For executives and entrepreneurs holding highly appreciated assets, the need for diversification becomes increasingly important. Selling stock outright, however, can incur a sizable tax bill—making it difficult to balance concentration risk with long-term portfolio preservation.
But for those interested in charitable giving, there may be a way to address the tax concerns associated with highly appreciated assets and give meaningfully over time.
A charitable remainder trust (CRT) is a sophisticated estate and tax planning tool that allows individuals to avoid capital gains tax, receive a charitable deduction, and generate income from appreciated assets. In the right context, a CRT can convert what would otherwise be taxable gains into philanthropic opportunity and income stability.
The Purpose of a Charitable Remainder Trust (CRT)
Let’s say you hold a concentrated position in a single stock with a low cost basis. Selling shares of this appreciated stock outright would likely trigger significant capital gains tax.
With a CRT, you can avoid the immediate tax impact, take a charitable deduction, and still receive income from the trust either for the rest of your life (or the life of a beneficiary) or for a term of up to 20 years.
Here’s how it works:
Establish the trust: A CRT is an irrevocable trust, meaning the assets contributed to it are deemed to be outside of your estate. This also means assets can not be removed at will once added by the donor (you).
Contribute assets: When you contribute appreciated stock in-kind to a CRT, the transfer is not treated as a sale, and therefore not a taxable event. The charitable trust, in turn, can sell the shares and reinvest the full proceeds without incurring capital gains tax.
Take the deduction: As the donor, you receive a charitable income tax deduction. This amount of the deduction is determined based on the present value of the remaining interest on the date of the contribution (this also takes into consideration the fact you will be receiving income from the CRT for several years).
For example, if you donate an asset worth $500,000 and the “remainder interest” to the charity is $50,000, the tax deduction would be for the $50,000 amount (not the full $500,000).
This deduction can be used in the year of the contribution and carried forward for up to five additional years if it isn’t fully utilized.
Receive income: During the term of the trust, you—or other designated income beneficiaries—may receive an annual distribution from the trust. This payout generally falls between a minimum of 5% and 50% of the trust’s fair market value.
Donate to charity: Following your death, the death of another beneficiary, or at the end of a fixed term (up to 20 years), the remaining assets in the trust are transferred to one or more qualified charitable organizations of your choosing (or to a DAF if properly structured).
Reduce your estate: In addition to the income and deduction benefits, the assets contributed to an irrevocable trust (like a CRT) are legally separated and removed from your taxable estate. If your estate is close to or currently exceeds the federal estate tax exemption limit (or state exemption limits, if applicable), a CRT can also help reduce potential estate tax liability.
This combination of benefits—tax deferral, income generation, charitable impact, and estate planning efficiency—makes CRTs a compelling option for those with both philanthropic intent and appreciated assets.
The Three Types of CRTs
While all CRTs share the same core structure, there are several variations, each suited to different planning goals.
Charitable Remainder Annuity Trust (CRAT)
A CRAT pays a fixed dollar amount to the income beneficiary each year, calculated as a percentage of the initial trust value. For example, a $1 million CRAT with a 5% payout rate would distribute $50,000 annually for the duration of the trust.
The amount you (or another beneficiary) receive from a CRAT remains consistent, regardless of how the trust’s investments perform. Having a fixed payment structure can provide beneficiaries with a sense of financial stability (much like a traditional annuity), making it an attractive option for individuals who prioritize predictable income.
However, there are trade-offs. Namely, a CRAT cannot accept additional contributions once the trust is established.
Charitable Remainder Unitrust (CRUT)
While a CRAT pays a fixed rate annually to beneficiaries, a CRUT pays a fixed percentage of the trust’s assets, and the amount is revalued annually. If the trust grows, your income grows. If it declines, so does your distribution.
Generally speaking, a CRUT offers more flexibility than a CRAT. It allows for additional contributions, which is particularly advantageous for those who expect their financial situation or giving capacity to evolve. Because the trust is revalued annually, any appreciation in the trust’s assets directly translates into higher annual distributions, aligning the trust’s performance with the beneficiary’s income over time.
A variation of the CRUT, the Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT), can be especially useful when funding a trust with illiquid or non-income-producing assets.
In a NIMCRUT, the trust pays the lesser of its net income or the fixed unitrust percentage. This enables more flexible income distributions based on actual earnings.
If the trust doesn’t generate enough income to meet the required payout in a given year, it’s tracked and can be “made up” in future years when the trust earns more than the required distribution.
This make-up provision can be especially useful for donors who contribute non-dividend-paying stock or other assets that may not initially produce income but are expected to appreciate or generate returns later on. It enables the trust to delay significant income distributions until the assets begin producing income, which can potentially lead to more efficient tax and income planning over time.
Flip CRUT
For those contributing illiquid assets such as real estate or private company stock or do not need income immediately, a Flip CRUT may be an appealing option. Initially, the trust functions as a NIMCRUT, distributing only the net income it earns, which is typically minimal or nonexistent when the asset is not producing income. This allows the donor to defer receiving taxable income distributions until later (ideally, at a more opportune time).
Once a specific triggering event occurs—most commonly the sale of the illiquid asset—the trust “flips” into a standard CRUT. At that point, it begins distributing a fixed percentage of the trust’s value each year, based on annual revaluation of the trust assets.
