Charitable Trust Returns
(CRT & CLT)

Split-interest trusts require specialized compliance

Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) are split-interest trusts: one set of beneficiaries receives an income stream, the other receives the remainder. The IRS requires annual reporting on Form 5227 (Split-Interest Trust Information Return) for both types, and CLTs also file a Form 1041 because their remainder interest benefits non-charitable beneficiaries.

These trusts are typically established through estate planning attorneys and financial advisors. The ongoing compliance work, annual returns, distribution calculations, and beneficiary reporting, is where we come in.

Charitable remainder trusts (CRTs)

A CRT pays an income stream to one or more non-charitable beneficiaries (often the grantor or the grantor’s spouse) for a term of years or for life. When the income interest ends, the remaining assets pass to one or more qualified charities. CRTs are tax-exempt entities, they don’t pay income tax on earnings within the trust, but the distributions to income beneficiaries are taxable under a specific ordering system.

There are two types:

• CRAT (Charitable Remainder Annuity Trust): pays a fixed dollar amount each year, determined at inception and never adjusted. No additional contributions are permitted after the trust is funded.
• CRUT (Charitable Remainder Unitrust): pays a fixed percentage of the trust’s net asset value, revalued annually. The payout changes each year as asset values fluctuate. Additional contributions are generally permitted.

The four-tier system

CRT distributions are taxed to the beneficiary under a four-tier ordering system (IRC §664(b)) that characterizes each dollar of distribution in the following order:

1. Ordinary income: interest, dividends, rents, and other ordinary income earned by the trust, current year and accumulated
2. Capital gains: short-term first, then long-term, current year and accumulated
3. Tax-exempt income: municipal bond interest and other exempt amounts
4. Return of corpus: tax-free return of the trust’s original principal

Each tier must be exhausted before moving to the next. The trust maintains cumulative category tracking across all years. Getting this accounting right is essential for correct K-1 reporting to the beneficiary and for Form 5227 itself.

CRAT listed transaction scrutiny

The IRS identified certain CRAT transactions as listed transactions under Notice 2024-55, specifically arrangements where a CRAT is used to shelter gain on the sale of appreciated assets through an inflated basis or mischaracterized distributions. If you administer a CRAT that sold highly appreciated assets near inception, this notice may create disclosure and reporting obligations. We monitor for these issues as part of the annual compliance engagement.

Charitable lead trusts (CLTs)

A CLT is the mirror image of a CRT: charity receives the income stream first (an annuity or unitrust payment), and the remainder passes to non-charitable beneficiaries, typically family members. CLTs are not tax-exempt; they file both Form 5227 and Form 1041.

CLTs come in two income tax flavors:

• Grantor CLT: the grantor receives an upfront income tax deduction for the present value of the charitable interest, but is then taxed on all trust income annually (grantor trust rules apply).
• Non-grantor CLT: the trust itself is the taxpayer. It claims a charitable deduction for amounts paid to charity each year, files its own 1041, and issues K-1s to remainder beneficiaries when applicable. The grantor receives no income tax deduction but may achieve gift or estate tax benefits.

What we handle

• Annual Form 5227 preparation for CRATs, CRUTs, and CLTs
• Form 1041 for charitable lead trusts (non-grantor CLTs as the taxpaying entity; grantor CLTs as informational filings)
• Four-tier distribution accounting for CRT beneficiary reporting
• K-1 preparation and coordination with beneficiary returns
• Annual unitrust revaluation for CRUTs
• CRAT listed transaction analysis and disclosure requirements
• Coordination with the grantor’s 1040 for grantor CLTs

What we need to open a matter

• Trust document (or relevant sections establishing the split-interest terms)
• Trust EIN
• Prior year Form 5227 and Form 1041 (if applicable)
• Cumulative four-tier category tracking (for CRTs)
• All income statements: 1099s, brokerage statements, K-1s received by the trust
• Asset valuations for CRUT annual revaluation
• Distribution records for the year
• Charitable remainder beneficiary information

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