust's assets erode each year unless portfolio returns exceed the payout percentage.

Charitable Remainder Unitrust (CRUT). Under IRC § 664(d)(2), a CRUT pays a percentage of the annually-revalued trust assets each year.¹ The same 5% minimum and 50% maximum apply, but the actual dollar amount changes as the portfolio grows or shrinks. A CRUT with $1,000,000 at a 6% rate pays $60,000 in year one; if the portfolio grows to $1,100,000 by the next January valuation date, year two's payout is $66,000. Additional contributions to a CRUT are permitted, unlike a CRAT.

CRUTs also have two subtypes you may encounter: a net income CRUT (NICRUT) pays the lesser of the unitrust amount or the trust's actual accounting income; a net income with makeup CRUT (NIMCRUT) allows underpayments from low-income years to be made up in later high-income years when accounting income exceeds the unitrust amount.

The annual distribution: your core duty

The CRT's defining obligation is the required annual distribution. Unlike a standard irrevocable trust where distribution timing is largely at trustee discretion, a CRT's annual distribution is mandatory. Failing to make the required payment in full is a breach of trust and can jeopardize the trust's charitable status with the IRS.

For a CRAT: the dollar amount is fixed in the trust document. Multiply the original trust value by the payout rate. That number doesn't change year to year.

For a CRUT: the dollar amount changes annually. The trustee must value the trust assets as of the valuation date specified in the trust document (usually January 1, or within a reasonable period after the start of the taxable year), then multiply that value by the payout rate. The IRS requires that CRUT valuations be made using an acceptable method — for marketable securities, the mean of the high and low trading price on the valuation date; for real estate and closely held business interests, a qualified appraisal.

Most trust documents specify that the annual distribution be paid in a single installment or in quarterly installments. If the trust document permits quarterly payments, make them on a consistent schedule. If the trust runs short of cash due to illiquid holdings, you may need to distribute in-kind — but consult the trust document and an attorney first, as in-kind distributions have their own valuation and characterization requirements.

How CRT distributions are taxed: the four-tier income system

CRTs are not subject to federal income tax at the trust level — the trust itself pays no tax on its ordinary income, capital gains, or tax-exempt interest. The tax is deferred until distributions are made to the income beneficiary. When a distribution is made, it is characterized under IRC § 664(b) using a four-tier ordering system, drawing first from the income pool with the highest tax rate:¹

1. Tier 1 — Ordinary income. Distributions are treated as ordinary income (taxed at federal rates up to 37%) to the extent of the trust's current-year and accumulated ordinary income (interest, rents, dividends, REIT distributions).
2. Tier 2 — Capital gain income. After Tier 1 is exhausted, distributions are treated as capital gain income. The capital gain pool is subdivided by character: the net investment income subject to the 3.8% NIIT, short-term capital gain, and long-term capital gain at various rates. The IRS requires reporting within each Tier 2 subcategory in reverse chronological order (most recent gains first).
3. Tier 3 — Tax-exempt income. After Tiers 1 and 2 are exhausted, distributions are characterized as tax-exempt income (from municipal bonds and similar instruments held by the trust). This income is not taxed to the recipient — but note that placing tax-exempt investments in a CRT is generally inadvisable, since the trust already generates no tax at the entity level and the tax-exempt income tier is below the taxable tiers.
4. Tier 4 — Return of corpus. Once all income in Tiers 1–3 has been distributed, the remainder of any distribution is a tax-free return of corpus.

In practice, a CRT funded with appreciated stock that is then sold inside the trust will accumulate a large Tier 2 capital gain pool. Early distributions will draw from Tier 1 ordinary income (on interest and dividends earned since funding); then Tier 2 capital gain as those distributions exhaust ordinary income. This is why beneficiaries of a long-running CRT often face a combination of ordinary income and capital gain characterization on each year's distribution.

The trust administrator tracks the four tiers on an accumulation schedule maintained from year to year and reported annually on Form 5227. This schedule is how you know the character of each dollar you distribute. Inheriting a CRT where prior trustees failed to maintain this schedule can create significant reconstruction work — and is one of the strongest arguments for engaging a CPA with CRT experience immediately upon taking over as trustee.

Form 5227: what CRTs file instead of Form 1041

Standard irrevocable trusts file Form 1041 and pay income tax on undistributed income. CRTs file Form 5227 (Split-Interest Trust Information Return) and pay no income tax at the trust level.² This is one of the most commonly misunderstood aspects of CRT administration — the CRT itself is tax-exempt, which is the core economic benefit that made it attractive to the grantor.

