On July 8, 2026, the Department of the Treasury and the Internal Revenue Service issued final regulations identifying certain Charitable Remainder Annuity Trusts (“CRATs”) as tax avoidance or “listed” transactions. Charitable remainder annuity trusts allow individuals to donate to charities and receive income payments in return. The designation as a “listed transaction” requires material advisors and certain participants to file disclosures with the IRS, with penalties imposed for failure to do so. Charities receiving the remainder of these trusts will generally not be subject to these reporting rules.
In the proposed regulations (and subsumed into the final regulations), the IRS identified two tax avoidance schemes using CRATs: (i) beneficiaries avoiding recognition of ordinary income or capital gain by using a single premium immediate annuity, and (ii) trustees taking the position that a transfer of appreciated property to the trust gives it a stepped-up basis to fair market value.
When the proposed regulations were released, tax professionals opined that the identified abusive uses of CRATs were not common.