The IRS just closed the door on a popular CRAT workaround

If you've had a client ask about pairing a Charitable Remainder Annuity Trust (CRAT) with a single premium immediate annuity (SPIA) to soften the tax bill on a big sale, you'll want to sit down with this one. On July 8, the Department of the Treasury and the Internal Revenue Service (IRS) finalized regulations naming certain CRAT arrangements as listed transactions; the regulations took effect July 9, 2026. The regs are not a small administrative footnote. They're the IRS telling the profession, in writing, that it's seen this move before and isn't buying it.

A trust that’s normally perfectly fine    

A CRAT itself is nothing new or shady. Set up correctly, it lets a donor transfer assets to a trust, collect an income stream for a term of years or for life, and eventually pass what's left to a charity. Plenty of clients use them the way they're intended. The version the IRS is going after is different.

Here's the pattern: Someone transfers property that's appreciated well beyond its basis, maybe an interest in a closely held business or assets tied up in a trade or business, into a purported CRAT. The trust turns around and sells the property, then uses the proceeds to buy a SPIA. From there, the taxpayer or beneficiary reports the annuity payments as taxable only to the extent of the SPIA's income portion, which conveniently makes most of the original gain vanish on paper.

Where the math falls apart

That reading leans on §§72 and 664 of the Internal Revenue Code (IRC), and it stretches both past what they actually say. Section 664 lays out a tiered system for taxing CRAT distributions to the beneficiary, working through ordinary income, capital gain, other income and corpus in order. Section 72 governs how annuity payments get taxed in general. Mashing the two together to argue that gain simply disappears was never a fair application of either provision, and the IRS has now made that official.

What “listed transaction” actually triggers

Once something is labeled a listed transaction, the disclosure clock starts running for taxpayers and material advisors alike. Participants typically need to file Form 8886, Reportable Transaction Disclosure Statement, and material advisors carry their own filing and recordkeeping duties on top of that. Missing that step isn't a small oversight either; the penalties for failing to disclose a listed transaction apply on their own, separate from whatever happens with the underlying tax position.

IRS Chief Executive Officer Frank Bisignano said the agency remains focused on tax avoidance schemes and will keep pursuing abusive shelters. This rule follows proposed regulations the IRS put out earlier flagging these same CRAT structures, so nobody in the profession should be surprised by where this landed.

If a client’s file looks like this

If you have a client whose CRAT also holds a single premium immediate annuity (SPIA), or someone's pitched a similar structure recently, it's worth pulling the file and looking closely at how the income has actually been reported. Check it against the tiered rules under §664 rather than a shortcut that trims down what's reportable. If the arrangement matches the pattern above, determine whether the client has a Form 8886 disclosure obligation, including whether the special deadline for a previously filed return applies. Also confirm whether a material advisor is involved.

It's also just a good excuse to circle back on any CRAT planning from the last few years. A quiet review now beats an unpleasant letter from the IRS later.