Form 5227 is an information return, not a tax return. It reports:

• Trust income by type (ordinary, capital gain, tax-exempt, corpus) for the year
• Distributions made to income beneficiaries and their four-tier characterization
• The trust's asset values at the beginning and end of the year
• Whether the trust had any unrelated business taxable income (UBTI)
• The charitable remainder beneficiary information

The beneficiary receives a Schedule K-1 equivalent (Schedule A of Form 5227) showing the character of their annual distribution — the amount they must report on their personal Form 1040 and in which category. The trustee must provide this to the income beneficiary promptly, since the beneficiary's tax return depends on it.

Due dates. Form 5227 is due April 15 for calendar-year trusts. A 6-month extension to October 15 is available by filing Form 8868 before the April 15 deadline.² Unlike Form 1041 (which has associated tax payments), Form 5227 has no associated trust-level tax — so the extension is purely for filing the information return itself.

One exception: when a CRT owes excise tax. If the trust had any unrelated business taxable income during the year, it may owe a 100% excise tax under IRC § 664(c) (see the next section). In that case, a tax payment is due regardless of the extension.

The UBTI trap: why CRTs cannot use margin debt or certain partnerships

Under IRC § 664(c), a charitable remainder trust that has unrelated business taxable income (UBTI) in any taxable year must pay an excise tax equal to 100% of that UBTI.¹ Not 37%. Not 21%. One hundred percent. This provision is designed to eliminate the incentive to shift UBTI-generating investments into the tax-exempt trust structure.

Common UBTI sources that successor trustees must avoid:

• Margin debt. Borrowing against trust assets (using leverage) generates "debt-financed income," which is UBTI. CRTs should not hold securities in a margin account or use any form of leverage financing.
• Master limited partnerships (MLPs) and some hedge funds. These pass-through entities often generate UBTI from their operating activities. A single MLP K-1 showing UBTI allocations to the trust can trigger the 100% excise tax. Review all partnership K-1s received by the trust annually before filing Form 5227.
• Working interests in oil and gas. Active participation in a business — as opposed to passive royalty interests — can generate UBTI.

When you take over as trustee, audit the investment portfolio for UBTI exposure before the end of the first taxable year. If you inherit a portfolio with MLPs or other UBTI-generating assets, consult a tax advisor about whether the exposure can be liquidated without triggering other complications. The cost of the 100% excise tax almost always exceeds the benefit of retaining the position.

Prohibited transactions: private foundation self-dealing rules apply

CRTs are subject to the self-dealing rules of IRC § 4941, which is borrowed from the private foundation regime through IRC § 4947(a)(2).¹ These rules prohibit transactions between the CRT and "disqualified persons" — which includes the trustee, the income beneficiary, and their family members.

Prohibited transactions include:

• Selling trust property to or buying property from a disqualified person
• Lending money to or borrowing money from a disqualified person
• Paying excessive compensation to a disqualified person for services
• Furnishing goods, services, or facilities to a disqualified person (or receiving them)

The penalty for self-dealing is a 10% excise tax on the amount of the transaction (on the disqualified person who engaged in it), and 5% on the foundation manager who knowingly participated. A second-tier tax of 200% can apply if the transaction is not corrected within the correction period. Unlike the UTC § 802 self-dealing rules that apply to conventional irrevocable trusts, the § 4941 rules do not have a "court authorization" escape hatch — beneficiary consent alone does not cure a prohibited transaction.

As trustee, you are a disqualified person. Pay your trustee compensation only in amounts that are reasonable and documented — and be careful that any service you or a related business provides to the trust is at arm's length and for fair market value, or avoid it entirely.

Investment policy for a CRT

The trustee's investment duty for a CRT involves balancing two competing obligations: generating sufficient return to fund the required annual payout, and preserving the principal to deliver a meaningful charitable remainder at the end of the trust's term.

For a CRAT with a fixed dollar payout, the math is explicit: if the trust pays 6% annually and earns only 4% net of expenses, the principal erodes 2% per year. Over a 15-year term, a $1M CRAT paying $60,000/year will see significant principal erosion unless returns exceed the payout rate. The UPIA prudent investor standard still applies — you must act as a prudent investor for the benefit of the charitable remainder beneficiary, balancing growth and income needs.

For a CRUT, the payout adjusts annually to trust value, so there is no "floor" below which the trust technically fails — but distributing too high a percentage over a long term reduces the charitable remainder and may expose the trustee to challenge by the charitable beneficiary.

