WASHINGTON, D.C. — The U.S. Department of the Treasury and Internal Revenue Service have finalized regulations classifying certain charitable remainder annuity trust (CRAT) arrangements as listed tax-avoidance transactions, requiring taxpayers and advisers involved in the transactions to disclose them to the IRS or face potential penalties.
The rule, effective July 9, expands the IRS’ enforcement tools against trust structures the agency contends are being used to improperly avoid ordinary income and capital gains taxes following the sale of appreciated assets. The regulations were published in the Federal Register as Treasury Decision 10051 (91 FR 42353).
The regulations target arrangements in which taxpayers transfer appreciated property—such as interests in closely held businesses or business assets—to a trust purporting to qualify as a CRAT. After the trust sells the property, the proceeds are used to purchase a single premium immediate annuity, and beneficiaries allegedly misapply Internal Revenue Code provisions to report substantially less taxable income than required.
Treasury and the IRS concluded those transactions improperly interpret the tax treatment of CRAT distributions under Section 664 of the Internal Revenue Code. By designating them as listed transactions, the agencies require participants and material advisers to file disclosure forms with the IRS. Failure to disclose can trigger civil penalties under existing tax law.
“The Internal Revenue Service remains vigilant and is watching out for tax avoidance schemes,” IRS Chief Executive Officer Frank J. Bisignano said. “Taxpayers should not forget that the IRS will continue to combat abusive tax shelters and transactions.”
The final rule largely adopts regulations first proposed in March 2024 without substantive changes.
Treasury received one public comment supporting the proposal. The commenter agreed the transactions misapply CRAT tax rules and argued that charities named as remainder beneficiaries typically have no role in promoting or implementing the arrangements.
The final regulations preserve an exemption for charities whose only connection to the trust is serving as the designated charitable remainderman. Those organizations are not treated as participants in the listed transaction or parties to a prohibited tax shelter solely because they are named to receive the trust’s remaining assets.
Treasury and the IRS also declined to amend the regulations to further clarify when a charitable organization could become a material adviser, concluding existing rules already distinguish between providing general information about legitimate charitable remainder trusts and promoting abusive tax strategies.
According to the agencies, the regulations are expected to affect between 50 and 100 taxpayers annually. Treasury certified the rule will not have a significant economic impact on a substantial number of small entities, noting that most affected parties are individuals and trusts and that the reporting requirements rely on existing disclosure forms.
Material advisers generally must report listed transactions using Form 8918, while participating taxpayers must disclose them using Form 8886 as required under existing IRS reporting rules.
The final rule is available in the Federal Register as Published Document 2026-13851 (91 FR 42353).
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