Charitable Remainder Trusts: Understanding the Role of the § 7520 Rate

Jurisdiction: Federal (I.R.C. §§ 664, 7520); California conformity Primary Statutes: I.R.C. §§ 664, 7520; Treas. Reg. § 1.664-3; Rev. Proc. 2005-52 IRS Publications: IRS Publication 561; Tables in IRS Publication 1457 (actuarial factors) Last Reviewed: 2026 Category: Charitable Planning | Income Tax | Trusts

Executive Summary

A Charitable Remainder Trust (CRT) is a split-interest trust that pays income to one or more non-charitable beneficiaries for a term — either a fixed number of years or the life of the beneficiary — with the remainder passing to a qualified charity. The donor receives an immediate income tax deduction equal to the present value of that charitable remainder interest.

The IRS § 7520 rate is used to calculate that deduction at inception. That is its only role. The § 7520 rate does not determine, predict, or constrain the economic performance of the trust after funding. Returns to the income beneficiaries, the ultimate value passing to charity, and whether the trust outperforms alternatives are all determined by investment results, asset allocation, market conditions, and the choices of the trustee — none of which the § 7520 rate controls.

This distinction is widely misunderstood. The § 7520 rate has become a fixation among advisors and clients in a way that distorts the planning conversation. This article addresses both the mechanics and the misconception.

Governing Law

The Split-Interest Structure: I.R.C. § 664

Under I.R.C. § 664, a CRT is a trust that meets strict statutory requirements: it must pay a fixed dollar amount (Charitable Remainder Annuity Trust, or CRAT) or a fixed percentage of annually revalued assets (Charitable Remainder Unitrust, or CRUT) to a non-charitable beneficiary, with the remainder to a qualified charitable organization. The trust itself is exempt from income tax during the trust term — one of the significant economic advantages of the vehicle.

The two main forms differ in one critical respect: a CRAT pays a fixed annuity regardless of trust performance; a CRUT pays a percentage of the trust’s fair market value as revalued each year, so distributions fluctuate with the portfolio. This distinction has major implications for both the income beneficiary’s experience and the charity’s ultimate receipt.

The § 7520 Rate and the Charitable Deduction: I.R.C. § 7520

I.R.C. § 7520 requires the IRS to publish a monthly discount rate — set at 120% of the applicable federal midterm rate — used to compute the present value of certain interests in trusts. For CRT purposes, the § 7520 rate is used in actuarial tables (published in IRS Publication 1457) to calculate the present value of the charitable remainder interest at the time the trust is funded. That present value is the donor’s income tax deduction.

The mechanics are straightforward: a higher § 7520 rate decreases the actuarially computed present value of the income interest retained by the beneficiary, which correspondingly increases the present value assigned to the charitable remainder — and therefore increases the deduction. A lower rate does the reverse.

For a detailed treatment of the actuarial mechanics, see: Gottlieb, Klaus, From Myth to Math: A Tutorial on the Actuarial Valuation of Charitable Remainder Unitrusts under I.R.C. § 7520 (December 15, 2025), available at https://ssrn.com/abstract=5924942.

Strategic Rate Selection: Three-Month Window

Under Treas. Reg. § 1.7520-2(a)(2), a donor may elect to use the § 7520 rate from the month of funding or from either of the two immediately preceding months. This allows the donor to select whichever of the three available rates produces the most favorable deduction. In practice, this means checking rates in the two prior months before funding and comparing the resulting deduction calculations.

Carryforward: Five-Year Deduction Period

The charitable deduction for a CRT contribution is subject to the standard percentage-of-AGI limitations applicable to contributions of appreciated property to public charities (generally 30% of AGI for appreciated capital gain property contributed to a public charity remainder beneficiary). Amounts that cannot be deducted in the year of funding may be carried forward and deducted over up to five succeeding tax years. This carryforward provision ensures that donors with unusually large contributions relative to their income can still capture the full deduction over time.

The § 7520 Rate: What It Does and Does Not Determine

⚠️ CRITICAL MISCONCEPTION: The § 7520 rate is a deduction-sizing mechanism at inception. It is not a measure of CRT performance, a predictor of trust returns, or a reason — by itself — to establish or avoid a CRT. Conflating the deduction calculation with the economics of the trust is one of the most common errors in CRT planning conversations.

The table below clarifies what the § 7520 rate does and does not govern.

The appropriate question is not “is the § 7520 rate high enough to fund a CRT?” The appropriate questions are: Does this donor have appreciated, low-basis assets generating minimal current income? Is there a genuine charitable intent? What is a realistic expectation for investment performance? Does the CRT structure — as compared to a direct sale, hold-to-death, or other alternative — produce a better outcome across the likely range of scenarios?

Those are economic and actuarial questions. The § 7520 rate answers none of them.

CRTs as a Planning Vehicle: When Suitability Is Present

A CRT merits serious consideration when several conditions are present together. The vehicle is not universally appropriate, and it is not made more appropriate simply because the § 7520 rate happens to be high.

Appreciated, Low-Basis Assets

The CRT’s core tax advantage is that the trust — as a tax-exempt entity under § 664 — can sell appreciated assets inside the trust without triggering immediate capital gains tax. The resulting proceeds are reinvested in full, and capital gains are recognized by the income beneficiary only as distributions are received (under the trust’s four-tier income ordering rules). This deferral and potential conversion of character can be substantial for donors with highly appreciated stock, real estate, or business interests.

