Who Can Be the Income Beneficiary of a Charitable Remainder Trust?

Klaus Gottlieb, Esq.
3 days ago
32 min read

Jurisdiction: Federal, with California overlay

Primary Statutes: IRC §§ 170(c), 664, 2036, 2055, 2056(b)(8), 2503(b), 2522, 2523(g), 2702, 4941, 4946, 4947, 7520, 7701(a)(1); Cal. Prob. Code §§ 15200 et seq., 15800, 16000 et seq.

Key Authorities: Treas. Reg. §§ 1.664-1, 1.664-2, 1.664-3, 1.664-3(d), 20.2036-1, 53.4947-1; Rev. Rul. 2002-20; Rev. Rul. 77-374; Rev. Proc. 2016-42; 42 U.S.C. § 1396p(d)(4); One Big Beautiful Bill Act, Pub. L. 119-21 (July 4, 2025)

Last Reviewed: April 2026

Category: Charitable Planning — CRT Design

At a Glance

When the income beneficiary choice is unproblematic

Donor as sole income beneficiary, single life
Donor and spouse, joint and survivor — the workhorse structure for married couples
Surviving spouse alone after the donor's death (typically through a § 2056(b)(8) marital deduction in a testamentary CRT)
Term of years (not exceeding 20) payable to the donor or to donor and spouse

When the income beneficiary choice creates meaningful risk — require structural attention

Adult children or other non-spouse individuals as concurrent or successor beneficiaries (gift tax exposure, 10% MRI tightening, § 2036 inclusion at donor's death)
A class of beneficiaries (closed-class rule applies for life-measured CRTs; more flexibility for term of years)
Two-life consecutive structures where the second life is materially younger than the first
A second trust as income beneficiary for the life of a financially disabled individual (Rev. Rul. 2002-20)
A § 170(c) organization as one of multiple income beneficiaries
Term of years used to extend the income stream beyond a single life

When the income beneficiary choice should not be used

An estate or revocable trust as a life-measured recipient (a non-individual cannot supply a measuring life, though it may be a permissible recipient of a term-of-years CRT)
A class of life-measured beneficiaries open to future-born or unascertainable members
Any structure where the actuarial mathematics fails the 10% MRI test (CRUT) or, for CRATs not protected by Rev. Proc. 2016-42 sample language, the 5% probability-of-exhaustion test
A trust whose beneficial interest is held entirely by § 170(c) organizations (defeats the noncharitable-recipient requirement)
Conduit structures designed to channel the unitrust amount to a disqualified person through a sham intermediate trust

Three drafting rules

Identify each income beneficiary by name or by closed class. Specify whether the interest is for life or for a term of years not exceeding 20. Confirm that every measuring life is in being on the funding date.
Run the 10% MRI test (CRUT) or the combined 10% MRI / 5% probability tests (CRAT, unless protected by Rev. Proc. 2016-42 sample qualified-contingency language) before signing. These tests are functions of beneficiary identity, payout rate, and § 7520 rate, and they fail more often than clients expect when non-spouse lives are added.
Coordinate the gift tax, marital deduction, § 2036 estate inclusion, and offsetting § 2055 and § 2056(b)(8) deduction consequences of the chosen structure with the donor's overall estate plan. The wrong beneficiary choice can convert a charitable deduction into a partially taxable gift.

The short answer. For most married-couple CRTs, the income beneficiary structure is the donor and spouse joint and survivor, with the remainder to charity at the second death. Anything more elaborate — successor children, a class, a second trust for a disabled child, a charity as one income recipient, a non-spouse term beneficiary — must be justified against the actuarial, gift, estate, and § 4941 consequences. The defensible space is narrower than many clients initially want.

Executive Summary

The CRT statute speaks of payments "to one or more persons (at least one of which is not an organization described in section 170(c)) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals." IRC § 664(d)(2)(A), with parallel language at § 664(d)(1)(A) for CRATs. That sentence does only modest work to constrain who the income beneficiary can be. The Code's definition of "person" in § 7701(a)(1) sweeps in individuals, trusts, estates, partnerships, associations, companies, and corporations. The substantive constraints come from elsewhere — from the regulations under § 1.664-3, from the actuarial requirements of §§ 664(d)(1)(D) and (d)(2)(D), from the gift and estate tax rules that flank the income tax treatment of a CRT, and from the private foundation regime layered onto the CRT through § 4947(a)(2).

Practitioners who treat the income beneficiary question as a casual selection at intake produce structures that fail one or more of these regimes. The donor wants the income to herself, then her spouse, then her children, then a charity, with optional acceleration for disability — and the drafter writes that into a form trust without asking whether the actuarial math works, whether a taxable gift is being made, whether the eventual flow of cash will trigger trust-rate compression, or whether the beneficiary identity creates a self-dealing risk under § 4941 that the unitrust amount carve-out does not reach.

This briefing organizes the income beneficiary question around three zones, parallel to the trustee briefing earlier in this series. Zone 1 covers the donor and the donor's spouse — the structure that drives the great majority of CRTs and that is unproblematic across the relevant tax regimes. Zone 2 covers the structurally permissible but doctrinally crowded space: non-spouse individuals, classes of beneficiaries, second trusts as income beneficiaries (including the Rev. Rul. 2002-20 structure for financially disabled individuals), term-of-years structures, and charity-as-income-beneficiary. Zone 3 covers the configurations that fail at threshold — open life-measured classes, life-measured non-individual beneficiaries, lives that fail the actuarial tests, and structures that conduit the unitrust amount to disqualified persons through a non-statutory channel.

The donor's estate plan, the donor's gross estate relative to the federal exemption, and the donor's family situation all bear on the choice. There is no default answer. A married couple in California with a moderate estate and adult children almost always lands in the Zone 1 joint-and-survivor structure, with children inheriting through a separately funded estate plan rather than through a CRT successor income interest. A couple with a disabled child lands in a different and more elaborate analysis. A donor with a closely held business and a desire to support a class of family members looks at successor structures that often fail the 10% MRI test on day one.

