Charitable Remainder Trust: Meaning, How it Works

A charitable remainder trust is an irrevocable trust that pays income to the donor or other noncharitable beneficiary for a set period. Whatever is left after that time period, called the remainder, goes to charity^[0]

This type of trust works in the reverse of a charitable lead trust, which supports a charitable organization first and then passes the remainder to personal beneficiaries such as family members^[0]

» MORE: The 7 steps of estate planning

Charitable remainder trusts can be structured as a fixed amount like a regular, annual salary (annuity trust) or as a percentage of the trust's total value (unitrust).

» MORE: Why appraising your assets can help your estate planning

1. The grantor (creator) identifies their beneficiaries, both charitable organizations and non-charitable heirs such as a spouse, children or grandchildren.

2. The grantor selects a trustee to manage the trust. This can be a friend, family member or a third party, such as a bank.

3. The grantor funds the trust with assets, including cash, real estate, publicly traded securities and certain types of closely held stock, bonds and other investments.

4. The grantor drafts a trust deed with an estate planning attorney or other professional. In some states, you may need to register your charitable trust with a government agency such as the state attorney general or secretary. 

5. Every year, the grantor or trustee fills out tax forms for the trust, typically IRS Form 990. You may also have to fill out a split-interest trust return, IRS Form 5227, or a trust return, IRS Form 1041 or 1041-A^[0]

   IRS.gov. Additional Returns for Private Foundations, Charitable Trusts and Split-Interest Trusts. Accessed Jan 26, 2024.

   View all sources

   . 

6. The trustee ensures the beneficiaries receive their income from the trust every year.

» MORE: Learn what a donor-advised fund is and how it works