Charitable Remainder Trust at $10M+ Sale: Defer + Income

The Charitable Remainder Trust is the most underused tax structure in mid-market business-sale planning. For a $10M-plus pre-sale contribution, a properly designed CRT defers $2.38M to $4.76M of immediate federal capital-gains tax (23.8 percent on $10M to $20M of embedded gain), produces a present-value charitable deduction worth $740K to $1.48M of additional tax savings at the 37 percent bracket, and pays the founder a $500K to $800K annual income stream for 25 to 30 years of retirement. The remainder passes to charity (or a DAF named by the donor) at death.

The catch: the contribution is irrevocable, the income stream is partly taxable as ordinary income over time, and the remainder cannot go to family heirs. For founders with strong wealth-transfer motives to children or grandchildren, the CRT is the wrong tool — GRATs, SLATs, and family limited partnerships preserve the transfer route. For founders with charitable intent, retirement-income need, and limited family-transfer pressure, the CRT at $10M+ deal sizes routinely produces $3M to $5M more after-tax lifetime value than an outright sale followed by post-tax personal investment.

How a CRT works in three steps

1. Founder contributes appreciated stock to the CRT. The contribution must occur before a binding sale agreement (same anticipatory-assignment-of-income rules as DAF contributions). The founder receives an immediate charitable deduction equal to the present value of the charitable remainder interest under sec. 664(d).
2. CRT sells the stock. The CRT is exempt from income tax under sec. 664(c) and sec. 501(a). The sale produces no immediate capital-gains tax. The CRT reinvests the proceeds in a diversified portfolio.
3. CRT pays the donor an annual income stream. A CRAT pays a fixed annuity; a CRUT pays a fixed percentage of trust assets revalued annually. Payments continue for the donor's life (or for a term of years up to 20). Each payment is taxed under the four-tier ordering rules of sec. 664(b): ordinary income first, then capital gain, then tax-exempt income, then principal. The deferred capital gain is recognized as it is distributed, not when the CRT sold the stock.

At the donor's death (or end of the term), the remaining trust assets pass to one or more qualified charities. The donor can specify the charitable beneficiary in advance (e.g., a particular operating charity) or name a Donor-Advised Fund as the remainder beneficiary, retaining family advisory privileges over the charitable grants for an additional generation.

CRAT vs CRUT: the structural choice

Sec. 664 defines two CRT structures:

• CRAT (Charitable Remainder Annuity Trust) — sec. 664(d)(1). Pays a fixed dollar amount each year regardless of trust performance. Defined at trust funding (must be 5 percent to 50 percent of initial contribution). No additional contributions allowed after funding.
• CRUT (Charitable Remainder Unitrust) — sec. 664(d)(2). Pays a fixed percentage of trust assets revalued annually. Same 5 percent to 50 percent range. Additional contributions to the same CRUT permitted.

For most $10M+ sale contributions, CRUTs dominate. CRAT's fixed-dollar payments do not adjust for inflation, so a 25 to 30 year payment stream loses substantial real value. CRUT payments rise with trust value, providing implicit inflation protection. The IRS's sec. 7520 rate environment also matters: at low 7520 rates, CRATs face a "probability of exhaustion" test under Rev. Rul. 77-374 that disqualifies CRATs whose payout depletes the trust before the donor's expected death. CRUTs do not face this test because the percentage payout automatically self-adjusts.

The 10 percent charitable remainder test

Sec. 664(d)(1)(D) and (d)(2)(D) require that the present value of the charitable remainder interest be at least 10 percent of the initial contribution. The calculation uses the IRS sec. 7520 rate (currently approximately 4.4 to 5.0 percent), the donor's life expectancy under IRS Table 2010CM, and the payout rate.