Key investment principles for CRT administration:

• Total return approach. Seek the best risk-adjusted total return (growth + income), then fund distributions from dividends, interest, and selective liquidation. Do not default to a high-yield income portfolio that generates excessive Tier 1 ordinary income.
• Capital gain planning. The CRT's biggest tax advantage is the ability to sell appreciated assets inside the trust without immediate capital gains — those gains accumulate in the Tier 2 pool and are taxed only when distributed. Consider bunching large capital gain realizations within the trust early, when the income beneficiary may be in a lower bracket.
• UBTI monitoring. Screen every holding annually for UBTI exposure. This is non-negotiable given the 100% excise tax.
• Charitable remainder projections. The charitable beneficiary has a legal interest in the trust. Running periodic projections of the expected remainder helps document that your investment policy is serving both interests.

When the CRT terminates

A CRT terminates when the trust's term expires — either the end of a fixed term (maximum 20 years under § 664(d)(1)(B) and (d)(2)(B))¹ or the death of the last income beneficiary if the trust runs for lives. At termination:

1. Make the final required distribution. The income beneficiary receives the final annuity or unitrust amount pro-rated for the final period if the trust terminates mid-year.
2. Liquidate the portfolio (or distribute in-kind). The charitable remainder beneficiary receives whatever remains. Confirm with the charity whether they prefer cash or in-kind distribution of securities. Coordinate the timing with the charity's receipt procedures.
3. File the final Form 5227. Check the "final return" box. Report all income for the partial year and the final distributions to both the income beneficiary and the charitable remainder beneficiary.
4. Obtain a written acknowledgment from the charity. Get a receipt for the distribution, including the date, amount, and a statement that no goods or services were provided in exchange. This closes your trustee file.

One practical note: IRS processing of CRT final returns can take 6–12 months. Do not expect immediate confirmation that the charitable deduction was properly reported. Retain all trust records — investment statements, Form 5227 filings, valuation reports, distribution receipts — for at least seven years after the trust closes.

How a fee-only advisor helps CRT trustees

CRT administration is more technically specialized than standard irrevocable trust administration. The four-tier accumulation schedule, UBTI monitoring, Form 5227 preparation, and investment policy coordination require professionals who work with CRTs regularly — not every CPA or financial advisor has this experience.

A fee-only financial advisor who specializes in trust administration can help CRT trustees:

• Design an investment policy statement (IPS) that explicitly addresses UBTI constraints, the required payout rate, and the charitable remainder obligation
• Prepare annual asset valuations for CRUT resets
• Coordinate with the trust's CPA on the Form 5227 four-tier accumulation schedule
• Run projections of the expected charitable remainder under different return assumptions, documenting that the trustee is investing impartially between income and remainder beneficiaries
• Screen holdings for UBTI exposure before year-end

The advisor charges a transparent fee (typically 0.5–1.0% of assets annually for ongoing investment management and consultation), with no commissions. That transparency matters in a CRT context: the charitable remainder beneficiary — the charity — has an interest in ensuring trustee costs are reasonable. An advisor who earns fees from product sales creates the kind of self-dealing optics that draw scrutiny.

1. IRC § 664 — Charitable Remainder Trusts. law.cornell.edu/uscode/text/26/664. Statutory rules for CRAT (§ 664(d)(1)), CRUT (§ 664(d)(2)), four-tier income ordering (§ 664(b)), and the 100% UBTI excise tax (§ 664(c)). Self-dealing rules applied through IRC § 4947(a)(2).
2. IRS Form 5227 Instructions (Split-Interest Trust Information Return). irs.gov/forms-pubs/about-form-5227. Annual filing requirement, due date April 15 (October 15 with Form 8868 extension), Schedule A characterization of distributions to income beneficiaries.
3. IRS Publication 561 (Determining the Value of Donated Property). irs.gov/publications/p561. Valuation standards for CRT assets, including the mean high/low rule for publicly traded securities (26 CFR § 20.2031-2).
4. IRS Rev. Proc. 2003-53 through 2003-60 (sample CRAT documents) and Rev. Proc. 2005-52 through 2005-59 (sample CRUT documents). These IRS-provided sample trust forms define the baseline structure that most practitioners use — useful for interpreting your trust document if its terms are ambiguous. Available at irs.gov/charities-non-profits/charitable-remainder-trusts.

Values and statutory rules verified as of June 2026. The IRC § 7520 rate (used to test the 10% charitable remainder requirement at trust creation) is published monthly by the IRS and varies with interest rates; it affects the economics of creating a new CRT but does not alter ongoing administration of an existing CRT.