Governing Framework

The Statutory Identification of Permissible Recipients

The starting point is the recipient language of § 664(d)(1)(A) and (d)(2)(A). Both subsections require that the unitrust or annuity amount be paid "to one or more persons" with the constraint that "at least one of which is not an organization described in section 170(c)." That is the noncharitable-recipient requirement: a CRT with only § 170(c) recipients of the income stream is not a CRT. The income must flow to at least one non-charity for the life or term that determines the trust's duration.

The duration language is constraining but not as bright-line as it first appears. The CRT's payment period must not extend beyond either the permissible measuring life or lives or a term of years not exceeding 20. Treas. Reg. § 1.664-3(a)(5)(i) permits some hybrid formulations, including "A for life or for a term of years not longer than 20 years, whichever is longer (or shorter)" and "A for life, then to B for life or for a term of years not exceeding 20 years, whichever is shorter," provided both A and B are living when the trust is created. What fails is a provision that can extend beyond both the permissible lives and the 20-year cap. Section 664(f) also permits qualified contingencies — provisions that can terminate the unitrust or annuity payments earlier than they would otherwise terminate, provided they cannot extend payments beyond the otherwise permissible period.

The "individual or individuals" language in the life-measure half of the disjunctive does substantive work. Lives used to measure trust duration must be human lives. A corporation, partnership, estate, or trust cannot have its existence used as a measuring "life," because non-individual entities do not have lives in the relevant sense. Such an entity can, however, be a permissible recipient of a CRT for a term of years not exceeding 20 — the entity can receive the income, but its existence cannot extend the trust beyond the 20-year cap.

The "In Being" Requirement for Measuring Lives

Treas. Reg. § 1.664-3(a)(5)(i) requires that any individual whose life is used as a measuring life be alive at the date the trust is created and funded. This requirement does two things. First, it prohibits using the lives of unborn or unascertained future persons. Second, it limits the class of measuring lives to those who can be specifically identified at the funding date.

The "in being" rule combines with § 7520 actuarial principles to require that any measuring life be specifically identifiable on the funding date. The IRS has historically scrutinized arrangements that use the lives of seriously ill non-relatives to artificially extend or compress the actuarial term, and the regulation has been refined over time to address such "lifespan-shopping" abuses. In practice, measuring lives are almost always the income beneficiary, the income beneficiary's spouse, and close family members; drafters proposing more attenuated relationships should be prepared to defend the choice and to confirm a substantive nexus between the measuring life and the trust's purpose.

The 10% MRI Test for CRUTs and the 5% Probability Test for CRATs

A CRUT must satisfy § 664(d)(2)(D) — the value of the charitable remainder interest, computed at funding using § 7520 rates and the actuarial tables, must be at least 10% of the funding value. A CRAT must satisfy both § 664(d)(1)(D), the same 10% MRI test, and historically the separate 5% probability-of-exhaustion test of Rev. Rul. 77-374, which requires that the probability of the trust corpus being exhausted before the annuity term ends be no greater than 5%. Rev. Proc. 2016-42 provides sample qualified-contingency language under § 664(f); a CRAT incorporating the sample provision is not subject to the 5% probability-of-exhaustion test, providing a workaround for trusts that would otherwise fail.

These tests are functions of three variables: payout rate, § 7520 rate at funding, and beneficiary identity (which determines the expected trust term). For a single-life CRUT funded by a 65-year-old donor with a 5% payout, the remainder factor is comfortably above 10% across most § 7520 rate environments. Add the 60-year-old spouse as joint and survivor, and the factor drops but typically holds above 10%. Add a 35-year-old child as a successor life behind both spouses, and the factor often crashes below 10% — the trust fails to qualify, and there is no CRT.

The interaction between beneficiary choice and the actuarial tests is the most common drafting failure point in CRT design. Drafters who try to accommodate a client's wish for "income for me, then for my spouse, then for my children" often produce a trust that fails on day one. The fix is structural — trim the beneficiary list, lower the payout rate (which improves the remainder factor), shorten the term, or shift to a term-of-years structure that does not use the children's lives at all.

The Gift Tax Consequences of Beneficiary Identity

A CRT funding involves a transfer of property to a trust in exchange for retained interests. The retained income interest is valued under § 7520 and is not a completed gift to the extent the donor retained it. The remainder interest passes to charity and produces a gift tax charitable deduction under § 2522 equal to the present value of the remainder. So far, no taxable gift on a single-donor CRT naming the donor.

Add a non-spouse beneficiary — an adult child as concurrent or successor income beneficiary, a sibling, a parent, a friend — and the analysis changes immediately. The portion of the income interest passing to the non-spouse beneficiary is a completed gift of a future interest in property, valued at the actuarial present value of that beneficiary's interest at the § 7520 rate in effect at funding. The annual exclusion under § 2503(b) does not apply (the interest is not a present interest), so the gift uses lifetime exemption or generates gift tax.

For a spouse, § 2523(g) provides a specific marital deduction rule for the spouse's interest in a qualified CRT. The provision permits the marital deduction even though the spouse's interest is technically a terminable interest, by virtue of the special CRT carve-out. Section 2523(g) requires that the spouse be the only non-charitable beneficiary of the trust other than the donor — which is satisfied in the standard joint-and-survivor structure. This is what makes the joint-and-survivor structure clean: the spouse's interest is fully shielded from gift tax on funding.

For family members within § 2702(e)(1), the special valuation rule applies. The donor's retained CRT interest is a "qualified interest" under § 2702(b), so the donor's own interest is valued normally. The interaction matters where successor family-member interests are layered on, and in particular configurations the apparent gift can be larger than the straight § 7520 calculation suggests.

