The IRS Just Labeled a Popular Charitable Trust Strategy a 'Listed Transaction' — Here's What Trustees Need to Know

What just happened

On July 8, 2026, the Treasury Department and IRS issued final regulations (T.D. 10051) identifying a specific type of charitable remainder annuity trust (CRAT) arrangement as a listed transaction — the IRS's formal designation for tax strategies it considers abusive tax avoidance. The regulations took effect July 9, 2026. This isn't a new position; the IRS first flagged this scheme back in Notice 2004-8 and proposed making it a listed transaction in 2024. What changed is that the designation is now final and binding.

How a legitimate CRAT works

A properly structured CRAT under Internal Revenue Code Section 664(d)(1) is a legitimate and widely used planning tool. A donor irrevocably transfers assets to the trust, receives a fixed annuity payment for a term of years or for life, and whatever remains at the end goes to charity. The donor gets an upfront charitable income tax deduction, and the trust itself is generally tax-exempt — though distributions to the donor carry out the trust's income under a tiered set of ordinary income, capital gain, and other categories.

The scheme the IRS is targeting

The newly listed transaction involves a specific pattern. A taxpayer transfers highly appreciated property — often stock or a closely held business interest — into a purported CRAT. The trust sells the property and uses the proceeds to buy a single premium immediate annuity (SPIA) to fund the required payments. Promoters told clients the trust could use the property's fair market value as its basis under Section 1012, largely eliminating the gain on the sale. That's wrong: because the transfer to the trust is a gift, the trust's basis carries over from the donor under Section 1015, and the built-in gain doesn't disappear. Promoters then compounded the problem by misapplying Section 72's annuity rules together with Section 664 to claim the SPIA payments were taxable only to the extent of their small income component — treating what should have been capital gain and ordinary income as if it were mostly a tax-free return of investment.

Here's what that looked like in practice. Say you own stock worth $1 million that you originally bought for $100,000 — a built-in gain of $900,000. You transfer the stock to a purported CRAT. The trust sells the stock for $1 million and, under the promoters' theory, reports the sale using a basis of $1 million — the value on the day you contributed it — so no gain shows up at all. The trust then uses the full $1 million to buy a single premium immediate annuity that pays you, say, $50,000 a year for life. Because part of a normal annuity payment is a tax-free return of the money used to buy it, promoters argued that only a small slice of each $50,000 payment — the portion attributable to the annuity's own interest earnings — was taxable, with the rest tax-free.

The correct answer looks very different. Under Section 1015, the trust's basis in the stock is your original $100,000, not $1 million, so the $900,000 gain is real and has to be recognized when the trust sells. Under the tiered accounting rules for charitable remainder trusts in Section 664(b), that gain then has to be carried out to you as capital gain — taxed at capital gains rates — as you receive your annuity payments in the years that follow, rather than shielded by treating those payments as mostly tax-free annuity income. Depending on the payout rate, it can take a decade or more of annuity payments before that $900,000 is fully accounted for and taxed.

Why this matters if you're a trustee or beneficiary

If you serve as trustee of a CRAT that matches this pattern — appreciated property in, a SPIA purchased with the proceeds, gain reported as little or nothing — you and the trust's beneficiaries are now treated as participants in a listed transaction, whether or not you understood the strategy that way when you set it up. Participants must disclose their involvement to the IRS on Form 8886, and the professionals who promoted the structure have their own disclosure duty on Form 8918 as material advisors.

Here's the part with a real deadline: when a transaction becomes listed after a return reporting it has already been filed, the disclosure statement is due within 90 calendar days of the transaction becoming listed — which means the clock is already running for anyone with an existing structure like this, pointing toward early October 2026. Missing it is costly. Failure-to-disclose penalties under Section 6707A run up to 75% of the resulting tax decrease, capped at $100,000 for an individual and $200,000 for other taxpayers — on top of whatever tax, interest, and accuracy-related penalties apply if the underlying position is disallowed.

What this doesn't mean

Ordinary CRATs — where a donor contributes cash or property, the trustee invests it sensibly, and annuity payments are taxed correctly under the normal tiered rules — are entirely unaffected. The IRS has been explicit that only transactions matching this specific fact pattern, and substantially similar variations, are listed. If your trust doesn't involve a SPIA purchased to eliminate gain recognition, this designation isn't about you.

What to do now

If you administer a CRAT set up in the last several years — especially one marketed with promises of eliminating gain on appreciated assets through an annuity purchase — it's worth a prompt review against this fact pattern before the 90-day window closes. We prepare fiduciary income tax returns for trusts, including CRATs, and can help you determine whether a structure you're involved with falls inside this listed transaction and what disclosure, if any, is required. Given the deadline, this isn't one to sit on.