CRT on a $1M Low-Basis Stock: Income Stream vs Sell Now

The decision, resolved with numbers

Margaret, 68, single, lives in Portland, Oregon. Twenty years ago she put $100,000 into a single tech stock that is now worth $1,000,000. She wants to diversify out of the concentrated position, she has no children, and she already gives to her university every year. Her choice is concrete: sell the stock now and reinvest the after-tax proceeds, or fund a charitable remainder trust (CRT) with the shares.

If she sells now, she realizes a $900,000 long-term gain. At the 20% top LTCG rate plus the 3.8% net investment income tax (NIIT) — a combined 23.8% under IRC §1411 — the federal capital-gains bill is $214,200. Oregon then taxes the gain as ordinary income at up to 9.9%, adding roughly $89,000 more. She is left with about $696,800 to reinvest.

If she funds a CRT instead, the trust — a tax-exempt entity under IRC §664 — sells the stock and pays zero tax on the sale. The full $1,000,000 stays invested. She receives an income stream (a 5% unitrust pays $50,000 in year one), takes a partial charitable deduction of roughly $400,000 in the funding year, and the remainder eventually goes to her university. The lever is simple: she is trading the remainder she does not need for tax-free diversification and lifetime income she does.

What a CRT actually is

A charitable remainder trust is an irrevocable, tax-exempt trust defined in IRC §664. You contribute assets, the trust pays you (or another non-charitable beneficiary) an income stream for a term — either your lifetime or a fixed period up to 20 years — and whatever remains when the term ends passes to one or more charities. Because the trust is exempt, it can sell appreciated assets without recognizing capital gain.

There are two flavors, and the difference matters:

• CRUT (charitable remainder unitrust): pays a fixed percentage of the trust’s value, recalculated every year. If the portfolio grows, your income grows. You can also make additional contributions over time. This is the common choice for appreciated stock because it tracks inflation and growth.
• CRAT (charitable remainder annuity trust): pays a fixed dollar amount set at funding, never changing. No additional contributions allowed. Simpler, but the payout does not keep up with inflation, and CRATs are harder to qualify in low-interest-rate environments because of the 5% probability-of-exhaustion test.

The capital-gains math: CRT vs sell now

This is the heart of the decision. Selling triggers the gain today; the CRT defers it and spreads it across years of payments, taxed only as the income comes out. Here is Margaret’s side-by-side on the $1,000,000 position with a $100,000 basis.

The CRT keeps roughly $303,000 more capital working on day one (the avoided $214,200 federal plus ~$89,000 Oregon). That delta compounds for the rest of Margaret’s life inside a tax-exempt trust. The cost is that the remainder — whatever is left when she dies — goes to her university instead of to an estate or heirs.

How the payout is taxed: the four-tier rule

Deferring the gain does not make it disappear. CRT distributions carry out the trust’s income under the worst-in, first-out ordering rules of IRC §664(b). Each annual payment is taxed in this priority:

1. Ordinary income first (interest, non-qualified dividends) — taxed at your bracket.
2. Capital gains next — this is where Margaret’s deferred $900,000 gain comes out, taxed at LTCG rates as it is distributed.
3. Tax-exempt income (municipal-bond interest) third.
4. Return of principal last — tax-free.

Because the gain is spread over many years of $50,000-ish payments rather than recognized all at once, Margaret may stay in the 15% LTCG bracket (single, taxable income $48,351–$533,400 in 2026) instead of the 20% bracket, and she may stay under the $200,000 NIIT threshold entirely. The deferral can become a permanent rate reduction.

The deduction math, and why it is only partial

You do not deduct the full $1,000,000. The IRS lets you deduct the present value of the remainder interest — the actuarial estimate of what charity will eventually receive. That value is driven by three inputs: the IRS §7520 rate (published monthly), your payout rate, and the trust term or beneficiary age.

• Higher payout rate → more goes to you → smaller remainder → smaller deduction.
• Older beneficiary / shorter term → charity gets the remainder sooner → larger deduction.
• Higher §7520 rate → larger deduction for a CRUT.

For a 68-year-old funding a 5% lifetime CRUT, the remainder deduction commonly lands around 35–45% of the contribution — roughly $350,000–$450,000 here. Because the gift is appreciated stock to a CRT, the deduction is capped at 30% of adjusted gross income per year under IRC §170(b), with a 5-year carryforward for any excess.