Estate Tax Inclusion of the Income Interest Under § 2036

A donor who retains a CRT annuity or unitrust interest has retained an interest within § 2036. The includible amount is determined under Treas. Reg. § 20.2036-1 and may be a portion of, or in some cases all of, the trust corpus, depending on the actuarial relationship between the retained payment and the trust's investment performance. For a single-life CRT terminating at the donor's death, the gross estate inclusion is generally offset entirely by the § 2055 charitable deduction, since the entire remainder passes to charity at death. The net estate tax effect is typically zero, but the path is through gross inclusion plus an offsetting deduction, not through absence of inclusion.

For a joint-and-survivor CRT where the surviving spouse holds a continued income interest, § 2036 again pulls trust corpus into the first-to-die spouse's gross estate. The portion attributable to the surviving spouse's continued income interest qualifies for the § 2056(b)(8) marital deduction; the remainder portion qualifies for the § 2055 charitable deduction. At the survivor's death, § 2036 again pulls corpus into the gross estate, offset entirely by the § 2055 charitable deduction as the remainder passes to charity. The net estate tax effect is typically zero in both estates, again achieved through the combination of inclusion plus offsetting deductions.

For a non-spouse successor beneficiary, the analysis breaks. Trust corpus is included in the donor's gross estate at the donor's death under § 2036, but the portion attributable to the non-spouse successor interest does not qualify for either the § 2056(b)(8) marital deduction or the § 2055 charitable deduction. That portion is taxable in the estate, in addition to any prior gift tax consequences at funding. The double-track exposure (gift tax at funding plus residual estate inclusion at death, with the charitable deduction available only for the eventual remainder going to charity) is often invisible to clients and underweighted in design.

For donors whose gross estates are below the $15M basic exclusion amount made permanent by the One Big Beautiful Bill Act (Pub. L. 119-21, July 4, 2025), the residual inclusion of a non-spouse successor interest may be absorbed without estate tax. Married couples can effectively use two $15M exclusions through portability or appropriate trust planning. For donors in or near the taxable range, the inclusion can produce a meaningful tax. The exemption permanence eliminated the TCJA sunset that would have reduced the exemption to roughly $7M per person on January 1, 2026, but the OBBBA's "permanence" is structural rather than absolute — a future Congress can amend the exemption, and California practitioners should plan with an eye toward that legislative risk.

Section 4947(a)(2) and the Self-Dealing Carve-Out

A CRT is subject to the private foundation rules of §§ 4941–4946 by operation of § 4947(a)(2). The first-tier self-dealing rules of § 4941 prohibit transactions between the trust and any disqualified person. The donor is a disqualified person (substantial contributor under § 4946(a)(2)); so are the donor's spouse, ancestors, descendants, spouses of descendants, and entities controlled by them.

Section 4947(a)(2)(A) carves out a critical exception: payment of the unitrust amount or annuity amount to the income beneficiary is not a § 4941 self-dealing transaction, even though the income beneficiary is a disqualified person. This is what makes donor-as-income-beneficiary work in the first place. Without the carve-out, the entire CRT structure would be a per se self-dealing violation.

The carve-out is narrower than it sounds. It covers payment of the unitrust or annuity amount to the income beneficiary as such. It does not cover transactions between the trust and the income beneficiary in any other capacity. A donor who is the income beneficiary cannot also rent property from the trust, lend money to the trust, or buy assets from the trust without committing self-dealing — the unitrust payment is exempt, not the donor-trust relationship generally.

The carve-out also does not protect indirect channels. If the income beneficiary is a trust whose terms direct or permit immediate distribution to a disqualified person, and the structure is designed to conduit the unitrust amount through the intermediate trust to evade § 4947(a)(2)(A) limits, the IRS retains authority to recharacterize. The clean path is: name the actual end-user of the unitrust amount as the income beneficiary, or use an intermediate trust only where it serves a substantive non-tax purpose under independent law (such as the SSI/Medi-Cal preservation purpose of an SNT under 42 U.S.C. § 1396p(d)(4)).

Zone 1: Where the Income Beneficiary Choice Is Unproblematic

A narrow but very common band of structures lands in Zone 1. These are the structures most CRTs use and that most drafters will have seen many times.

Donor as Sole Income Beneficiary, Single Life

The simplest CRT names the donor as the sole income beneficiary for the donor's life. This works cleanly across every regime:

Income tax. § 664 is satisfied; the donor receives the unitrust or annuity amount under the four-tier characterization rules of § 664(b).
Gift tax. No gift to anyone other than the charity; the charitable gift tax deduction under § 2522 covers the remainder.
Estate tax. § 2036 pulls trust corpus into the donor's gross estate by reason of the retained income interest, with the includible amount determined under Treas. Reg. § 20.2036-1. The § 2055 charitable deduction offsets the inclusion to the extent the remainder passes to charity. Net estate tax effect: typically zero, because the entire remainder qualifies for the § 2055 deduction.
§ 4941. The unitrust payment to the donor is the paradigmatic § 4947(a)(2)(A) carve-out transaction.
Actuarial tests. The 10% MRI test (CRUT) and 5% probability test (CRAT, absent Rev. Proc. 2016-42 sample language) are easiest to satisfy with a single older life, modest payout rate, and current § 7520 rates.

This is the structure for a single donor with no spouse, no need to provide for non-charitable successors through the CRT, and a desire for income during life with charitable disposition at death. It is also the structure that produces the largest charitable deduction relative to funding for an older single donor — a shorter expected term means a higher remainder factor.

Donor and Spouse, Joint and Survivor

The most common CRT structure for married couples names both spouses as income beneficiaries on a joint-and-survivor basis: full unitrust amount during both lives, full unitrust amount continuing to the survivor for the survivor's life, remainder to charity at the second death.

