What Are the Pitfalls of a Charitable Remainder Trust?

A charitable remainder trust is an irrevocable trust that pays you (or someone you name) an income stream for life or up to 20 years and then passes what is left to charity. The benefits, and the difference between an annuity trust (CRAT) and a unitrust (CRUT), are on the Florida charitable remainder trust page. The pitfalls below are the other half of that decision, the ways the trust fails and what each failure costs.

1. The Trust Misses a Payment or Pays Someone Else

A charitable remainder trust has to pay its annual amount on time, every year, from the day it is funded, and it may pay nobody except the named beneficiaries and the charity. The trust document can be perfect and the trust still fails if the trustee skips a payment, lets the payment accumulate, or uses trust money for the donor’s bills or estate taxes. The Tax Court wrote that “The operational failure cannot be corrected by reformation.” The federal appeals court for Florida agreed and added that “It is not sufficient to establish a trust under the CRAT rules, then completely ignore the rules during the trust’s administration, thereby defeating the policy interests advanced by Congress in enacting the rules themselves.” The trust in that case was a $3,999,974 annuity trust in Miami Beach that never paid its donor seven quarterly checks of $49,999.68.

The trust also files Form 5227 every year by April 15. A late or incomplete return costs $25 a day up to $13,000, or $130 a day up to $65,000 when the trust’s gross income is over $327,000, under the current IRS instructions.

Practice pointer. Pay from a dedicated trust account by transfer, on a calendar, and keep the bank record of each payment, because the donor saying the checks were sent and never cashed did not save the Miami Beach trust. Avoid letting a donor who does not need the income waive or defer it.

2. A Drafting Defect Fixed Too Late

A trust that describes the payout wrong is not a charitable remainder trust, even if everyone administers it correctly. Federal law allows one repair, a court reformation that must be started within 90 days after the estate tax return is due (including extensions) when the trust takes effect at death. A private amendment after the fact does not count. In a 2023 Tax Court case, a woman’s trust for her sister paid "the greater of" all net income or $50,000 a year, which is not the fixed sum the rules require. After the IRS opened its audit, the trustees signed an amendment deleting the net-income language and made it retroactive. The court denied the entire $352,085 deduction and wrote, “We cannot craft an exception that Congress did not provide for.” In a 2007 federal appeals case, a priest’s $3.4 million estate lost a $1.5 million deduction because the complaint to reform his trust was prepared but never filed and one grandniece did not sign a private fix. The appeals court said of the deadline, “The requirement is not unimportant; it protects against efforts to bend trust law to get a tax benefit.”

Practice pointer. Draft from the IRS’s own sample trusts, which the IRS will recognize when the document is substantially similar and the trust is run to its terms. When a defect turns up after a death, the court petition goes on file inside the 90 days, before anyone negotiates with the IRS.

3. The Payout Fails the 10% Test or the 5% Exhaustion Test

The payout must be between 5% and 50% a year, and the charity’s remainder, valued with the IRS interest rate for the month the trust is funded, must be worth at least 10% of what goes in. Younger or multiple beneficiaries and a high payout rate push the remainder below 10%, and a trust that misses the test is not a charitable remainder trust at all. A net-income trust (one that pays the lesser of its income or the stated percentage) is measured at the stated percentage, not at what it is likely to pay. The Tax Court held that in 2015 for two trusts a 97-year-old funded with 11% and 10% payout rates, and both failed. An annuity trust faces a second test. If there is more than a 5% chance the fixed payments will exhaust the trust before the beneficiary dies, the IRS denies the deduction, unless the document includes the early-termination clause the IRS published in 2016 to answer that problem.

Practice pointer. Run the 10% and exhaustion numbers at the actual month’s IRS rate before anyone signs, and keep a lower payout or a term of years ready as the fallback. Avoid picking the payout rate first and the beneficiaries second.