The 10% test is the primary constraint on the payout rate. For a 65-year-old donor in a 4.8% sec. 7520 rate environment:

• 5% CRUT: remainder present value ~37% (passes)
• 6% CRUT: remainder present value ~28% (passes)
• 7% CRUT: remainder present value ~21% (passes)
• 8% CRUT: remainder present value ~15% (passes)
• 10% CRUT: remainder present value ~8% (FAILS 10% test)

For older donors or lower 7520 rate environments, the maximum permitted payout rate is lower. For an 80-year-old donor at 4.8% sec. 7520, the 10% test fails at about 9 to 10 percent payout. For a 90-year-old donor, the test may fail at even 7 percent.

The four-tier ordering rules of sec. 664(b)

Each distribution from the CRT to the donor is taxed in a specific order:

1. Tier 1: Ordinary income. Interest, dividends, and other ordinary income earned by the CRT during or before the year of distribution. Taxed at ordinary rates up to 37 percent + 3.8 percent NIIT.
2. Tier 2: Capital gain. Long-term and short-term capital gain realized by the CRT, including the deferred gain from the original stock sale. Taxed at applicable capital-gain rates (typically 23.8% for long-term).
3. Tier 3: Tax-exempt income. Municipal bond interest. Taxed at zero (for federal purposes).
4. Tier 4: Return of principal. Distribution in excess of accumulated income. Not taxed.

The CRT's investment strategy controls the tier composition of distributions. A CRT invested heavily in muni bonds produces lots of Tier 3 income (tax-free distributions). A CRT invested in a diversified equity portfolio produces Tier 1 (dividends) and Tier 2 (gains on rebalancing) income. The original sale gain from the founder's stock contribution sits in Tier 2 and is recognized as distributions exceed Tier 1 ordinary income each year.

Worked example: $12M pre-sale contribution to a 6% CRUT

Maya founded Vertex Biopharma, a Massachusetts C-corp, in 2018 with $150K of basis. The company has grown to $8M of EBITDA. In early 2026, Maya is 64 and expects a strategic sale within 24 months at approximately $30M deal value. She has $8M in retirement accounts, no significant taxable savings outside the business, and wants to ensure $40K-$60K per month of retirement income. She is charitably inclined but does not have children.

Her advisor recommends contributing $12M of pre-sale stock to a 6% CRUT in early 2026, well before any deal discussions begin. The remaining $18M of stock will be sold in 2027 with sec. 1202 exclusion applied to the first $10M.

Pre-sale contribution to CRUT (2026)

• FMV of contributed stock: $12,000,000
• Maya's basis in contributed shares: $60,000 (proportional)
• Embedded gain on contributed shares: $11,940,000
• Immediate federal capital gains tax: $0 (CRT is tax-exempt)
• Present-value charitable deduction at 4.8% sec. 7520 (donor age 64, 6% payout, single life): ~$2,940,000 (24.5% of contribution)
• Maya's 2026 AGI: $1,800,000 (salary, dividends, miscellaneous)
• 30% AGI limit on long-term capital-gain property: $540,000
• 2026 deduction taken: $540,000. Carryforward: $2,400,000 to years 2027-2031
• 2026 federal tax savings: $540,000 × 37% = $199,800

CRT sells the contributed stock in 2027

• CRT sells $12M of stock for $14M (some appreciation during 2026-2027)
• CRT capital gain: $14,000,000 − $60,000 carryover basis = $13,940,000
• CRT federal tax on gain: $0 (CRT is tax-exempt under sec. 664(c))
• CRT reinvests $14M in a diversified portfolio of equities and bonds

Annual income stream — Years 1-5 (Maya age 65-69)

• Year 1 (2027): CRT value $14M. 6% payout: $840,000
• Year 2 (2028): CRT value grows to $14.7M. 6% payout: $882,000
• Year 3 (2029): CRT value $15.4M. 6% payout: $924,000
• Year 4 (2030): CRT value $16.2M. 6% payout: $972,000
• Year 5 (2031): CRT value $17.0M. 6% payout: $1,020,000
• Total 5-year income: $4,638,000

Tax on income stream (assuming Tier 2 capital gain dominates)

The CRT's deferred capital gain ($13.94M) flows out in Tier 2 distributions. Year 1: assume $25K of Tier 1 ordinary income (CRT dividends) and $815K of Tier 2 capital gain. Tax: $25K × 37% + $815K × 23.8% = $9,250 + $193,970 = $203,220.