Income tax. Same as single life; the unitrust amount is paid to the named recipients with K-1 reporting of the four-tier characterization.
Gift tax. § 2523(g) provides the marital deduction for the spousal interest. No gift tax on funding.
Estate tax. § 2036 pulls trust corpus into the first-to-die spouse's gross estate. The portion attributable to the surviving spouse's continued income interest qualifies for the § 2056(b)(8) marital deduction; the remainder portion qualifies for the § 2055 charitable deduction. At the survivor's death, § 2036 again pulls corpus into the gross estate, offset entirely by the § 2055 charitable deduction. Net estate tax effect: typically zero in both estates, achieved through inclusion plus offsetting deductions.
§ 4941. Both spouses are disqualified persons; both are within the § 4947(a)(2)(A) carve-out for unitrust payments.
Actuarial tests. The joint-and-survivor structure produces a longer expected trust term than single life on the older spouse, which compresses the remainder factor. For most middle-aged or older couples, this is comfortably within the 10% MRI threshold; for younger couples (both under 55), it can become tight at higher payout rates.

This is the workhorse structure. The vast majority of married-couple CRTs use it. The terminology in some drafting systems calls it "consecutive" rather than "joint and survivor" — the operative point is that the unitrust amount continues at full level to the survivor, not at a reduced level. A "concurrent" two-life CRT that terminates at the first death is structurally permissible but cuts off the survivor and is rarely what couples actually want.

Surviving Spouse Alone

A variant of the joint-and-survivor structure pays the unitrust amount only to the surviving spouse following the donor's death. This is unusual as a lifetime structure and is more often encountered as a testamentary CRT funded through the donor's estate or revocable trust at death.

The analysis tracks the joint-and-survivor case at the second-spouse end: § 2056(b)(8) marital deduction in the donor's estate for the spousal income interest, no further estate tax effect at the surviving spouse's death (§ 2036 inclusion offset by § 2055 charitable deduction), charitable deduction for the remainder. The actuarial test runs on the surviving spouse's life alone, which produces a more favorable remainder factor than two-life consecutive structures.

Term of Years Payable to Donor or Donor and Spouse

A term-of-years CRT pays the unitrust amount for a fixed number of years (up to 20), regardless of who is alive. If the named recipient is the donor, the donor receives the unitrust for the term, with the unitrust amount payable to the donor's estate (or to the donor's revocable trust as successor) if the donor dies before the term ends.

This is a useful structure for younger donors who want to fund a CRT but do not want a multi-decade actuarial commitment. A 45-year-old donor funding a single-life CRT may have a 40-year expected term, which crushes the remainder factor; the same donor funding a 20-year term-of-years CRT has a fixed 20-year term, which produces a more favorable remainder factor and avoids the longevity drag.

The structure raises one wrinkle worth flagging: a term-of-years CRT does not extinguish at the donor's death. The donor's interest in the remaining unitrust payments is includable in the donor's gross estate at the donor's death, valued as the present value of the remaining payments. For a donor whose estate is below the federal exemption, this is unproblematic; for a donor in the taxable range, it is a meaningful inclusion that requires planning around.

Zone 2: Where the Income Beneficiary Choice Creates Meaningful Risk

Zone 2 is where most of the doctrinal interest lies. These structures are permissible but require structural attention, careful drafting, and explicit consideration of the gift, estate, and actuarial consequences.

Adult Children or Other Non-Spouse Individuals

Naming an adult child — or a sibling, parent, or unrelated friend — as a concurrent or successor income beneficiary is permissible under § 664 but triggers immediate gift tax consequences and, often, actuarial test failures.

Gift tax on funding. The portion of the income interest passing to the non-spouse beneficiary is a completed gift of a future interest, valued at the actuarial present value of that beneficiary's interest at the § 7520 rate in effect at funding. There is no marital deduction analog; the gift is taxable to the extent it exceeds the donor's available lifetime exemption. For a donor naming a 35-year-old child as a successor life beneficiary on a $2 million CRT, the gift tax value of the child's interest can easily run into the high six figures, depending on payout rate and § 7520 rate.

No annual exclusion for future interests. The annual exclusion of § 2503(b) is available only for present interests. A successor income interest in a CRT — payable to the child only if and when the prior beneficiaries' interests terminate — is a future interest, and the annual exclusion does not apply. Drafters who hope to use $19,000 (2026) annual exclusions to absorb the gift are mistaken.

§ 2702 special valuation. When the donor and the non-spouse income beneficiary are family members within § 2702(e)(1), the special valuation rule applies. The donor's retained CRT interest is a "qualified interest" under § 2702(b), so the donor's own interest is valued normally. The interaction matters where successor family-member interests are layered on, and in particular configurations the apparent gift can be larger than the straight § 7520 calculation suggests.

Estate tax consequences at donor's death. § 2036 pulls trust corpus into the donor's gross estate, with offsets for charitable remainder and qualifying spousal interests as described in the Governing Framework. The portion of the trust attributable to a non-spouse successor income interest does not qualify for either the § 2056(b)(8) marital deduction or the § 2055 charitable deduction, so that portion remains taxable in the estate. The donor cannot avoid this through drafting; the retention of the income interest during life is what produces the inclusion. The gift tax consequence at funding does not eliminate the residual estate tax exposure at death; the two regimes operate separately, with credits for prior gift tax paid available under the unified system but no general offset.

Actuarial test interaction. Adding a younger non-spouse life as a successor extends the expected trust term and reduces the remainder factor. The 10% MRI test for CRUTs and the combined 10% MRI / 5% probability tests for CRATs become much harder to pass. A two-life CRUT with the donor at 65 and an adult child at 35, with a 5% payout, may or may not clear 10% depending on the § 7520 rate at funding. The numbers must be run before signing.

The structural alternatives are: (i) drop the child from the CRT and fund the child through a separate gift or inheritance pathway; (ii) shorten the CRT to a term of years that ends before the child becomes the operative measuring life; (iii) lower the payout rate, which improves the remainder factor (the 10% MRI test passes more easily at lower payouts, all else equal) at the cost of reducing the income beneficiary's stream; or (iv) accept the gift tax consequences and use lifetime exemption to absorb the gift, recognizing the parallel residual § 2036 estate tax exposure at death.

