Setting up a charitable remainder trust in California means meeting the federal structural rules under Internal Revenue Code Section 664, registering the trust with the California Attorney General within 30 days of funding, and filing annual returns with both the IRS and the Franchise Tax Board for the life of the trust. California conforms to the federal framework for most purposes, so the trust itself pays no California income tax on its investment earnings, but the state parts ways with federal law on one specific issue: how unrelated business income is taxed.
Federal Rules the Trust Must Meet
Before California-specific requirements come into play, the trust has to qualify as a CRT under Internal Revenue Code Section 664. Three structural rules govern that qualification, and missing any of them disqualifies the trust from the start.
- The annual payment to the income beneficiary must be between 5% and 50% of the trust’s value. For an annuity trust, that percentage is measured against the initial funding value; for a unitrust, it is measured against the assets as revalued each year.
- The trust can last for the lifetime of one or more named individuals or for a fixed term of up to 20 years. It cannot run indefinitely.
- At the time of each contribution, the present value of the charity’s expected remainder must equal at least 10% of the net fair market value of what was contributed.
The 10% remainder test uses the IRS Section 7520 rate, which changes monthly. As of April 2026, that rate is 4.6%.1Internal Revenue Service. Section 7520 Interest Rates A higher 7520 rate makes the test easier to pass. A young donor choosing a lifetime payout at a high percentage can fail the test because too little is projected to remain for charity; older donors and shorter fixed terms clear it more easily.2Office of the Law Revision Counsel. 26 US Code 664 – Charitable Remainder Trusts
Choosing Between an Annuity Trust and a Unitrust
A charitable remainder annuity trust (CRAT) pays a fixed dollar amount every year, set when the trust is funded as a percentage of the initial value. The payment never changes, no matter how the investments perform, and no additional contributions are allowed after funding.
A charitable remainder unitrust (CRUT) pays a fixed percentage of the trust’s assets as revalued each year. Payments rise when the portfolio grows and fall when it shrinks. A CRUT also allows additional contributions over time, which suits donors who plan to fund the trust in stages.
How California Taxes a CRT
California generally follows the federal framework, so the trust itself is exempt from California income tax on its investment earnings. The income beneficiary reports distributions on their California return and pays state income tax on those distributions using the same tiered characterization that applies federally.
The one meaningful divergence is unrelated business taxable income (UBTI). Federally, a CRT that earns any UBTI owes an excise tax equal to 100% of that income, though the trust keeps its exempt status on everything else.3Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts When California conformed to the federal framework in 2014, it took a different approach: UBTI is taxed at normal trust income tax rates, which currently reach as high as 13.3%. The trust keeps its exempt status on all other income. That matters most for CRTs that hold partnership interests or other investments capable of generating UBTI, because the California hit on that income is much less punishing than the federal 100% excise tax.
Registering With the California Attorney General
Every CRT operating in California must register with the Attorney General’s Registry of Charitable Trusts. The trustee has 30 days from the date the trust first receives property to file the initial registration.4California Legislative Information. California Government Code 12585
After that, the trustee files an annual renewal on Form RRF-1 with a fee tied to the trust’s annual revenue.5California Department of Justice. Annual Registration Renewal Fee Report to Attorney General of California Trusts with less than $50,000 in annual revenue pay $25. The fee scales up in brackets to a maximum of $1,200 for trusts with revenue exceeding $500 million. Most individual CRTs sit in the lower brackets. The renewal is due four months and fifteen days after the end of the trust’s accounting period. Falling behind can flag the trust as delinquent and may trigger a minimum tax of $800 plus interest from the Franchise Tax Board.
Annual Filings the Trustee Owes
Compliance for a California CRT runs on three tracks every year.
Federal. The trustee files IRS Form 5227, the Split-Interest Trust Information Return, by April 15 following the close of the trust’s tax year. Extensions are available on Form 8868.6Internal Revenue Service. Return Due Dates – Other Returns and Reports Filed by Exempt Organizations Form 5227 reports the trust’s income, gains, distributions, and asset values. The trustee also issues a Schedule K-1 to each income beneficiary showing the character and amount of that year’s distributions.
California FTB. The trustee files California Form 541-B with the Franchise Tax Board to report the trust’s financial activity.7Franchise Tax Board. Instructions for Form 541-B Charitable Remainder and Pooled Income Trusts It is required for every calendar year the trust exists and mirrors much of what appears on Form 5227.
California Attorney General. Form RRF-1, described above.
Between the three, the yearly compliance load is real. Most trustees budget for professional preparation, and ongoing administration including tax preparation and investment management typically runs between $2,000 and $5,000 per year depending on complexity.
Setting the Trust Up in California
Once the trust document is drafted and executed, the trustee applies to the IRS for an Employer Identification Number before any assets can be titled or returns filed. The online application issues the EIN immediately.8Internal Revenue Service. Get an Employer Identification Number
The donor then transfers ownership of the contributed assets into the trust’s name. Brokerages re-register publicly traded securities. For California real estate, a new deed transferring title to the trustee has to be recorded with the county. When the trust is funded with real estate, closely held business interests, or other hard-to-value assets, a qualified independent appraisal is required to substantiate the charitable deduction, and the donor reports the non-cash contribution on IRS Form 8283 with the appraiser’s signature.
Self-Dealing Traps
CRTs are treated like private foundations under the self-dealing rules of Internal Revenue Code Section 4941. Any transaction between the trust and a “disqualified person,” a category that includes the donor, the donor’s family members, and entities they control, triggers excise taxes even if the transaction was conducted at fair market value.9Internal Revenue Service. Self-Dealing and Other Tax Issues Involving Charitable Remainder Trusts
Typical traps: the donor renting property from the trust, borrowing trust assets, or using trust-owned property personally. The initial excise tax is 5% of the amount involved for each year the transaction remains uncorrected. If the disqualified person does not unwind it, a second-tier tax of 200% applies. Those penalties fall on the disqualified person, not the trust, and can dwarf whatever benefit triggered them. The trustee reports any excise taxes on IRS Form 4720.
Estate Tax Context
Because a CRT is irrevocable, assets transferred into it are generally removed from the donor’s taxable estate. The One Big Beautiful Bill Act, signed into law on July 4, 2025, raised the federal estate and gift tax exemption to $15 million per person starting in 2026, with inflation indexing going forward.10Internal Revenue Service. One, Big, Beautiful Bill Provisions Married couples can shelter up to $30 million combined. Estates below that threshold see less estate tax benefit from a CRT. Estates approaching or above it can use a CRT to accomplish three things at once: produce a lifetime income stream, generate a current income tax deduction, and shrink the taxable estate.