A Texas charitable trust lets you support the causes you care about while also meeting personal and family financial goals. The most common forms, charitable remainder trusts and charitable lead trusts, are governed primarily by federal tax law, but Texas law controls how they are created, administered, supervised by the Attorney General, and modified when circumstances change. For Texans with highly appreciated stock, real estate, closely held business interests, or mineral rights, a charitable trust can convert an illiquid or low-basis asset into a diversified income stream while benefiting charity.
This page explains how charitable remainder and charitable lead trusts work, the federal requirements that shape them, why they fit certain Texas assets, the Texas Attorney General’s role under Property Code chapter 123, and how charitable trusts are modified. For general Texas trust law, see the Texas trusts overview, and for how charitable planning fits the rest of a plan, visit the Texas estate planning hub.
What Is a Texas Charitable Trust?
In the broadest sense, a charitable trust is a trust with a charitable purpose, such as relief of poverty, advancement of education or religion, promotion of health, or other purposes beneficial to the community. A purely charitable trust exists entirely for charity. A split-interest trust, the kind most commonly used in estate planning, divides benefits between charity and private individuals.
Texas trust law applies to charitable trusts with a few distinctive features. Charitable trusts are not subject to the rule against perpetuities that applies to private trusts under Property Code § 112.036. The Texas Attorney General has a statutory role in proceedings involving charitable trusts. And courts have tools to modify charitable trusts whose purposes become impossible or impractical.
Charitable Remainder Trusts Under IRC § 664
A charitable remainder trust, or CRT, pays an income stream to one or more individuals, usually the donor and a spouse, for life or for a term of years. When the income interest ends, the remaining assets pass to one or more charities.
Federal requirements
Internal Revenue Code § 664 sets strict rules:
- The annual payout must be at least 5% and no more than 50% of the trust’s value.
- The value of the charitable remainder interest must be at least 10% of the initial fair market value of the property contributed to the trust.
- The term must be either the lives of the individual beneficiaries or a term of no more than 20 years.
- The trust must be irrevocable and must comply with detailed governing instrument requirements.
CRATs and CRUTs
A charitable remainder annuity trust, or CRAT, pays a fixed dollar amount each year, set when the trust is created. No additional contributions are allowed. A CRAT suits donors who value a predictable payment.
A charitable remainder unitrust, or CRUT, pays a fixed percentage of the trust’s value, revalued annually. Payments rise and fall with the trust’s investment performance, and additional contributions are permitted.
Flip CRUTs
A flip CRUT begins as a net-income unitrust, paying the lesser of the unitrust amount or actual trust income, and then “flips” to a standard unitrust upon a triggering event, such as the sale of an illiquid asset. Flip CRUTs are often used when a donor contributes real estate or a closely held business interest that will take time to sell.
Tax benefits
When a donor contributes appreciated property to a CRT, the trust can sell the property without paying capital gains tax immediately, because the CRT itself is generally exempt from income tax. The donor receives an income tax charitable deduction for the present value of the remainder interest, subject to percentage limitations, and the payments to the individual beneficiaries carry out income under a tiered system. Because Texas has no personal income tax, the tax analysis for a Texas donor is federal only, which differs from states where a state deduction adds to the benefit.
Why Charitable Remainder Trusts Fit Certain Texas Assets
Texas families often hold assets that make CRTs attractive:
- Highly appreciated publicly traded stock, often concentrated in a single company.
- Real estate held for many years, including farm and ranch land.
- Interests in closely held businesses approaching a sale.
- Mineral and royalty interests, which produce income but can be difficult to divide among heirs.
Each asset type has its own issues. Mortgaged real estate can create problems with debt-financed income and self-dealing rules. Business interests must be evaluated for unrelated business taxable income, which is subject to a punitive excise tax in a CRT. Pre-arranged sales can cause the gain to be taxed to the donor under the assignment of income doctrine, so the timing of the contribution relative to a sale matters. Mineral interests require careful valuation and attention to how royalty income is characterized. Holmes Law coordinates with the donor’s CPA and financial advisor on these questions.