Classes of Beneficiaries

A CRT may name a class of beneficiaries — "my children, in equal shares" — rather than specific individuals. The closed-class rule and its scope depend on whether the CRT is life-measured or term-of-years.

Closed class for life-measured CRTs. For a CRT measured by lives, individual class members must be living and ascertainable when the trust is created (Treas. Reg. § 1.664-3(a)(3)(i)). A trust naming "my children, in equal shares" as life-measured beneficiaries works only if the class is closed against future children — either because the donor is past childbearing or has drafted the class to exclude later-born children. A donor in her early 40s naming "my children" as a class without further restriction cannot satisfy the closed-class requirement on a life-measured basis. The drafting fix is to name specific children by name, or to restrict the class to "my children living on the date of this trust's funding."

Term-of-years class flexibility. For a CRT whose payment period consists solely of a term of years, the regulation is more flexible — the strict closed-class requirement does not apply. This permits "my children living from time to time during the trust's term" or similar formulations within a 20-year term-of-years CRT. Drafters using this flexibility should still avoid discretionary-allocation provisions that could create grantor-trust issues under §§ 671–679 or recharacterization risks.

Per stirpes substitution. A trust providing that a deceased class member's share passes to that member's descendants per stirpes raises an ascertainability problem on a life-measured basis — the descendants may not be ascertainable on the funding date. The cleaner draft names the class members specifically and uses default-charity dispositions for predeceased members rather than per stirpes substitution.

Gift tax for class members. Each non-spouse class member's interest is a separate gift, valued under § 7520. Multiple class members compound the gift tax exposure on funding.

Two-Life Consecutive Structures

A two-life consecutive CRT pays the unitrust amount to the first beneficiary for life, then to the second beneficiary for life, with the trust terminating at the second death. The most common configuration is donor for life, then spouse for life — which is just the joint-and-survivor structure described in Zone 1. The Zone 2 structures are: donor for life, then non-spouse for life (e.g., parent then child); or donor and spouse jointly, then non-spouse on the survivor's death.

The actuarial mathematics works against extended consecutive structures. A donor at 65 and a child at 35 produce a combined expected term well in excess of 50 years, which crushes the remainder factor. The 10% MRI test fails routinely in this configuration at typical payout rates. The structural alternatives are described above; the most common solution is to drop the consecutive child interest and fund the child through other means.

Second Trusts as Income Beneficiaries — Rev. Rul. 2002-20

A trust can be the named income beneficiary of a CRT. The clearest federal authority is Rev. Rul. 2002-20, which holds that a CRT may pay its unitrust amount to a second trust for the life of a financially disabled individual within § 6511(h)(2)(A), with the disabled individual's life serving as the measuring life. The second trust holds and disburses the unitrust amounts under its own terms, and the disabled individual is treated as effectively receiving the unitrust amount directly for § 664(d)(2)(A) purposes.

It is important to be clear about what Rev. Rul. 2002-20 does and does not decide. The ruling is a CRT qualification ruling — it addresses whether the structure satisfies § 664 and the related actuarial requirements. It is not a ruling on SSI or Medi-Cal eligibility. The second trust's effect on public benefits eligibility must be analyzed independently under federal SSI rules, federal Medicaid rules under 42 U.S.C. § 1396p, and California Medi-Cal rules administered by the Department of Health Care Services. A second trust that satisfies Rev. Rul. 2002-20 for federal CRT purposes does not automatically preserve public benefits; the second trust's terms must independently meet SSI and Medi-Cal requirements.

The structural availability of the CRT-pays-to-second-trust arrangement is settled. The harder question is whether you ever want to use it. In most cases, no — and the reasons stack up.

The structural risk: trust-rate compression. This is the dominant practical problem with naming a second trust (including a properly drafted SNT) as the CRT's income beneficiary. The unitrust amount must be paid to the second trust every year regardless of need. A well-drafted SNT distributes only what the disabled beneficiary requires for supplemental needs, which means the SNT will accumulate the rest. Accumulated income in a complex trust hits the top federal bracket at roughly $15,200 of taxable income (2026), plus the 3.8% NIIT under § 1411. The § 664(b) tier system delivers ordinary income and capital gains into the second trust in character; that character-laden income then sits in the second trust being taxed at trust rates. By contrast, parents-as-income-beneficiaries pay at individual rates — often 15 to 20 percentage points lower — and can then gift to a separately funded SNT at their discretion using annual exclusion gifts and lifetime exemption.

The structural risk: actuarial test failure. The disabled child's life is typically much younger than the parents' lives. The 10% MRI test computed on the disabled child's life can fail outright, particularly for a young child or where the payout rate is at typical levels. Drafters who default to "name the second trust, use the child's life" without running the numbers produce non-qualifying CRTs.

The structural risk: irrevocability and inflexibility. The CRT instrument is irrevocable. If the second trust later proves unworkable — trustee problems, change in benefits law, child predeceases the parents, child's circumstances change so SSI/Medi-Cal preservation is no longer needed — the unitrust stream cannot be redirected. The parents-as-income-beneficiaries plus separately funded SNT structure preserves family flexibility; the CRT-pays-to-second-trust structure forecloses it.

When the structure is appropriate. Rev. Rul. 2002-20 is properly used in a narrow set of circumstances: a single surviving parent with no spouse and a disabled child as the only natural object of bounty; an older parent who genuinely does not need the unitrust income; or a case where the appreciated asset is large enough that the deduction analysis works even with a young measuring life. In these cases, the CRT-pays-to-second-trust structure does what nothing else does — provides a charitable deduction during life, an income stream available for the disabled child's supplemental needs, and a remainder to charity at the disabled child's death.

