A highly appreciated asset can create a planning dilemma: selling unlocks liquidity but may trigger substantial capital gains tax. A charitable remainder trust, or CRT, can offer another path. When properly structured and funded before a sale becomes binding, a CRT can generally sell appreciated investment property without immediate federal capital gains tax at the trust level, reinvest the proceeds and make payments to designated beneficiaries. The donor may also qualify for a partial charitable deduction. We view this as a charitable planning strategy with tax benefits—not a way to retain full ownership while eliminating taxes.

How a charitable remainder trust works

A CRT is an irrevocable split-interest trust governed by Internal Revenue Code Section 664. It provides payments to one or more noncharitable beneficiaries, often the donor and a spouse, for their lifetimes or a fixed term of no more than 20 years. When that period ends, the remaining assets pass to qualified charitable beneficiaries.

The donor transfers property to the trust, and the trustee manages or sells it. Under Section 664(c), a qualifying CRT is generally exempt from federal income tax. That treatment can allow the full sale proceeds, before transaction expenses, to remain invested rather than being reduced by immediate capital gains tax.

The distinction is important: gains usually are deferred, not erased for the income beneficiaries. Taxable income and gains accumulate in the trust's accounting records and can become taxable when distributed. The charitable remainder is permanently dedicated to charity.

Choosing between a CRAT and a CRUT

  • Charitable remainder annuity trust, or CRAT: Pays a fixed dollar amount annually, based on the initial contributed value. Additional contributions are not permitted.
  • Charitable remainder unitrust, or CRUT: Pays a fixed percentage of assets revalued annually. Payments fluctuate with trust value, and additional contributions may be permitted.
  • Specialized CRUT designs: Net-income and flip provisions may help address assets that produce little cash before sale. These designs require careful drafting under Treasury Regulation Section 1.664-3.

A standard payout generally must be at least 5% and no more than 50%. A higher payout is not automatically better: it reduces the charitable remainder, can threaten qualification and leaves less capital available for future growth.

Who qualifies—and when the strategy fits

A CRT may fit a donor with substantial appreciated assets, a genuine charitable objective and sufficient outside liquidity. Publicly traded securities are often straightforward candidates. Real estate and closely held business interests require deeper review of liabilities, transfer restrictions, income character and sale timing.

  • Charitable remainder test: The actuarial value of the charitable remainder must equal at least 10% of the initial fair market value contributed. Additional CRUT contributions require their own testing.
  • Permitted payment period: Payments must satisfy Section 664's lifetime or term-of-years requirements. Beneficiary ages affect the actuarial calculations.
  • CRAT exhaustion test: A lifetime CRAT generally must address the IRS's 5% probability-of-exhaustion rule. An approved qualified contingency may provide an alternative under Revenue Procedure 2016-42.
  • Qualified charitable destination: The remainder must benefit an eligible charity, with beneficiary provisions coordinated with the applicable deduction rules.

We generally would not recommend a CRT for someone who needs unrestricted access to the principal, expects heirs to inherit the contributed assets or lacks a meaningful charitable goal. The transfer is irrevocable, and the donor cannot later withdraw the assets for personal use.

How the charitable deduction is determined

The deduction is not the entire value transferred. Under Section 170(f)(2), the donor generally deducts the present value of the charity's remainder interest, subject to applicable limitations. The calculation uses the payment design, beneficiary ages or trust term, and the Section 7520 rate. Eligible donors can generally elect the funding month's rate or either of the preceding two months' rates.

For long-term capital gain property in a common CRT benefiting a public charity, the deduction generally faces a 30% adjusted gross income limitation; other charitable beneficiaries can produce a 20% limitation. Cash and other property follow different limits and valuation rules. Unused deductions generally carry forward for five succeeding tax years.

For individual itemizers beginning in 2026, Section 170 also imposes a 0.5%-of-contribution-base floor, generally measured using AGI, with special carryover coordination. Additional rules can limit the tax benefit of itemized deductions for top-bracket taxpayers. We model the usable deduction under current law rather than multiplying the actuarial amount by a headline tax rate.

The numbers: appreciated stock in a CRUT

Assume a donor contributes publicly traded stock worth $2 million with a $400,000 tax basis to a qualifying 5% CRUT before any binding sale obligation. The trustee then sells the stock for $2 million.

  • Embedded gain: $1.6 million.
  • Direct-sale comparison: If all gain were subject to a 20% federal long-term capital gains rate and the 3.8% net investment income tax, federal tax would be $380,800, before state tax.
  • CRT sale: Assuming no unrelated business taxable income, the trust generally owes no immediate federal income tax on that sale.
  • Annual payment: A full-year payment would be $100,000 if the applicable annual valuation were $2 million. Actual payments depend on valuation, timing and required adjustments.

The charitable deduction requires a separate actuarial calculation; a 5% payout alone does not establish its value. Future payments also are not necessarily tax-free. This comparison shows potential investment deferral, not guaranteed savings or investment performance.

How beneficiary payments are taxed

Section 664(b) applies a four-tier distribution system: ordinary income first, then capital gains, then other income, and finally corpus. Undistributed amounts carry forward within those categories, and detailed ordering rules apply within tiers.

Consequently, a trust holding accumulated sale gains may distribute taxable capital gains for years. The 3.8% net investment income tax may also apply to beneficiaries. For California residents and California-source property, we separately evaluate state taxation and trust reporting; federal exemption is not a blanket state-tax conclusion.

Common mistakes and IRS scrutiny

A CRT must be funded early enough that the donor has not already earned or fixed the right to the sale proceeds. Signing the trust before closing does not, by itself, solve assignment-of-income risk.

We review negotiations, purchase agreements, approvals and remaining contingencies with legal counsel. A prearranged sale can cause the IRS to tax the donor on the gain despite the contribution.

Asset selection creates additional risks. Debt-encumbered property can raise bargain-sale, self-dealing and debt-financed income issues. Active business income and some pass-through investments can generate unrelated business taxable income. Under Section 664(c)(2), a CRT owes an excise tax equal to its UBTI—not merely ordinary income tax on that amount. A CRT is generally not an eligible S corporation shareholder.

Loans, personal use of trust property and transactions involving donors or related parties can trigger self-dealing rules under Sections 4941 and 4947. Noncash deduction substantiation may require Form 8283 and a qualified appraisal under Section 170(f)(11), subject to exceptions such as qualifying publicly traded securities. Annual administration generally includes Form 5227, beneficiary Schedules K-1 and reliable valuation and tax-tier records.

How we implement CRT planning

We compare a direct sale, an outright charitable gift and appropriate CRT designs using projected payments, deduction utilization, taxes, costs and the expected charitable remainder. We coordinate asset diligence, valuation and transfer timing with licensed attorneys and investment professionals. SWITCH is not a law firm and does not provide legal advice; legal counsel drafts the trust and handles legal execution. Our team coordinates tax modeling, substantiation and ongoing compliance planning.

Request a free consult with our team to evaluate whether a charitable remainder trust fits your assets, income needs and charitable goals.