4. The Sale Was Already Agreed Before the Gift

The capital gains benefit depends on the trust, not you, making the sale. If the buyer is effectively locked in when the asset goes into the trust, the gain is taxed to you as if you sold first and gave away the cash. The IRS’s published position is that it will treat the sale as yours when the trust is legally bound to sell, and in a 2003 private letter ruling it accepted that a company’s right of first refusal did not bind a unitrust to sell (a private ruling binds the IRS only for the taxpayer who asked for it). The courts look past legal obligation to whether the sale was practically certain. In a 2023 Tax Court case involving a donor-advised fund rather than a remainder trust, an owner selling his company for $107 million wrote that “I do not want to transfer the stock until we are 99% sure we are closing.” The court taxed the gain on the donated shares to him and held that “To avoid an anticipatory assignment of income on the contribution of appreciated shares of stock followed by a sale by the donee, a donor must bear at least some risk at the time of contribution that the sale will not close.” The same rule applies to a charitable remainder trust. In a 2000 case that did involve one, a California couple’s buyers insisted that the couple personally sign a covenant not to compete, the money went to the trust, and the court taxed them on $200,000 of it, writing that “The true earner of income must bear the tax consequences.”

Practice pointer. Fund the trust before a letter of intent turns binding, and keep the trustee free to walk away from any offer. Anything the buyer pays for your personal promises, such as a non-compete or a consulting agreement, is your income and is paid to you, not routed through the trust.

5. The Appraisal Is Missing, Late or Done by the Wrong Person

Federal law denies the deduction for donated property over $5,000 without a qualified appraisal, and over $500,000 the appraisal itself must be attached to the return. The appraiser cannot be the donor or the donee, which includes a donor who is also the trustee. In a 2012 Tax Court case, a Sacramento real estate broker and certified appraiser gave land and a shopping center to his unitrust and valued them himself at $18,526,499.62. Independent appraisals ordered after the audit came in higher, at $20,277,246, and the land later sold for nearly $23 million. The court denied every deduction for both years and wrote, “A taxpayer relies on his private interpretation of a tax form at his own risk.” The appraisal rule also runs for the life of the trust. Each year a unitrust holding real estate or private company stock must value it through an independent trustee or a current qualified appraisal, or the trust stops qualifying.

Practice pointer. Order the appraisal before the gift, from an appraiser with no role in the transaction, dated no more than 60 days before the transfer. For a unitrust holding hard-to-value assets, name an independent special trustee for valuations from the start.

6. You or Your Family Use Trust Property

A charitable remainder trust is treated like a private foundation for the self-dealing rules. The donor, the donor’s family and the trustee are disqualified persons, and almost any transaction between them and the trust is prohibited. Living in the trust’s condominium, renting trust land for a family business, borrowing from the trust or selling it your other property all count. The tax is 10% of the amount involved for each year, paid by the person who dealt with the trust, plus 5% on a trustee who knowingly took part, and it rises to 200% if the transaction is not undone. In a 2006 IRS Chief Counsel memorandum (which cannot be cited as precedent), a donor-trustee paid his pickup truck installments from the trust account for about two years, used trust real estate rent-free and had the trust prepay 10 years of his rent elsewhere. Chief Counsel concluded the trust did not qualify as a unitrust at all.

Practice pointer. Treat the trust account as someone else’s money, because it is. Avoid any purchase, lease, loan or personal use involving you or your family, however fair the price.

7. The Property Has a Mortgage

Mortgaged property causes two separate problems. When you remain personally liable on the loan and the trust pays it, the trust is paying your debt, and the IRS treats a trust that pays the grantor’s obligations as the grantor’s own trust, which is never a charitable remainder trust. The same Chief Counsel memorandum reasoned that a trust that paid off the mortgage on a quitclaimed property from the sale proceeds, while the donor remained personally liable on it, would not qualify. Borrowed money against property also produces unrelated business income, taxed at 100% under pitfall 8. In a 2000 Ohio case, a couple giving land valued at $1,262,500 to a university’s unitrust sold one-fifth of it to the university for $225,000 first, to pay off the mortgage before the rest went into the trust.

Practice pointer. Clear the debt before funding, by paying it off or selling a fraction as that couple did, and have the lender’s release recorded before the deed to the trust.

8. The Trust Earns Unrelated Business Income

A charitable remainder trust pays no income tax, with one exception. For every dollar of unrelated business taxable income, the trust owes a 100% excise tax, reported on Form 4720 with the annual return. The usual sources are an operating business held directly, a partnership or LLC interest that runs a business, and property bought or carried with borrowed money. Before 2007 the rule was harsher, and any such income cost the trust its exemption on all of its income for that year. A Ninth Circuit case applied that rule in 1997 to a unitrust holding publicly traded partnership units, which said its tax had run to about three times its business income, and the court answered that “it is for Congress, not the courts, to take appropriate measures to avert them.” Congress changed the rule in 2006 to the 100% excise tax that applies today. S corporation stock is its own problem, because a charitable remainder trust cannot hold it without ending the company’s S election (see can a trust own S corporation stock).

