On July 8, Treasury and the IRS announced final regulations designating a specific charitable remainder annuity trust maneuver as a listed transaction, the agency's label for arrangements it considers abusive tax avoidance. The final rule took effect July 9, 2026, the day it was published in the Federal Register. If your development office presents CRATs the way the law intends, nothing about this changes your program. But "IRS targets charitable trusts" headlines are already circulating, and some donors and board members will ask. Here is what actually happened.
The Rule Targets a Gain-Erasing Scheme, Not the CRAT Itself
A charitable remainder annuity trust is a long-standing planned-giving vehicle: a donor irrevocably transfers assets to a trust, receives a fixed annual payment for a term of years or for life, and whatever remains at the end goes to charity. The donor gets a partial charitable deduction up front, and each year's payment is taxed under section 664(b)'s ordering rules, which treat distributions as ordinary income first, then capital gain, then other income, and only last as tax-free return of principal.
The scheme the IRS listed works differently. A promoter has the donor fund a purported CRAT with appreciated property, often real estate or a closely held business interest. The trustee sells the property, pays no tax at the trust level, and uses the proceeds to buy a single premium immediate annuity, an insurance contract that converts a lump sum into fixed payments. The donor then reports those payments under section 72, the general annuity rules, treating most of each payment as a tax-free return of investment. The built-in gain on the contributed property supposedly disappears.
Courts were not persuaded. In Gerhardt v. Commissioner, 160 T.C. No. 9, decided by the Tax Court in April 2023, the lead couple in a consolidated family case contributed property worth about $1.8 million with a basis under $100,000, ran it through exactly this structure, and reported almost none of the resulting payments as income. The court called the claimed result a "gain disappearing act" with no support in the tax code and applied the normal CRAT ordering rules, which made the distributions taxable as ordinary income.
Listed Status Means Disclosure Paperwork and Real Penalties
The regulation, first proposed in March 2024 and adopted without change, adds the scheme to the IRS list of transactions that must be disclosed. Participants, meaning taxpayers whose income tax or gift tax consequences reflect the claimed treatment (a gift tax return need not have been filed), must file Form 8886 with the IRS. The obligation reaches backward: under the reportable transaction rules, anyone who participated in a year that is still open under the statute of limitations owes a disclosure filing within 90 calendar days of the July 9 listing date, which lands in early October 2026. Material advisors, meaning people who are paid past a threshold for material aid on the transaction and who make a statement endorsing the abusive tax treatment, must file Form 8918. Failing to disclose carries penalties under section 6707A for participants and section 6707 for material advisors, on top of whatever tax and accuracy penalties the underlying scheme already generates.
Charities Named as Remainder Beneficiaries Are Not "Participants"
The part that matters most for nonprofits sits in the fine print. Under the final rule, an organization described in section 170(c) is not treated as a participant in the listed transaction solely because it holds the remainder interest, and it is not treated as a party to a prohibited tax shelter transaction under section 4965, the excise tax that can reach exempt organizations. A charity that discovers one of these trusts in its gift pipeline does not owe the IRS a disclosure filing just for being named as the beneficiary.
That protection covers the charity in its role as remainder beneficiary; it is not blanket immunity. The preamble draws the line at endorsement: general educational material about CRATs does not make anyone a material advisor, but a written statement endorsing the section 72 treatment of the annuity payments can. A gift officer should describe how CRAT payments are actually taxed and leave the donor's return positions to the donor's own advisors.
What Gift Planning Programs Should Do Now
First, nothing in the rule changes how a lawful CRAT works. Payouts remain taxable under the four-tier rules, the donor still receives a dependable income stream and a partial deduction, and the charity still receives the remainder. The vehicle is intact; a specific misuse of it is now flagged.
Second, read your planned-giving materials with fresh eyes. Any language hinting that a CRAT can wipe out capital gains on appreciated property was always wrong, and as of this month it describes a listed transaction. Take it out.
Third, if a donor tells you an advisor pitched the CRAT-plus-annuity structure, encourage them to consult independent tax counsel about their disclosure obligations, and keep the charity out of the advice business. The gift conversation can continue; legitimate options for appreciated assets, from standard CRATs to outright stock gifts, are unaffected, and smaller donors have their own fresh incentive in the revived non-itemizer charitable deduction.
The takeaway
The final regulations formalize what the Tax Court said in 2023: a CRAT defers and spreads tax on appreciated assets, it does not erase it. Charities that merely hold remainder interests are exempt from the new disclosure requirements, gift planners have no new forms to file, and the only programs with a problem are the ones promising tax magic. When a donor asks about the headlines, the answer is one sentence: the IRS listed a scheme, not the vehicle.