Charitable Remainder Trusts and the ILIT Wealth Replacement Strategy

How a tool designed for charity can also leave heirs with more than they would have received outright.

May 15, 2026

A charitable remainder trust is one of the older instruments in the planning toolkit, and one of the most misunderstood. The structure is codified at Internal Revenue Code §664, and the basic mechanics have not changed materially in decades. What has changed is the environment around it. The §7520 rate the IRS uses to value the charitable remainder sat as low as 0.4% during August through November of 2020, and ran at or below 1% throughout 2020 and most of 2021. As of May 2026, it is 5.0%.¹ That is a markedly higher rate environment than the one that prevailed for most of the post-2008 period, and it changes the math on these trusts in ways that have not been true for years.

Most clients I talk to about charitable remainder trusts have heard the phrase before but have a fuzzy mental model. The common one is "I give my money away and I get to deduct it." That is not quite right. A CRT is a split-interest trust --- the donor (or another non-charitable beneficiary) keeps an income stream for a period of years or for life, and only the remaining principal at the end goes to charity. The IRS allows a deduction for the present value of that future charitable remainder, computed today, using the §7520 rate.²

The reason I want to write about this now is that two things have changed in the last twelve months. First, the One Big Beautiful Bill Act, signed July 4, 2025, made the higher federal estate-tax exemption permanent and set it at $15 million per individual for 2026, with a combined $30 million for a married couple using portability.³ That change took the urgency out of the 2026 sunset that had dominated estate-planning conversations for the prior three years. Second, with the §7520 rate sitting near 5%, charitable remainder trusts produce larger income tax deductions than they have in years. Together, those two facts shift the conversation. The CRT is no longer primarily a sunset-driven exemption tool. It is again what it was originally designed to be --- a tool for clients with concentrated, highly appreciated positions, a charitable instinct, and a desire to keep an income stream off that asset.

The piece that gets left out of most CRT explanations is the irrevocable life insurance trust. Pair the two, and a strategy that on its own diverts wealth to charity can actually leave heirs with more than they would have received from selling the asset and holding the proceeds. That is the structure I want to walk through here.

A charitable remainder trust is established by an irrevocable transfer of property to a trustee. The trust pays an income stream to one or more non-charitable beneficiaries --- typically the donor, the donor's spouse, or both --- for a fixed term of up to twenty years, or for the life of one or more beneficiaries.⁴ At the end of that term, whatever remains in the trust passes to one or more qualified U.S. charitable organizations.⁴

There are two flavors. A charitable remainder annuity trust, or CRAT, pays a fixed dollar amount each year, set when the trust is funded and never adjusted. A charitable remainder unitrust, or CRUT, pays a fixed percentage of the trust's value, recalculated each year. Both must pay between 5% and 50% of the relevant base, and both must be structured so that the present value of the charitable remainder is at least 10% of the initial fair market value of the property contributed.⁵ That 10% test is the gating requirement --- a CRT designed with too high a payout, too long a term, or too low a §7520 rate environment can fail to qualify in the first place.

The economic engine of the CRT is the trust's tax-exempt status under §664(c)(1). Once the trust holds the asset, it can sell that asset and pay no immediate capital gains tax. For a client holding a low-basis position --- founder stock, a long-held real estate parcel, an inherited concentrated holding --- this is the central appeal. A $5 million position with a $500,000 basis, sold outright, generates a $4.5 million long-term capital gain. At a 20% federal long-term capital gains rate plus the 3.8% net investment income tax, plus typical state income tax, that gain produces seven figures of immediate tax. Inside a CRT, the same sale generates no immediate tax to the trust. The full $5 million is reinvested, and the income stream is paid out from the larger base. Figure 1 puts numbers on this for a representative case.