Practice pointer. Screen every asset for business income and debt before it goes in. Avoid funding with an interest in an operating partnership or LLC on the assumption that a passive investor is safe.

9. A Net-Income Trust Pays Nothing, or the Flip Is Written Wrong

A net-income unitrust pays the lesser of its actual income or the stated percentage, often with a make-up account for shortfalls. Funded with land that produces no income, the trust pays you nothing until the land sells. The Ohio couple signed their unitrust in August 1990 on projections of $48,000 in the first year and $97,000 in the second, and their first payment arrived in January 1993. A flip provision converts the trust to a standard unitrust later, and Treasury regulations allow it only when the trigger is a fixed date or a single event outside anyone’s control, such as the sale of the unmarketable asset, a marriage, a divorce, a death or a birth. The switch takes effect at the start of the next year, and any make-up amount owed is forfeited when it does.

Practice pointer. Tie the flip to the sale of the illiquid asset and write it in the regulation’s terms. Avoid a trigger that the trustee or the family can decide, which is the version the regulations reject.

10. A Promoter’s CRAT That Is Too Good to Be True

The IRS taxes every payment from a charitable remainder trust in a fixed order, ordinary income first, then capital gain, then tax-exempt income, and principal last. No structure turns the gain from a sale inside the trust into tax-free cash. Promoters have sold annuity trusts that buy a single-premium immediate annuity and report the payments as a tax-free return of principal. In a 2023 reported Tax Court opinion, a Minnesota couple put real estate with a $97,517 basis into such a trust, reported at $1,808,000. The trust bought a five-year annuity for $1,537,822 paying $311,708 a year, and the couple reported $2,026 each of interest. The court held the payments were ordinary income and said of the couple’s theory, “That view finds no support in the law governing CRATs or elsewhere.” Treasury made the arrangement a listed transaction in final regulations effective July 9, 2026, which brings mandatory disclosure and penalties for anyone who fails to disclose. A separate 2008 IRS notice flags the coordinated sale of every interest in a charitable remainder trust to a third party as a transaction of interest with its own disclosure duty.

Practice pointer. Ask any adviser to show you, on paper, which of the four tiers each payment comes from. Avoid any plan that promises the gain back to you tax-free, which is the promise the Tax Court rejected.

11. You Cannot Easily Undo It, and Your Heirs Get Nothing From It

The asset and all of its growth go to charity at the end, and your children receive nothing from the trust. Ending it early requires state-law authority and, in practice, every beneficiary and the charity to agree, with each taking the actuarial value of its share. The IRS has refused since 2008 to issue rulings on those early terminations, and its 2026 revenue procedure still lists them. A 2013 ruling issued to one couple under the older practice, with physicians’ sworn statements on their life expectancy, found no self-dealing and treated their payout as long-term capital gain. A court will not force a cash-out over a charity’s objection. In a 2010 Virginia case, two surviving beneficiaries and one of two remainder charities asked to split a trust worth between five and six million dollars and cash out one half. The state supreme court refused because the second charity objected.

Practice pointer. Decide how your children are made whole before you fund the trust, often with life insurance held in an irrevocable life insurance trust, and keep the right to change which charity receives the remainder.

12. Your Old State May Tax What the IRS Does Not

The federal exemption for the trust’s income does not bind the states. In a June 2026 decision, the New Jersey Tax Court held that a unitrust owed New Jersey income tax on about $6.01 million of short-term gain that was exempt federally, and the state sought $55,284.11 more after the trust asked for a $450,172 refund. Florida has no personal income tax. A trust created while you lived elsewhere, or with a trustee or assets in another state, can still be exposed to that state’s rules.

Practice pointer. For a donor moving to Florida, settle the Florida domicile and pick the trustee before the trust sells anything.

What It Costs to Set Up or Review a Charitable Remainder Trust

A new charitable remainder trust is a flat fee quoted at consult, because the price moves with the asset (listed stock is simpler than real estate or a private company) and with whether an independent trustee and an appraisal are needed. A review of an existing trust, its payment history and its Forms 5227 is also a flat fee quoted at consult. The appraisal, the trustee’s fees and any recording are paid separately to those providers. Litigation over a trust, such as a dispute with a trustee or a charity, is quoted per matter. The 30-minute consult is free, and it covers whether a charitable remainder trust fits your numbers at all.