The two qualification rules that disqualify bad CRTs

A CRT only earns tax-exempt status if it clears two hard tests in IRC §664. Get either wrong and the trust is void from inception.

1. The 5%–50% payout band. The annual payout must be at least 5% and no more than 50% of trust value. Five percent of $1,000,000 is the $50,000 floor; almost no one funds a CRT near the 50% ceiling because it leaves nothing for charity.
2. The 10% remainder rule. At funding, the present value of the charitable remainder must be at least 10% of the amount contributed. A payout rate set too high, or a beneficiary too young, can push the projected remainder below 10% and disqualify the trust. This is the most common reason an aggressive CRUT fails — people chase income and starve the remainder.

CRT vs donor-advised fund: the real fork

The most common alternative people compare is the donor-advised fund (DAF). Both avoid the $214,200 capital-gains tax. The difference is whether you get money back.

If Margaret wanted only the gift and the biggest possible deduction, the DAF wins — full fair-market-value deduction, near-zero administration. But she needs income. The CRT is the only structure that avoids the gain and sends her ~$50,000 a year. That is the decision point: income stream needed, choose CRT; no income needed, choose DAF.

What most people get wrong about CRTs

The biggest myth is that a CRT “eliminates” capital-gains tax. It does not eliminate it — it defers it and changes who pays when. The trust sells tax-free, but the $900,000 gain rides along inside the trust and is taxed to you as it flows out through the four-tier rules. The win is timing and rate arbitrage: spreading a $900,000 gain over 15–20 years of payments can keep you in the 15% LTCG bracket and below the NIIT threshold, instead of paying 23.8% in a single year. The benefit is real, but it is a deferral-plus-rate play, not an erasure.

The second misunderstanding: people assume the CRT pays a fixed amount forever. A CRUT does not — it pays a percentage of a moving balance. If markets fall, your $50,000 falls too. If they rise, it grows. Choose a CRUT for growth and inflation protection; choose a CRAT only if you want a locked dollar amount and accept it will erode in real terms.

The third trap is the 10% remainder rule. A donor who insists on a 9% or 10% payout to maximize income can blow past the test and disqualify the trust entirely — losing the deduction and the gain deferral. The payout rate is not a dial you turn to taste; it is constrained by the math.

When a CRT is the wrong tool

• You want the asset to go to your kids. The remainder must go to charity. If heirs are the priority, a CRT is the wrong structure — look at step-up in basis at death (IRC §1014) instead, which wipes the gain for heirs entirely.
• You need the principal back. A CRT is irrevocable. You get the income stream, never the lump sum. If you might need the $1,000,000 itself, do not fund a trust with it.
• The position is small. Setup runs $3,000–$8,000 plus annual trustee and tax-prep costs. On a $50,000 position the friction outweighs the benefit; bunching gifts through a DAF is the lighter tool.
• You have minimal charitable intent. If you would not otherwise give a meaningful sum to charity, the remainder you forfeit is a real economic cost, not a freebie.

The estate angle

Assets in a CRT are removed from your taxable estate — the remainder qualifies for the unlimited estate charitable deduction under IRC §2055. For 2026 the federal estate exemption is $13.99M per individual ($27.98M for a married couple with portability), so most people will not owe federal estate tax regardless. The estate benefit bites harder at the state level: Oregon taxes estates over just $1,000,000, and Massachusetts over $2,000,000. For Margaret in Portland, moving $1,000,000 out of her taxable estate is a meaningful state-estate-tax saving on top of the income-tax math.

The decision lever

Run it as one question: do you want income from this money, and are you willing to give the remainder to charity? If yes to both, the CRT converts a $1,000,000 low-basis stock position into a tax-free $1,000,000 reinvestment, a ~$50,000 annual income stream, a ~$400,000 deduction, and a removed-from-estate asset — while a sell-now would have handed $214,200 in federal tax (plus ~$89,000 to Oregon) to the government before you reinvested a dollar. If you need the principal back or want the asset for heirs, skip the CRT and look at holding for step-up or selling and paying the 23.8%. The number that decides it is the $303,000 of capital the CRT keeps working on day one against the remainder you agree to give away.