This flip mechanism provides meaningful control over the timing of income, helping align the CRT’s benefits with the donor’s financial and tax planning goals. A Flip CRUT can also be funded with assets that might not initially support consistent distributions—essentially expanding the types of property that can be strategically used in CRT planning.
Tax Treatment of CRTs
From a tax perspective, the CRT offers a rather appealing combination of benefits: capital gains deferral, charitable deduction, and income and estate tax planning.
When appreciated stock is contributed to a CRT, you receive a partial charitable income tax deduction for the year the contribution is made and carry forward any unused portion for up to five years.
Once the trust sells the contributed stock, it does so without incurring capital gains tax because it is a tax-exempt entity. The full proceeds of the sale of stock are able to be reinvested.
While the trust itself is not taxed, the income you receive as a beneficiary is taxable and reported on a Schedule K-1.
Taxes are ranked in a four-tier system defined by the IRS, which prioritizes the most highly taxed income first. The tiers include:
- Ordinary income (ex. Dividends and interest)
- Capital gains
- Tax-exempt income (ex. Municipal bond interest)
- Return of principal or “corpus”
Distributions are deemed to come first from the highest-taxed category. This means that if the CRT has realized capital gains, those gains will be taxed to you as they are distributed, even though the trust did not owe tax on the sale itself. So while the CRT doesn’t eliminate tax, it does defer and potentially spread it over time.
Designing a CRT: A Comparison
Here’s a simple comparison of two scenarios: one where appreciated stock is sold outright and reinvested, and another where the stock is transferred to a CRT first.
Scenario 1: Sell the Stock Directly
Let’s say for this first scenario, you choose to sell a highly appreciated stock outright before reinvesting the proceeds and withdrawing annually for 20 years.
The original stock is valued at $1,000,000 and has a cost basis of $50,000.
Assuming a capital gains tax rate of around 23.8%, your tax bill will come out to around $226,100.
$1,000,000 FMV – $226,100 capital gains tax = $773,900 net proceeds.
Let’s assume you’re able to reinvest the $773,900 proceeds and earn 7% annually over the next 20 years. During this time, you take a 10% withdrawal each year.
Your total distributions would come to around $1,184,000, with a final remaining value of $423,000 (which you may choose to donate to charity or do something else with).
Scenario 2: Contribute to a CRT
Now instead of selling that highly appreciated stock outright and reinvesting, let’s say you transferred it into a CRT and received an approximate charitable deduction of $130,000.
The CRT is able to sell the stock and does not owe capital gains tax on the proceeds of the sale. This enables the trust to reinvest the full $1,000,000, which again earns 7% annually. You receive a 10% unitrust payout each year for 20 years.
In the first year, your payout distribution comes to around $107,000. By the end of the 20-year period, your total distributions equal around $1,567,000. The account is left with another $600,000, which gets donated to a charity of your choice.
In this hypothetical, the CRT produces more after-tax income over time and leaves a meaningful charitable legacy. Keep in mind real-world variables (such as portfolio returns, tax brackets, and the structure of the CRT) will impact results.
Who Should Consider a CRT?
CRTs are not for everyone. They are a complex legal entity that require initial administrative costs, ongoing oversight, and stringent recordkeeping with complex tax rules. But for some people, the tax benefits may be worth the legwork.
Charitable remainder trusts are best suited for those holding highly appreciated, low-basis assets—such as company founders, early employees, or long-term investors—who are looking for a strategic way to diversify without immediately triggering capital gains taxes.
CRTs are also suitable options for those seeking income replacement in retirement or following a liquidity event, as well as philanthropically inclined individuals who wish to support charitable causes while still retaining income from the donated assets. Additionally, CRTs offer potential estate planning advantages for those looking to reduce their taxable estate.
That said, a CRT may not be appropriate in all situations. If you don’t need income from the asset, if the asset has not appreciated significantly, or if you prefer to maintain full control over the asset and how it’s invested, a CRT may not be the right fit.
Similarly, if the administrative costs and complexity of the trust outweigh the tax or philanthropic benefits, other giving strategies, such as a donor-advised fund (DAF), might be a better alternative. A DAF offers a larger immediate charitable deduction but does not provide income back to the donor. CRTs, on the other hand, are better suited for those seeking both income and charitable benefits.
Is a CRT Right For You?
A Charitable Remainder Trust may be able to help you diversify appreciated assets without incurring immediate taxes, generate income over time, and make a lasting charitable contribution. But they involve the utilization of complex trust tools that require thoughtful planning and the help of a knowledgeable professional to establish.
We’ve helped those who are looking to address concentration risk from employer stock explore such charitably-oriented and tax-focused options, like CRTs.
To determine whether a CRT fits into your financial plan, schedule a call with our team. We’ll help you evaluate the options, run the numbers, and design a strategy aligned with your goals and values.
This material is intended for informational/educational purposes only and should not be construed as investment, tax, or legal advice, a solicitation, or a recommendation to buy or sell any security or investment product.
The information contained herein is taken from sources believed to be reliable, however accuracy or completeness cannot be guaranteed. Please contact your financial, tax, and legal professionals for more information specific to your situation. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions. This content is provided as an educational resource.
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