Book a free consult or see the full fee schedule.

Frequently Asked Questions

Common Situations

The business owner with a buyer. An owner in Tampa has a signed letter of intent and wants to put part of the company into a charitable remainder trust before closing. The first question is how binding the letter is and how far the deal has progressed, because the gain follows the owner once the sale is practically certain.

The retiree with a rental building. A couple in Naples owns a building with a low basis and a small mortgage. The mortgage has to be cleared before funding, and a net-income unitrust with a flip on the sale of the building keeps them from receiving payments the trust cannot fund.

The widow whose trust went quiet. A trust set up years ago by a late husband stopped sending payments when the widow said she did not need them. The payment history and the Forms 5227 are the first things to pull, because a skipped payment is the failure the courts treat most harshly.

Sources of Law

• 26 U.S.C. §664 (definitions, the 5% to 50% payout range, the 10% remainder test at §664(d)(1)(D) and (d)(2)(D), the net-income exception at (d)(3), and the 100% excise tax on unrelated business taxable income at §664(c)(2), added by Pub. L. 109-432 for taxable years beginning after December 31, 2006); §170(f)(2)(A) (no deduction for a remainder in trust unless the trust is a CRAT, CRUT or pooled income fund) and (f)(11) (qualified appraisal over $5,000; appraisal attached over $500,000); §2055(e)(2) and (e)(3) (estate tax deduction and qualified reformation, including the 90-day rule at (e)(3)(C)(iii)); §4947(a)(2) and §4941(a) and (b) (self-dealing, 10%, 5% and 200%); §514 (debt-financed income). Read from the 2024 United States Code, retrieved 2026-09-30.
• Treas. Reg. §1.664-1(a)(4) (must function exclusively as a CRT from creation), (a)(7) (unmarketable assets valued by an independent trustee or a current qualified appraisal), (c) (excise tax); §1.664-3(a)(1)(i)(c) to (e) (flip provisions and permitted triggering events); §1.664-2 and §1.664-4 (CRAT rules and unitrust valuation); §1.170A-17 (qualified appraisal and appraiser); §1.6011-15 (CRAT listed transaction), added by T.D. 10051, 91 FR 42353 (July 9, 2026), proposed at 89 FR 20569 (Mar. 25, 2024). eCFR current through 2026-09-28, retrieved 2026-09-30.
• IRS guidance: sample CRATs, Rev. Procs. 2003-53 to 2003-60 (IRB 2003-31); sample CRUTs, Rev. Procs. 2005-52 to 2005-59 (IRB 2005-34); Rev. Rul. 77-374 and Rev. Rul. 70-452 (probability of exhaustion), as described in Rev. Proc. 2016-42 (IRB 2016-34, the qualified-contingency sample provision); Rev. Rul. 78-197 (legally bound test), as described in PLR 200321010; Notice 2008-99 (IRB 2008-47, coordinated sale of CRT interests as a transaction of interest); Rev. Proc. 2026-3, §3.01(85) and (107) (no rulings on early termination); Instructions for Form 5227 (2025). Read in the Internal Revenue Bulletin and on irs.gov, retrieved 2026-09-30.
• Written determinations, which bind the IRS only as to the taxpayer who requested them and may not be cited as precedent: PLR 200321010 (right of first refusal did not make a CRUT legally bound to sell); CCA 200628026 (mortgage paid by the trust and personal use by the donor-trustee; trust not a CRUT); PLR 201325018 (early termination of a NIMCRUT; no self-dealing; long-term capital gain). Retrieved 2026-09-30.
• Cases, read in full from CourtListener opinion text: Estate of Atkinson v. Commissioner, 115 T.C. 26 (2000), aff’d, 309 F.3d 1290 (11th Cir. 2002), cert. denied, 540 U.S. 946 (2003), and the later collection case, T.C. Memo. 2007-89; Estate of Block v. Commissioner, T.C. Memo. 2023-30; Estate of Tamulis v. Commissioner, 509 F.3d 343 (7th Cir. 2007); Estate of Schaefer v. Commissioner, 145 T.C. 134 (2015); Estate of Hoensheid v. Commissioner, T.C. Memo. 2023-34 (a donor-advised fund, used here for its timing rule); Jorgl v. Commissioner, T.C. Memo. 2000-10; Mohamed v. Commissioner, T.C. Memo. 2012-152; Martin v. Ohio State University Foundation, 139 Ohio App. 3d 89 (2000); Leila G. Newhall Unitrust v. Commissioner, 105 F.3d 482 (9th Cir. 1997) (superseded by the 2006 amendment to §664(c)); Gerhardt v. Commissioner, 160 T.C. No. 9 (2023), and Furrer v. Commissioner, T.C. Memo. 2022-100; Ladysmith Rescue Squad, Inc. v. Newlin, 694 S.E.2d 604 (Va. 2010); Jacob & Alice Klein Charitable Remainder Unitrust v. Director, Division of Taxation, No. 006284-2020 (N.J. Tax Ct. June 4, 2026) (approved for publication; no reporter citation yet). Quotation note: every quoted passage is verbatim from the court’s opinion, except the sentence beginning "I do not want to transfer," which is the taxpayer’s own email as quoted by the Tax Court in Hoensheid. The parties were not clients of this firm. No citator service was used; later citing decisions were searched on 2026-09-30.