Charitable Lead Trusts
A charitable lead trust, or CLT, is the mirror image of a CRT. The charity receives payments first, for a term of years or for one or more lives, and the remainder passes to the donor’s family or other individuals.
CLATs and CLUTs
A charitable lead annuity trust, or CLAT, pays charity a fixed annuity. A charitable lead unitrust, or CLUT, pays charity a fixed percentage of the trust’s annually revalued assets. CLATs are more common in transfer tax planning, because when trust investments outperform the IRS interest rate used to value the gift, the excess passes to the family free of additional gift or estate tax.
Grantor and non-grantor CLTs
A grantor CLT gives the donor an upfront income tax deduction for the present value of the charity’s interest, but the donor is taxed on the trust’s income each year. A non-grantor CLT is taxed as a separate trust and receives a deduction for amounts paid to charity, but the donor does not receive an upfront income tax deduction. Choosing between them depends on the donor’s income, the assets involved, and the family’s goals.
Estate and Gift Tax Deductions
Charitable trusts can reduce federal transfer taxes as well as income taxes. Under Internal Revenue Code § 2055, the estate tax charitable deduction applies to the charity’s interest in a qualifying charitable trust created at death, and § 2522 provides a parallel gift tax deduction for lifetime gifts. The federal estate tax affects only a small fraction of estates, and Texas has no estate or inheritance tax, so for many Texas families the income tax and philanthropic benefits are the primary drivers.
A charitable trust can also be created at death through a will or trust. A testamentary CRT can provide income to a surviving spouse or children for life, with the remainder to charity, and is often used for retirement accounts, where the CRT can spread out income from an inherited account over the beneficiaries’ lives rather than the shorter periods that apply to many individual beneficiaries under current rules.
Texas Attorney General Oversight of Charitable Trusts
The Texas Attorney General represents the public interest in charitable assets. Property Code chapter 123 governs the Attorney General’s participation in proceedings involving charitable trusts.
Under Property Code § 123.002, the Attorney General may intervene in a proceeding involving a charitable trust on behalf of the public interest. Under § 123.003, a party initiating a proceeding involving a charitable trust must give notice to the Attorney General, and the Attorney General is entitled to notice of proceedings such as those to modify, terminate, or construe a charitable trust or to remove a trustee. Under § 123.004, a judgment in a proceeding involving a charitable trust is voidable if the Attorney General was not given the required notice.
The Attorney General’s office maintains a charitable trusts division, and the Texas decanting statute also requires notice to the Attorney General when a trust with a charitable interest is decanted. For donors, the practical takeaway is that once a charitable interest exists in a Texas trust, changes to that trust are no longer purely private family matters.
Private Foundations, Donor-Advised Funds, and Charitable Trusts
A charitable trust is one of several charitable vehicles. A donor-advised fund offers simplicity and an immediate deduction but no income stream. A private foundation, which in Texas is often organized as a nonprofit corporation under the Business Organizations Code or as a charitable trust, gives the family long-term control but involves excise taxes, minimum distribution requirements, and self-dealing rules. CRTs and CLTs are subject to many of the same self-dealing and related private foundation rules under Internal Revenue Code § 4947.
Many families combine these tools. For example, a CRT might name the family’s donor-advised fund or private foundation as the remainder beneficiary, which allows the children to direct future grants.
Choosing Trustees and Administering a Charitable Trust
A charitable trust requires ongoing administration. The trustee must make payments on time, value unitrust assets annually, invest prudently under Property Code chapter 117, avoid self-dealing, and file annual information returns such as IRS Form 5227 for split-interest trusts. Distributions to income beneficiaries must be reported under the tier rules that determine their tax character.
The donor can often serve as trustee of a CRT, but hard-to-value assets usually call for an independent trustee or special trustee to handle valuation. Many donors name a family member with an independent co-trustee, or a corporate trustee experienced with split-interest trusts. Where the trust holds endowment-like funds for a charity, the Texas Uniform Prudent Management of Institutional Funds Act in Property Code chapter 163 may also be relevant to the charity’s use of the gift.