The deduction the donor receives the year the trust is funded is not a deduction for the full contribution. It is a deduction for the actuarial present value of the future charitable remainder, calculated under §7520 using the applicable rate at the time of the gift.² At a higher §7520 rate, the assumed earnings inside the trust are higher, the projected remainder is larger, and the deduction goes up. At a lower rate, the deduction shrinks. Figure 2 shows how dramatically that rate has moved over the last six years.¹

What the donor receives in cash is taxed under a four-tier ordering rule that the IRS describes plainly: distributions are first ordinary income to the extent the trust has any, then capital gain, then other income (including tax-exempt income), and only then return of corpus.⁶ That sequence matters. A client who funds a CRT with appreciated stock and expects to receive a clean return-of-basis income stream is not reading the rule correctly --- because the trust now holds the embedded gain, every distribution is going to be characterized as capital gain until that gain is exhausted, then ordinary income from whatever the trust earns going forward. The deferral is real. The escape from the gain is not.

Figure 1: $5M Concentrated Position --- Outright Sale vs. CRT Funding

Figure 2: IRS §7520 Rate, Monthly --- January 2020 through May 2026

The case for a CRT is strongest in a fact pattern with several features in place at once. The client holds a concentrated, highly appreciated asset. The client has a charitable inclination --- not necessarily intense, but genuine. The client is at or near retirement and would value an income stream off the asset. And the client's tax bracket, today, is high enough that the immediate income tax deduction has real value. When all four are true, a CRT is one of the cleanest ways to diversify a concentrated position without writing a check to the IRS for the gain.

The strategy fails, or at least underperforms, when those features are absent. A client with little charitable interest who is sold a CRT because of the deduction will eventually realize that the principal is permanently outside their family's reach. A client funding a CRT with assets that throw off unrelated business taxable income --- operating partnership interests, certain leveraged real estate --- can trigger the 100% UBTI excise tax under §664(c)(2), which is exactly as punitive as it sounds.⁷ A client who sets up a fixed-annuity CRT in a low-§7520-rate environment may find the trust fails the actuarial qualification tests that govern these structures, since lower assumed earnings shrink the projected remainder. And a client who anticipates needing a much higher payout than 5% to 7% will find the math tightening quickly --- the higher the payout, the smaller the projected remainder, and at some point the 10% remainder requirement is breached.⁵

Three other constraints deserve mention. The trust is irrevocable. Once funded, the donor cannot reach back into corpus, cannot change the charitable beneficiary in a way that would disqualify the trust, and cannot accelerate the remainder. The trust is administratively real. It requires a trustee, an annual Form 5227 filing, and ongoing recordkeeping of the four-tier income classifications. And the trust is, fundamentally, a charitable strategy that happens to produce favorable income tax outcomes --- it is not a tax-shelter dressed up as a charity. Clients who do not actually want to leave money to charity should not use one.

The piece I find most clients have not absorbed is what the CRT does to the inheritance picture. The asset that goes into the trust does not pass to the kids. At the end of the term --- typically the death of the second spouse --- whatever is left in the trust goes to charity. From the heirs' perspective, that asset is gone. For a family that cares about leaving wealth to the next generation, this is the part of the conversation that often kills the deal. And it is exactly the part that the irrevocable life insurance trust is designed to fix.

The wealth replacement trust strategy is straightforward in concept. The donor funds the CRT with the appreciated asset and captures the income tax deduction and the deferred-gain treatment. The donor then takes a portion of the income stream from the CRT --- supplemented by the cash freed up by the income tax deduction --- and uses that cash to make annual gifts to a separately created irrevocable life insurance trust. The ILIT uses those gifts to pay premiums on a life insurance policy --- often a survivorship (second-to-die) policy when both spouses are insurable --- that is owned by the trust and benefits the heirs.

When the second spouse dies, two things happen. The CRT's remaining corpus passes to the named charity. And the life insurance policy inside the ILIT pays out a death benefit to the trust, which then distributes to the heirs according to the trust terms. Two features make this work mechanically. First, life insurance proceeds paid by reason of the insured's death are excluded from the recipient's gross income under §101(a).¹⁰ Second, when a policy is owned by an irrevocable trust in which the insured holds no incidents of ownership, the death benefit is excluded from the insured's gross estate under §2042 --- provided the insured survives at least three years from the date any existing policy was transferred to the trust under the §2035 look-back rule. A new policy purchased directly by the ILIT avoids the three-year issue from the start.⁸

The premium gifting itself is structured to qualify for the federal annual gift tax exclusion --- $19,000 per donee in 2026.⁹ A trust drafted with Crummey withdrawal powers gives each beneficiary a temporary right to withdraw their share of any contribution, which converts what would otherwise be a future-interest gift (and therefore ineligible for the annual exclusion) into a present-interest gift that qualifies. With a married couple gifting and several beneficiaries, the annual exclusion alone often covers the premium on a substantial policy without ever touching the lifetime gift exemption.