What the Charitable Remainder Trust Cases Show

In one case I have reviewed, a Miami Beach woman who would live to 97 did what careful, generous people do. In August 1991 she signed her will, funded a separate trust to pay her funeral expenses, debts and taxes, and put $3,999,974 of stock into a charitable remainder annuity trust that was to pay her 5% a year for life and then support the people and charities she cared about. The document tracked the federal rules to the letter. She did not need the money (her other assets covered her life comfortably), and the trustee, who knew the 5% had to go out every year, let it sit. At least seven quarterly payments of $49,999.68 were due before she died in June 1993 at 97, and not one left the account.

After her death her longtime caretaker, one of the people the trust was meant to provide for, said she had a notarized promise that she would never have to pay her share of the estate tax. The trustee settled with her, paid her $667,000, and the trust itself would have had to cover the tax she did not pay. The estate claimed a $3,894,535 charitable deduction, and the IRS disallowed all of it because the trust had never paid the donor and would have to pay estate tax it was not allowed to pay. The Tax Court agreed in 2000 and the federal appeals court for Florida affirmed in 2002. The estate was still fighting the IRS’s levy in 2007, by which time the balance due had reached $1,650,674.72 and the estate, once over $7 million, had shrunk to about $500,889 through questionable investments and other costs, including the legal fees of contesting the tax.

In 14 years of law practice, and as someone who litigates probate and trust disputes in court, I went through the federal case law on charitable remainder trusts myself rather than relying on a summary of it, and I have a few take-home points.

The first is that the document is the easy part. The common answer to "is a charitable remainder trust safe" is not wrong so much as incomplete, and the missing part is the part that costs money. The Miami Beach trust, the self-appraised Sacramento land and the trust amended after the audit all failed on something that happened after the signing. Practice pointer. An owner should know, before signing, who will make each year’s payment, from which account, and who files Form 5227.

The second is that kindness to the donor is not a defense. The trustee in Miami Beach was accommodating a woman who did not want the income, and the courts treated the skipped payments as fatal anyway. Avoid any arrangement where the payout depends on whether the donor asks for it.

The third is that the failures are rarely one mistake. The Miami Beach trust missed its payments and then faced an estate tax bill it could not legally pay, and a promised exemption from that tax sat in a notarized paper nobody coordinated with the trust. An owner who funds a charitable remainder trust should have the will, the other trusts and any side promises read together, because the tax apportionment in one document can disqualify the trust in another.

My reading of these cases has a limit. Most are federal tax decisions from outside Florida, and a Tax Court memorandum opinion is persuasive rather than binding precedent. The Florida-specific questions, such as how a Florida court would handle a request to end a charitable remainder trust early over a charity’s objection, have no Florida appellate answer that I found, and I will say so at the consult rather than supply one.

Kevin D. Klagge, Esq., admitted in Florida since 2012. The decisions described on this page are published opinions and IRS determinations in other parties’ matters, not matters handled by this firm, and they predict nothing about any reader’s situation. Past results do not guarantee a similar outcome.

Updated on September 30, 2026. Reviewed by Kevin D. Klagge, Esq., Fla. Bar No. 99502. Attorney Kevin Klagge represents families, businesses, and international clients in estate and tax planning, business structuring, and international law, with a focus on Florida legal tools. He litigates estate and business issues in court. General information about federal and Florida law, not legal or tax advice, and no attorney-client relationship is created. Coordinate any charitable remainder trust with your CPA and financial adviser. Do not send confidential information until we have agreed to represent you.