Modifying a Texas Charitable Trust
Charitable trusts are irrevocable, but circumstances change. A named charity may merge, dissolve, or change its mission, or the charitable purpose may become impossible or impractical.
Texas courts apply the doctrine of cy pres, which allows a court to redirect charitable assets to a purpose as close as possible to the donor’s original intent. Property Code § 112.054 also authorizes judicial modification in circumstances such as when the trust’s purposes have become impossible or illegal or when modification is necessary to achieve the settlor’s tax objectives. Any such proceeding requires notice to the Attorney General under chapter 123.
Good drafting reduces the need for court involvement. A charitable trust should allow the trustee or donor to substitute a qualified charity if a named charity no longer exists or no longer qualifies, and should give the trustee authority to amend administrative provisions to maintain qualification under § 664.
Steps to Create a Texas Charitable Remainder Trust
Creating a CRT follows a predictable sequence:
- Identify the asset to be contributed and confirm its basis, value, and any debt or restrictions on transfer.
- Choose the payout structure, whether annuity or unitrust, and model the payout rate and term against the 10% remainder test and the donor’s income needs.
- Select the charitable remainder beneficiaries, and decide whether the donor may later change them.
- Choose the trustee and, where needed, an independent special trustee for valuation.
- Sign the trust agreement and obtain a federal tax identification number for the trust.
- Transfer the asset to the trust before any binding agreement to sell it, and obtain a qualified appraisal when required for the deduction.
- Report the gift on the donor’s income and gift tax returns, and begin annual administration and Form 5227 filings.
Each step has technical requirements, and Holmes Law works with the donor’s CPA and financial advisor so that the legal documents, the tax reporting, and the investment plan fit together.
Integrating a Charitable Trust Into a Texas Estate Plan
A charitable trust should be coordinated with the rest of the plan. Considerations include:
- Community property. When a married couple contributes community property to a CRT, both spouses should consent to the gift and the trust should address both spouses’ interests.
- Coordination with a revocable trust or pour-over will when a charitable trust is created at death.
- The effect on children’s inheritances, sometimes addressed by using part of the tax savings to fund life insurance in an irrevocable life insurance trust.
- Liquidity for payout obligations when the trust holds illiquid assets.
Frequently Asked Questions
What is the difference between a charitable remainder trust and a charitable lead trust?
A charitable remainder trust pays individuals first and charity last. A charitable lead trust pays charity first and individuals last. CRTs are typically used for income and capital gains planning; CLTs are more often used for transfer tax planning.
Can I be the trustee of my own charitable remainder trust in Texas?
Often yes, but hard-to-value assets may require an independent trustee for valuation, and self-dealing rules still apply. The right structure depends on the assets.
Does the Texas Attorney General have to approve my charitable trust?
No approval is needed to create one. The Attorney General is entitled to notice of proceedings involving charitable trusts under Property Code chapter 123, including proceedings to modify or terminate them.
Can a charitable remainder trust hold Texas real estate or mineral interests?
Yes, but debt, unrelated business income, and valuation issues must be evaluated before the transfer, and a flip CRUT is often used when the asset will take time to sell.
Is there a Texas income tax deduction for charitable trusts?
No, because Texas has no personal income tax. The income tax benefits of a Texas charitable trust are federal.
What happens if the charity named in my trust no longer exists?
A well-drafted trust allows a substitute charity to be chosen. If not, a Texas court may apply cy pres or modify the trust, with notice to the Attorney General.
Speak With a Texas Charitable Trust Attorney
Holmes Law designs charitable remainder and charitable lead trusts for Texas clients and coordinates them with the rest of the estate plan and with the client’s tax and financial advisors. Michael Holmes is licensed in Texas and works remotely with clients across the state. To discuss charitable planning, contact Holmes Law.