The economics of the pairing are what drive the conversation. Figure 3 illustrates the comparison for a representative high-net-worth household. The numbers move with the specific facts --- the donor's age and health, the size of the asset, the §7520 rate, the policy's pricing, the assumed investment return inside the CRT --- but the structural result is consistent. A family that funds a CRT alone diverts the entire asset to charity at the second death, and the heirs receive nothing from that piece of the estate. A family that funds the CRT and an appropriately sized ILIT in parallel can deliver a tax-free death benefit to the heirs that, in many cases, exceeds what they would have received had the original asset simply been sold, taxed, and held as part of a taxable estate.

The phrase I use to describe this with clients is that the ILIT does not magically create wealth --- it converts a stream of small, deductible-capable gifts into a single, larger, income-tax-free and estate-tax-free payout, leveraged through insurance pricing. It is the financial-planning version of using a small spring to hold a very heavy door open. The spring is doing real work. It is not free. And it only works if the door is actually heavy enough to make the engineering worth it.

Figure 3: Net to Heirs vs. To Charity --- Three Strategies for the Same Asset

This is not a strategy that fits every estate. A client who is uninsurable cannot fund the ILIT, and the wealth replacement piece collapses without the death benefit. A client whose total estate is well under the $15 million per person / $30 million per couple federal exemption typically does not need the estate-tax-exclusion side of the ILIT in the first place; for those families, a simpler designation of the asset to heirs at the step-up in basis at death may produce a better outcome than a CRT-plus-ILIT structure. A client whose primary goal is maximum control and flexibility will not be comfortable with either of the two irrevocable trusts the pairing requires.

I also want to be honest about the cost stack. The CRT requires drafting and ongoing trust accounting. The ILIT requires drafting, annual Crummey notices to the beneficiaries, and a trustee willing to administer the withdrawal-rights mechanics. The insurance policy carries internal expenses, mortality charges, and commissions. Every one of those costs is a real drag on the strategy's net benefit. The math has to work after all of it, not before.

There is also state law variation. Several states impose their own estate or inheritance tax with exemption thresholds well below the federal $15 million figure, and a few states tax life insurance held in an ILIT differently than the federal rules suggest. For clients in those states, the planning conversation has to account for the state overlay, not just the federal mechanics described here.

My starting point on any CRT discussion is the question of charitable intent. If the client is not genuinely charitably inclined, I will not lead with a CRT --- there are cleaner ways to address concentration risk and tax exposure for someone whose only goal is family wealth transfer. If the charitable instinct is real, the next questions are about the asset itself, the donor's age and income needs, the family's broader estate picture, and the donor's insurability. The wealth replacement layer only enters the conversation once the underlying CRT case stands on its own merits.

I think in long horizons and multi-year designs on this. A CRT funded today commits a family to a structure that may run twenty or thirty years. The ILIT layered on top is a multi-decade premium commitment. Neither decision should be reverse-engineered from a single year's tax outcome. We model the path forward --- distribution character year by year, the projected remainder to charity, the policy's projected performance under conservative crediting assumptions, the sensitivity of the deduction to where the §7520 rate sits when the trust is actually funded. We coordinate with the client's estate attorney on the trust drafting, with the client's CPA on the deduction reporting and the four-tier accounting, and with an insurance professional on the policy design. Planning decisions of this scope do not live inside one office.

The framework I want clients to leave with is not "CRTs are a great tax move" or "CRTs are too restrictive." It is that a CRT is an instrument with a specific job to do, and when the fact pattern fits, the addition of an ILIT can convert what looks like a one-way charitable transfer into a structure that serves the charity and the heirs at the same time. That is the version of the strategy I find worth the complexity. Anything else is reaching for a tool that does not match the project.