Maya pays approximately $200K per year of federal tax on the income stream, spread over the next 25 to 30 years. The total deferred-gain tax recognized over Maya's lifetime (assuming life expectancy to age 90) is approximately $5M ($13.94M of deferred gain × ~23.8% rate on Tier 2 distributions). The same gain recognized in 2027 as a lump sum would have cost $3.32M federal tax at 23.8% — but the CRT spreads it over 25 years, providing time-value-of-money benefit.

Compared to outright sale of $12M of stock in 2027 (no CRT)

• Immediate federal tax on $11.94M gain at 23.8%: $2,841,720
• Net cash after tax: $9,158,280
• Maya invests $9.16M in a diversified portfolio at 5% net real return
• Year 1 portfolio: $9.62M. 6% withdrawal: $577,000 pre-tax
• Year 5 portfolio: ~$9.4M (5% return minus 6% withdrawal). 6% withdrawal: ~$564,000
• Total 5-year income from outright sale + investment: ~$2.85M

Cumulative comparison (5-year horizon)

• CRT route: $4,638,000 of pre-tax income + $3M of immediate tax savings + $2.94M of charitable deduction carryforward = combined economic benefit
• Outright sale: $2,850,000 of pre-tax income, $2.84M of federal tax paid up front
• CRT advantage at 5-year mark: ~$1.8M of additional cash flow and ~$2.84M of immediate tax savings

30-year cumulative comparison

• CRT income stream (assuming 5% real growth in trust value, 6% annual payout): $42M+ of cumulative pre-tax income over Maya's expected 30-year life
• Charitable remainder at death (year 30): ~$14M to $18M depending on actual returns
• Total combined value (income + remainder): ~$56M to $60M
• Outright sale + 5% real growth + 6% withdrawal: depletes portfolio in approximately 25 years
• CRT advantage at 30-year horizon: $15M to $25M more total economic value

CRT + QSBS combined strategy on $30M sale

Maya's full plan is to contribute $12M to the CRT and retain $18M of stock for direct sale. The retained stock is QSBS-qualified under sec. 1202.

• Contribution to CRT: $12M, basis $60K (no immediate tax, $2.94M deduction)
• Retained stock sold in 2027: $18M, basis $90K
• Capital gain on retained shares: $17.91M
• Sec. 1202 exclusion: $10,000,000
• Taxable gain: $7.91M
• Federal tax at 23.8%: $1,882,580

Combined: Maya pays $1.88M of federal tax on the $30M sale (effective rate 6.3 percent of total deal), receives $18M minus tax = $16.12M of cash plus a $12M CRT producing $840K-plus of annual income for the rest of her life, plus a $2.94M charitable deduction. The same $30M sale without the CRT would produce $4.07M of federal tax on $17.91M of taxable gain — the CRT saves $2.19M of immediate federal tax plus produces 25+ years of additional income from deferral.

Where CRTs go wrong: common failure modes

• Contribution after binding sale agreement. Same anticipatory-assignment-of-income trap as the DAF strategy. The CRT must own the stock before the LOI is signed.
• Payout rate too high. Fails the 10% remainder test under sec. 664(d). The trust does not qualify as a CRT and the favorable tax treatment collapses.
• 5% probability of exhaustion (CRATs). Under Rev. Rul. 77-374, a CRAT fails if there is more than a 5% probability the trust will exhaust before the donor's death. In low sec. 7520 rate environments, many CRATs fail this test.
• Trust unable to fund payments due to illiquid assets. If the CRT receives closely-held stock with no near-term liquidity event, the trust cannot generate the cash to make required payouts. Either the contribution must be liquid stock, or the trust must be structured as a net-income-with-makeup CRUT (NIMCRUT) under Treas. Reg. sec. 1.664-3(a)(1)(i)(b) that pays the lesser of income or the percentage amount.
• Prohibited transactions and self-dealing. The CRT is subject to sec. 4941 self-dealing rules. The donor cannot lend money to the CRT, sell assets to the CRT, lease assets to the CRT, or otherwise transact with the CRT. Violations trigger excise taxes and can disqualify the trust.
• Inadequate planning for the remainder. The remainder must pass to a qualified charity. Naming a DAF as the remainder beneficiary preserves family advisory privileges over the eventual charitable grants. Naming a specific operating charity locks in that beneficiary; if the charity later dissolves or merges, the remainder distribution must be redirected.