The default for the typical husband-and-wife scenario. A joint-and-survivor CRT on the parents (Zone 1). Separately, a third-party SNT for the child funded during life with annual exclusion gifts and at death through pour-over from the survivor's revocable trust, or via second-to-die life insurance owned by an ILIT pouring into the SNT. The CRT and the SNT run on independent tracks; the parents keep flexibility; the actuarial math works on the parents' lives; the gift and estate tax analysis is clean.

Other trusts as income beneficiaries. The Rev. Rul. 2002-20 framework extends to other trusts in principle — a trust can be the income beneficiary if the underlying actuarial and qualification rules are met — but the same trust-rate compression and irrevocability concerns dominate. A grantor trust named as the income beneficiary collapses the income tax analysis (the grantor is taxed on the trust's income, so the unitrust payment is effectively a payment to the grantor for tax purposes), but introduces additional complexity that rarely pays for itself. ESBTs and QSSTs are not relevant here because S-corporation stock cannot be held in a CRT in the first place — a CRT is not a permitted S-corporation shareholder under § 1361(b)(1)(B), and contribution of S stock terminates the S election. The default is: do not name a trust as the income beneficiary unless there is a substantive non-tax reason to do so.

A Charity as One of Multiple Income Beneficiaries

Treas. Reg. § 1.664-3(a)(3)(i) and the parallel CRAT regulation contemplate that a § 170(c) organization may be one of the income beneficiaries of a CRT, alongside non-charitable beneficiaries. The noncharitable-recipient requirement of § 664(d)(1)(A) and (d)(2)(A) requires that at least one income beneficiary not be a § 170(c) organization — but it does not prohibit § 170(c) organizations from being among the income beneficiaries.

The structure is uncommon in practice. The donor's typical motive for funding a CRT is to convert appreciated property into a stream of income for life with a charitable remainder; adding a charity to the income stream means the donor's income stream is reduced. But the structure can serve specific purposes — a donor who wants to provide a current income stream to a specific charity (e.g., a community foundation or a specific operating charity) for a defined period, with the remainder going to the same or different charities at the donor's death.

Income tax consequence — the key trap. Despite the intuition that a current income interest payable to a § 170(c) organization should generate an additional charitable deduction at funding, Treas. Reg. § 1.664-3(d) limits the donor's § 170 charitable contribution deduction to the value of the charitable remainder, even when a § 170(c) organization is also among the income beneficiaries. Donors seeking a current charitable deduction for a present-interest gift to charity should use a charitable lead trust or direct gifts, not a CRT structure with a charity as a co-income-beneficiary. The trust itself is exempt under § 664(c)(1) except as to UBTI under § 664(c)(2).

Gift tax consequence. The charitable income interest does qualify for the § 2522 charitable gift tax deduction at funding, even though the parallel income tax deduction is unavailable. The two regimes are not symmetrical here.

Actuarial consequence. Adding a charitable income beneficiary alongside a non-charitable beneficiary does not affect the 10% MRI test in the typical case, because the test is computed by reference to the value of the remainder and the non-charitable beneficiaries' interests.

The structure is doctrinally available but rare and specifically disadvantaged on the income tax side; most donors who want to provide for a charity during life use a charitable lead trust, not a CRT with a charity as one income beneficiary.

Term of Years Used to Extend the Income Stream

A term-of-years CRT can be used to extend the income stream beyond a single life or beyond a joint-and-survivor structure, or to deliver an income stream to a non-spouse beneficiary without using that beneficiary's life as a measuring life. The 20-year statutory cap applies regardless.

The most common configuration is a 20-year term funded by a younger donor as the income beneficiary, where the actuarial term cap gives the donor a more favorable remainder factor than a single life would. A less common configuration uses the term to provide income to a non-spouse beneficiary — e.g., "20-year term-of-years CRT, payable to my child." The child receives the unitrust amount for 20 years, with the remainder to charity at the end of the term. The structure works actuarially (the term is fixed at 20 years regardless of the child's age) and is permitted under § 664(d)(2)(A). But it is a completed gift to the child of the entire 20-year income interest at funding, with no marital deduction analog and no annual exclusion. The donor is funding the child's income stream entirely through the CRT structure.

The structure can be useful in education funding and similar finite-horizon contexts. It is not a substitute for a marital structure and should not be marketed as one.

Zone 3: Where the Income Beneficiary Choice Should Not Be Used

Three categorical configurations should not be used.

Estates and Revocable Trusts as Life-Measured Recipients

Naming the donor's estate or revocable trust as a life-measured income beneficiary fails the duration requirement. An estate is not an "individual" whose life can serve as a measuring life, and a revocable trust terminates at the donor's death by its own terms.

The prohibition is narrower than a categorical "no entities as recipients." A non-individual entity (estate, revocable trust, corporation, partnership) can be a permissible recipient of a CRT for a term of years not exceeding 20. Section 7701(a)(1) defines "person" to include trusts, estates, and entities, and § 664 permits payment to one or more persons for a term of years. The structural prohibition is on using a non-individual's existence as a measure of trust duration, not on naming a non-individual as a recipient under a fixed-term structure.

The configuration sometimes appears in inadvertent drafting — particularly in term-of-years CRTs where the drafter wants to provide that "if the donor dies before the term ends, the remaining payments shall be made to the donor's estate." This downstream provision is permissible (the donor's interest in remaining term-of-years payments is a property interest of the donor's estate at death) and is different from naming the estate as a life-measured beneficiary at funding.

Open Life-Measured Classes

A class of life-measured beneficiaries open to future-born or unascertainable members fails the closed-class requirement of Treas. Reg. § 1.664-3(a)(3)(i). The trust does not qualify as a CRT. This is a drafting error, generally fixable by redrafting to name specific individuals or to close the class as of the funding date. The closed-class requirement does not apply, by its terms, to a CRT whose payment period consists solely of a term of years — but life-measured class structures must satisfy it.