The §7520 rate at 5%, the federal exemption now permanent at $15 million per individual, and a market that has rewarded long-term equity holders with very large embedded gains have combined to make this an unusually favorable moment to revisit charitable remainder trusts for the right households. They are not for everyone. Done well, paired with an ILIT, they can move a concentrated, highly appreciated position into a diversified income stream, fund a meaningful charitable legacy, and still deliver tax-free wealth to the next generation --- often more than the family would have received by selling and holding outright.

This piece is educational. The specific decisions live in a conversation with us, your estate attorney, and your CPA. If you want to walk through whether the structure fits your situation, our team is happy to model it in detail.

All my best,

Brandon VanLandingham, CFA, CMT, CFP

Founder / CIO

This piece is educational. It is not legal, tax, or accounting advice and is not a recommendation to take or refrain from any specific action. Tax law is fact-specific and changes regularly. Please coordinate any decisions discussed here with your attorney, your CPA, and Perissos before acting.

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1. Internal Revenue Service, "Section 7520 Interest Rates" (current and prior-year tables). May 2026 rate: 5.0%; rates from 2020 onward as published. https://www.irs.gov/businesses/small-businesses-self-employed/section-7520-interest-rates and https://www.irs.gov/businesses/small-businesses-self-employed/section-7520-interest-rates-for-prior-years

2. Internal Revenue Service, "Charitable Remainder Trusts": "Contributions to a charitable remainder trust qualify for a partial charitable deduction. The deduction is limited to the present value of the charitable organization's remainder interest." https://www.irs.gov/charities-non-profits/charitable-remainder-trusts

3. Internal Revenue Service, "IRS releases tax inflation adjustments for tax year 2026, including amendments from the One, Big, Beautiful Bill" (basic exclusion amount of $15,000,000 for decedents dying in 2026; OBBBA enacted as P.L. 119-21, signed July 4, 2025). https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill

4. Internal Revenue Service, "Charitable Remainder Trusts": "The payments continue for a specific term of up to 20 years or the life of 1 or more beneficiaries… At the end of the payment term, the remainder of the trust passes to 1 or more qualified U.S. charitable organizations." https://www.irs.gov/charities-non-profits/charitable-remainder-trusts

5. Internal Revenue Service, "Charitable Remainder Trusts" (CRAT/CRUT structural rules: payout between 5% and 50%; remainder must equal at least 10% of the initial net fair market value of the property placed in the trust). https://www.irs.gov/charities-non-profits/charitable-remainder-trusts

6. Internal Revenue Service, "Charitable Remainder Trusts" (four-tier ordering of distributions under IRC §664(b): ordinary income, capital gain, other income including tax-exempt, then corpus). https://www.irs.gov/charities-non-profits/charitable-remainder-trusts

7. Internal Revenue Service, "Charitable Remainder Trusts" (and Form 5227 instructions): a CRT with unrelated business taxable income remains exempt from federal income tax but is subject to a 100% excise tax on the UBTI under §664(c)(2). https://www.irs.gov/charities-non-profits/charitable-remainder-trusts and https://www.irs.gov/instructions/i5227

8. Internal Revenue Code §2042 (life insurance proceeds includible in gross estate where the insured holds incidents of ownership) and §2035(a) (three-year inclusion rule for transfers of existing policies); see IRS Internal Revenue Manual 4.25.5, "Technical Guidelines for Estate and Gift Tax Issues." https://www.irs.gov/irm/part4/irm_04-025-005

9. Internal Revenue Service, "IRS releases tax inflation adjustments for tax year 2026" (annual gift-tax exclusion of $19,000 per donee for 2026). https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill

10. Internal Revenue Service, "Life Insurance & Disability Insurance Proceeds": "Life insurance proceeds you receive as a beneficiary due to the death of the insured person aren't includable in gross income…"; see IRC §101(a). https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds/life-insurance-disability-insurance-proceeds

Reducing Capital Gains on a Highly Appreciated Portfolio