State conformity and state-tax considerations

Most states conform to the federal treatment of CRTs because the CRT itself is a tax-exempt entity under sec. 501(a) and similar state-law exemptions. The income distributed to the donor is taxable to the donor at state ordinary or capital-gain rates depending on the tier.

California, New York, and other high-tax states present specific considerations:

• California: conforms to CRT treatment for state income tax. The donor pays CA tax on the income stream over time. For a California donor in a 13.3% top bracket, the income-stream tax is 13.3% on Tier 1 and 13.3% on Tier 2 (CA does not have preferential LTCG rates).
• State of trust situs. The CRT can be sited in a no-income-tax state (Nevada, Wyoming, South Dakota, Tennessee) by appointing a corporate trustee in that state and ensuring the trust's administrative activities occur there. This is particularly valuable for non-grantor CRTs whose accumulated income (not distributed) would otherwise be taxed by the donor's state. For CRTs that distribute all income, the state-situs benefit is less material.

When the CRT is the right strategy

The CRT is the dominant strategy when:

• The founder has charitable intent and the remainder can pass to charity (or a DAF) at death
• The founder needs a lifetime income stream from the sale proceeds
• The founder has no strong family-wealth-transfer motive that would otherwise consume the assets
• The sale is at least 6 months in the future (to avoid anticipatory-assignment-of-income)
• The founder is age 55-plus (younger donors face longer income streams that may exhaust the 10% remainder test at high payout rates)
• The deal size is $5M-plus (administrative costs and trustee fees are a higher percentage of small contributions)

The CRT is NOT the right strategy when:

• The founder wants to transfer wealth to children/grandchildren (use SLAT, GRAT, or LLC instead)
• The founder does not need lifetime income and prefers a larger immediate deduction (use DAF instead)
• The founder cannot commit to the irrevocable charitable remainder
• The contribution would consist of illiquid closely-held stock with no near-term exit
• The founder's expected retirement bracket is similar to current bracket (deferral arbitrage is small)

Key takeaways

• A pre-sale Charitable Remainder Trust under IRC sec. 664 transfers appreciated stock to a tax-exempt trust before close. The trust sells with no immediate gain, pays the founder a 5-8% annual income stream for life, and gives the remainder to charity at death.
• CRUTs are generally preferred over CRATs for $10M+ contributions because the percentage payout self-adjusts for inflation and avoids the 5% probability-of-exhaustion test that disqualifies many CRATs in low sec. 7520 rate environments.
• The 10% charitable remainder test under sec. 664(d) limits how high the payout rate can go. For most $10M+ contributions in the current rate environment, 5 to 8 percent payouts satisfy the test.
• Distributions are taxed under the four-tier ordering rules of sec. 664(b): ordinary income first, then capital gain, then tax-exempt, then principal. The deferred sale gain is recognized over the donor's lifetime in Tier 2, providing 20-30 years of tax-rate arbitrage if the retirement bracket is lower than the immediate-sale rate.
• CRTs combine well with QSBS sec. 1202: the contributed shares avoid tax entirely (CRT is exempt), preserving the $10M exclusion for application against the founder's retained shares. On a $30M sale with $12M CRT contribution and $18M retained QSBS, combined federal tax can drop from $4M+ to under $2M.
• The CRT is not the right tool for founders with strong family-wealth-transfer motives. SLATs, GRATs, and family LPs preserve the family-transfer route; the CRT directs the remainder to charity at the donor's death.