Measuring Lives or Configurations That Fail the Actuarial Tests

A CRUT with a beneficiary configuration producing a remainder factor below 10% is not a CRT under § 664(d)(2)(D); a CRAT failing the 10% MRI test is not a CRT under § 664(d)(1)(D), and a CRAT failing the 5% probability-of-exhaustion test (without Rev. Proc. 2016-42 sample qualified-contingency language) similarly fails. The trust is not qualified, the donor's charitable deduction is denied, and the trust is not exempt under § 664(c). The fix is to redraft before funding — change the payout rate, change the beneficiary configuration, change the structure (e.g., switch from CRUT to CRAT or vice versa, or shift to a term of years, or incorporate Rev. Proc. 2016-42 language for a CRAT). The fix is not available after funding except through qualified reformation under § 2055(e)(3) or comparable relief, which is not always available and is never simple.

This is the most common failure mode in CRT drafting, and the one most directly tied to beneficiary choice. Run the numbers before signing.

Conduit Structures Designed to Evade § 4947(a)(2)(A)

A trust naming an income beneficiary whose terms direct or permit immediate distribution of the unitrust amount to a disqualified person, where the structure is designed to evade the § 4947(a)(2)(A) limits, will be recharacterized. The IRS's general anti-abuse authority and the substance-over-form doctrine support recharacterization. The clean path is to name the actual end-user as the income beneficiary, or to use an intermediate trust only where it serves a substantive non-tax purpose under independent law.

This is rarely a deliberate drafting strategy and more often appears as a structural error in trusts attempting to combine CRT planning with private foundation planning or family LLC planning. The audit risk is not high in absolute terms, but the structural instruction is the same: the income beneficiary should be the substantive end-user of the unitrust amount, not a pass-through entity for a hidden disqualified person.

California Overlay

California's relevant overlay on the income beneficiary question is narrower than its overlay on the trustee question, but it is meaningful in three respects.

Spousal community property analysis. Property funded into a CRT from California community property carries the community character into the trust. The income interest of each spouse in a joint-and-survivor CRT is community property by attribution, with potential implications for divorce, separation, or successor distributions. Drafters should confirm the source of funding (community vs. separate property) and document the character election if a transmutation is intended under Family Code §§ 850 et seq.

Probate Code § 16000 et seq. California trust law imposes fiduciary duties and beneficiary protections that apply to CRTs as to any other trust. The income beneficiary is a beneficiary under California law and has standing to compel proper administration. The remainder charity is also a beneficiary and has standing as well, with parallel oversight by the California Attorney General under Government Code § 12591.

Probate Code § 15800. During the donor's lifetime, where the donor has the power to revoke the trust, the trustee's duty runs to the donor and not to the remainder beneficiary. CRTs are irrevocable by definition, so § 15800 does not apply — the trustee owes duties to the income beneficiary and the remainder charity from the moment of funding. A donor-trustee who treats a CRT as a "my money" arrangement misunderstands the fiduciary structure.

Special needs trust planning. California does not have a single dedicated third-party SNT statute. Probate Code § 3604 is narrower than its name suggests — it governs court-approved trusts funded with a minor's or person-with-disability's money arising from compromise or judgment proceedings, not third-party SNTs generally. Third-party SNTs in California are constructed under general trust law (Probate Code § 15200 et seq.), with public benefits compatibility tested separately under federal SSI rules, federal Medicaid rules under 42 U.S.C. § 1396p, and California Medi-Cal regulations administered by the Department of Health Care Services. The relevant distinction is between first-party SNTs under § 1396p(d)(4)(A) and (C) — which generally require Medicaid payback — and third-party funded SNTs, which are funded with assets belonging to someone other than the beneficiary and (when properly structured) are not subject to Medi-Cal recovery. A CRT-pays-to-second-trust structure under Rev. Rul. 2002-20 must be drafted with attention to which category the second trust occupies.

Summary Table: Income Beneficiary Selection by Scenario

Scenario	Single Donor Life	Joint & Survivor (Spouses)	Non-Spouse Successor	Second Trust for Disabled Child	Term of Years
Single donor, no spouse, no children	✅ Standard	N/A	❌ Gift tax + residual § 2036 exposure	N/A	✅ Acceptable for younger donors
Married couple, adult children, moderate estate	Acceptable	✅ Standard	❌ Use separate plan for children	N/A	Acceptable as alternative
Married couple, disabled child	Acceptable	✅ Standard, plus separately funded SNT	❌	Marginal — only in narrow cases	Acceptable
Single parent, disabled child as sole heir	Acceptable	N/A	❌	✅ Rev. Rul. 2002-20 structure	Acceptable
Married couple, taxable estate (>$15M BEA)	Acceptable	✅ Standard	❌ Residual estate exposure on successor portion	Marginal	Acceptable
Donor with class of named children	N/A	N/A	✅ With closed-class drafting (life-measured) or term flexibility	N/A	✅ More flexibility on class composition
Donor wanting current charitable income deduction	Acceptable	Acceptable	N/A	N/A	Use CLT instead — § 1.664-3(d) limits CRT deduction to remainder
Younger donor (under 50), single	Acceptable but lower deduction	N/A	N/A	N/A	✅ Often preferred (better remainder factor)

Strategic Implications for Practice

The income beneficiary question is a design question, not a documentation question. Many drafting systems present a default beneficiary structure (donor and spouse joint and survivor) without asking whether it is the right structure. For most married couples with moderate estates, it is. For couples with disabled children, taxable estates, blended families, or non-traditional charitable goals, the default may be wrong, and a deliberate analysis is required.

Run the actuarial tests before drafting. The 10% MRI test is mechanical: it depends on payout rate, § 7520 rate at funding, and beneficiary lives. A few minutes with a § 7520 calculator will identify whether a proposed structure clears or fails. A trust drafted without that check — and that fails on funding — is malpractice exposure for counsel. The CalCRUT Deduction Calculator tool published at calcrut.com runs the test for typical CRUT configurations and is a useful first check at intake. For CRATs, evaluate whether to incorporate Rev. Proc. 2016-42 sample qualified-contingency language to bypass the 5% probability-of-exhaustion test.