Charitable Inclination

The charitable remainder is irrevocable. A client with no charitable inclination whatsoever — who genuinely has no interest in benefiting any charitable organization — should look at other planning vehicles. CRTs are not the right tool for purely tax-driven transactions with no philanthropic dimension.

That said, many clients who initially resist the idea of a charitable remainder change their view once they understand the full picture. The combination of capital gains deferral, a meaningful income stream, a current tax deduction, and a legacy contribution to a cause that matters to them often looks quite different from the blunt premise of “giving your money away.” Advisors who frame the charitable remainder as a loss rather than a planned gift frequently never get past that framing to the actual planning conversation. Clients with even a modest charitable inclination — a university they attended, a hospital that treated a family member, a community foundation — are often well-served by a CRT once they see how the economics work across their specific facts.

Timing: High-Income Years

The deduction is most valuable in years of unusually high income — a business sale, large bonus, or other income spike — where the donor faces a high marginal rate. Funding a CRT in such a year can shelter a meaningful portion of that income. For donors anticipating retirement and a permanent drop in income, a CRUT established in the final high-earning years can provide both a current deduction and a lifetime income stream.

Economic Performance: Investment-Driven, Not Rate-Driven

Once a CRT is funded, its performance is governed entirely by the portfolio inside the trust. The § 7520 rate that determined the original deduction calculation is irrelevant to what happens next.

For a CRUT paying, say, 5% of annually revalued assets, the trust must generate total returns in excess of 5% to avoid erosion of principal — and therefore to avoid declining distributions over time. Whether that is achievable depends on asset allocation, market conditions, and investment management. A CRUT funded in a period of strong equity returns will produce very different outcomes than one funded with conservative fixed-income investments, regardless of the § 7520 rate at inception.

This is not a theoretical concern. Monte Carlo analysis of CRUT performance across a range of market scenarios shows that outcomes for income beneficiaries and remainder charities vary dramatically based on investment assumptions — far more than they vary based on reasonable changes in the § 7520 rate. For a quantitative treatment of this point, see the article cited above.

The trustee’s investment decisions therefore matter enormously — arguably more than any other single variable in CRT planning. A donor who funds a CRUT and then allows the trustee to pursue a strategy misaligned with the distribution rate, time horizon, and charitable goals has made a structurally sound decision that may still produce poor results.

📌 PLANNING NOTE: The § 7520 rate should be checked and the three-month election evaluated at funding. After that, the advisor’s attention should shift entirely to investment policy, payout rate selection, and trustee governance. These are where performance is made or lost.

CRAT vs. CRUT: A Structural Comparison

For most younger donors or those with longer planning horizons, the CRUT’s variable distribution feature provides better protection against the erosion of purchasing power and reduces the risk of trust exhaustion.

Practice Notes

At Funding

• Run the deduction calculation under all three available § 7520 rates (current month and two preceding months) and select the most favorable
• Confirm the applicable AGI limitation (30% for capital gain property to public charity remainder; 50% for ordinary income property) and model the five-year carryforward
• Verify that the 10% minimum remainder requirement under I.R.C. § 664(d) is satisfied at the selected payout rate, term, and § 7520 rate — this is a legal prerequisite, not merely a planning preference
• For CRATs only, confirm the 5% probability exhaustion test is satisfied (the trust must not have more than a 5% probability of exhaustion during the trust term)
• Document the charitable intent and the donor’s understanding that the remainder is irrevocable

Trustee and Investment Policy

• Establish a written Investment Policy Statement (IPS) for the trust that reflects the payout rate, distribution horizon, and charitable goals
• Ensure the trustee understands the relationship between total return, the payout rate, and the effect on long-term distributions and the charitable remainder
• A payout rate set above long-term expected returns will predictably erode assets over time — this is a foreseeable outcome that should be disclosed to the donor at funding, not discovered later

Ongoing Administration

• CRUTs require annual revaluation of trust assets to compute the unitrust distribution
• The trustee must file Form 5227 (Split-Interest Trust Information Return) annually
• Income retains its character as distributed to the income beneficiary under the four-tier ordering rules: ordinary income first, then capital gains, then other income, then corpus

⚠️ COMMON ERROR: Advisors and clients sometimes interpret a declining § 7520 rate as a reason to delay funding a CRT, on the theory that the deduction will be smaller. This inverts the analysis. If the underlying planning rationale is sound — appreciated assets, genuine charitable intent, appropriate income need — the § 7520 rate’s effect on the deduction is one factor among many. A smaller deduction in a lower-rate environment does not eliminate the capital gains deferral benefit, the income stream, or the charitable legacy. Delaying funding based solely on the § 7520 rate sacrifices those benefits in pursuit of a marginally larger upfront deduction.

NOT LEGAL ADVICE. This article is prepared for professional reference and educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship. Legal and tax professionals must conduct their own independent research and due diligence before relying on any analysis contained in this article. Laws, regulations, and administrative interpretations are subject to change. Application of these principles to specific facts requires professional judgment that this article cannot substitute for.