Start with the exemption, because everything attractive about the structure runs off it. Section 664(c)(1) provides that a charitable remainder annuity trust and a charitable remainder unitrust "shall, for any taxable year, not be subject to any tax imposed by this subtitle." So when the trust sells the concentrated, low-basis position the donor contributed, no tax is due at the moment of sale, and the entire sale proceeds are available to reinvest in a diversified portfolio. That is the case for using one: it converts a holding the owner could not sell without a large immediate bill into a diversified portfolio producing a stream of payments.
The four statutory tests, which apply to both forms. Under 664(d) the payout must be not less than 5 percent nor more than 50 percent; it must be paid not less often than annually; it must run for a term of years not in excess of 20 years, or for the life or lives of individuals, and in the case of individuals only to someone "living at the time of the creation of the trust"; and the value of the remainder interest, determined under section 7520, must be at least 10 percent. The 10 percent test is measured differently between the forms, which is easy to miss: for a CRAT it is 10 percent of the initial net fair market value of all property placed in trust (664(d)(1)(D)), while for a CRUT it is tested "with respect to each contribution of property" against that property's value on the date it goes in (664(d)(2)(D)).
The practical difference between the two forms, beyond fixed versus floating. A CRAT's governing instrument must provide that no additional contributions may be made after the initial contribution — that requirement comes from the regulation at 26 C.F.R. 1.664-2(b) rather than from the statute itself, and property passing to the trust by reason of the grantor's death counts as one contribution. A CRUT can take further contributions, and section 664(d)(4) handles the case where a new contribution would fail the 10 percent test by treating it as a transfer to a separate trust. A CRAT therefore suits a one-off funding with a payee who wants a predictable dollar amount; a CRUT suits ongoing funding and a payee willing to accept variation in exchange for participating in growth.
The four-tier rule is why "no tax" is the wrong summary. Section 664(b) provides that amounts distributed carry, in order: first, income other than capital gains, to the extent of the trust's such income for the year and undistributed such income from prior years; second, capital gain, on the same cumulative basis; third, other income; and fourth, a distribution of trust corpus. The section adds that "the trust shall determine the amount of its undistributed capital gain on a cumulative net basis." So the gain the trust avoided at the moment of sale sits in the second tier and is paid out, taxed, as the annual distributions work down through the tiers. A charitable remainder trust defers and re-characterizes gain and spreads it across years; it does not make it disappear, and a donor told otherwise has been told something the statute contradicts.
Why the statutory form matters at all, and the cost of getting it wrong. Section 170(f)(2)(A) is blunt: "in the case of property transferred in trust, no deduction shall be allowed under this section for the value of a contribution of a remainder interest unless the trust is a charitable remainder annuity trust or a charitable remainder unitrust (described in section 664), or a pooled income fund." A well-intentioned trust that pays a family member first and a charity afterwards but misses one of the 664 tests produces no charitable deduction whatsoever. How large the deduction is, what ceiling applies to it, and what substantiation it needs are questions for the charitable contribution deduction entry; the gate is here.
One trap inside the trust. Section 664(c)(2) imposes on a charitable remainder trust with unrelated business taxable income "an excise tax equal to the amount of such unrelated business taxable income" — a 100 percent tax on that income. It is the reason these trusts avoid operating businesses, certain partnership interests, and debt-financed property, and the reason funding one with mortgaged real estate needs specialist advice before the deed is signed.
What the structure costs, honestly. It is irrevocable, so the property is gone. The remainder goes to charity rather than to children, and the family's economics are the income stream plus the tax saving, not the asset. Because the gift is a completed transfer during life, the contributed property gets no step-up in basis at death, and for a family whose estate will never approach the federal exclusion, that forgone step-up is frequently worth more than everything the trust achieves. Set-up and annual administration have real costs, including a trust tax return, an annual valuation for a unitrust, and a trustee.