Coordinate the gift, estate, and charitable deduction analyses with the estate plan. A CRT with non-spouse beneficiaries makes a gift on funding. That gift uses lifetime exemption, generates gift tax, or both. Section 2036 pulls trust corpus into the donor's gross estate at death; the offsetting § 2055 charitable deduction and § 2056(b)(8) marital deduction are available only for charitable remainder and qualifying spousal portions, not for non-spouse successor portions. The donor's available exemption, prior gifts, and projected estate at death must all be reviewed before the beneficiary structure is set.

Resist the "income to me, then to my spouse, then to my children" instinct. This is the most common client request and the most common source of drafting trouble. The first two pieces (joint and survivor) work cleanly. The third piece (children as successors) almost always fails one or more of the regimes — gift tax, residual estate exposure, actuarial test, family flexibility. Counsel should be candid with clients at intake about why the structure does not work and offer the cleaner alternative: joint-and-survivor CRT plus separately funded estate plan for children.

The CRT-pays-to-second-trust structure is a narrow exception, not a default. Rev. Rul. 2002-20 does important work, but it is the right structure only in specific circumstances, and only for the federal CRT qualification question — public benefits eligibility is a separate analysis that the ruling does not resolve. The default for a husband-and-wife couple with a disabled child is joint-and-survivor CRT for the parents plus separately funded third-party SNT for the child. Counsel who default to the Rev. Rul. 2002-20 structure as the standard treatment for disabled-child families are doing the wrong analysis.

Term-of-years structures are underutilized. Younger donors funding CRTs are often steered to single-life or joint-and-survivor structures by default, even where the actuarial term produces a poor remainder factor. A 20-year term-of-years CRT is often the better structure for donors under 55, both for the deduction calculation and for the family's overall liquidity plan. Term-of-years structures also offer regulatory flexibility on class membership and on the use of non-individual recipients that life-measured structures do not.

Practice Notes

Intake questions for income beneficiary selection

Is the donor married? Spouse a U.S. citizen?
Are there minor or disabled children?
What is the donor's projected gross estate relative to the $15M basic exclusion amount?
What is the donor's age, and the spouse's age?
What payout rate is the donor targeting, and is it dictated by cash-flow needs or by deduction maximization?
Are there other natural objects of bounty whom the donor wants to provide for through the CRT, as opposed to outside it?
Does the donor have a specific charity (or class of charities) in mind for the remainder, and does the donor want to provide for any charity during life (recognizing that Treas. Reg. § 1.664-3(d) limits the CRT income tax deduction to the remainder)?
Is the contributed property community or separate property under California law?

Drafting checklist

Each income beneficiary identified by name or by closed class (life-measured) or by class with appropriate definition (term of years)
Each measuring life confirmed in being on the funding date
Trust duration drafted as life/lives, term of years not exceeding 20, or a permissible hybrid formulation under Treas. Reg. § 1.664-3(a)(5)(i); qualified contingencies under § 664(f) drafted to comply
Spousal income interest, if any, drafted to qualify for § 2056(b)(8) and § 2523(g) treatment
Successor non-spouse interests, if any, valued at funding for gift tax purposes and the gift coordinated with the donor's lifetime exemption; residual § 2036 estate inclusion analyzed
10% MRI calculation (CRUT or CRAT) and 5% probability calculation (CRAT, unless Rev. Proc. 2016-42 sample language is incorporated) run and documented before signing
For Rev. Rul. 2002-20 second-trust structures, the second trust drafted to satisfy public benefits eligibility under federal SSI, federal Medicaid (42 U.S.C. § 1396p), and California Medi-Cal rules, with first-party vs. third-party status confirmed
Class beneficiary provisions, if any, drafted to close the class as of the funding date for life-measured CRTs (not required for term-of-years)
Per stirpes substitution provisions, if any, scrutinized for ascertainability problems on a life-measured basis

Red flags during design

A "default" joint-and-survivor structure adopted without a question about disabled children, blended families, or successor goals
A successor income interest in an adult child without the gift tax and residual § 2036 exposure conversation
A single-life CRT with a young donor and a 5% payout, where a 20-year term-of-years structure would produce a better remainder factor
A second-trust-as-income-beneficiary structure adopted as a default for a married couple with a disabled child, without analysis of the joint-and-survivor-plus-separate-SNT alternative
A "class of children" provision used in a life-measured CRT without confirmation that the class is closed
A multi-life consecutive structure not run against the 10% MRI test
A trust-as-income-beneficiary structure (other than a Rev. Rul. 2002-20 second trust for a disabled individual) adopted without articulating the substantive non-tax purpose for the intermediate trust
A CRT marketed to a donor as a vehicle for a "current charitable deduction for income paid to charity" — this misstates Treas. Reg. § 1.664-3(d)

This briefing is provided for educational purposes and reflects federal and California law as of April 2026. It does not constitute legal or tax advice. Income beneficiary selection for a charitable remainder trust involves overlapping income tax, gift tax, estate tax, excise tax, public benefits, and state fiduciary law analyses, and the defensible structure depends on specific facts not addressed in this general treatment. Consult qualified legal and tax counsel before adopting an income beneficiary structure.

Considering a CRT and uncertain about the income beneficiary structure? The income beneficiary decision drives the actuarial mathematics, the gift tax analysis, the residual estate exposure at death, and the family flexibility of the entire structure. For a consultation that treats income beneficiary selection as an integrated design decision rather than a default, schedule a free call.

About CalCRUT. CalCRUT is the charitable remainder trust practice of Klaus Gottlieb, Esq. — JD, MS, MBA — serving the California Central Coast and California statewide.