Charitable Remainder Trusts: Turning an Appreciated Asset Into Income, a Deduction, and a Gift

A single trust that can convert a low-basis stock position or an appreciated investment property into a stream of income for decades, then pass what's left to a cause you care about.

Sell a highly appreciated asset outright and the capital gains bill arrives all at once, often at the worst possible moment for your tax bracket. Hold onto it indefinitely and you're carrying concentration risk, or missing the income it could otherwise generate. A charitable remainder trust (CRT) is one of the few structures built specifically to sit between those two problems — it lets you contribute the asset, have the trust sell it without triggering an immediate capital gains tax to you personally, and collect a defined payout for years while a charity waits for what remains.

It's a more involved tool than a donor-advised fund or a qualified charitable distribution, and it isn't the right fit for every appreciated position. But for the right asset and the right goal, the mechanics are worth understanding in some detail.

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The basic structure

A CRT is an irrevocable trust you fund with cash, securities, or certain other property. The trust pays income to you (or another named beneficiary) for a term of years — no more than 20 — or for the beneficiary's lifetime. When the term ends, whatever remains in the trust passes to one or more charities you've designated in advance.

Because the trust itself is tax-exempt, it can sell an appreciated asset inside the trust without an immediate capital gains hit. That's the central advantage: a $2 million stock position with a $400,000 cost basis can be sold inside the trust, reinvested in a diversified portfolio, and used to generate income across the full $2 million rather than the roughly $1.5 million that would remain after paying capital gains tax on an outright sale.

CRATs vs. CRUTs

There are two forms, and the difference determines how flexible the income stream is.

Charitable Remainder Annuity Trust (CRAT)

A CRAT pays a fixed dollar amount each year, set when the trust is created and unaffected by how the trust's investments perform afterward. It offers predictability, but no additional contributions can be made to a CRAT once it's funded, and a market downturn doesn't change the payout — which can strain the trust's principal in a weak year.

Charitable Remainder Unitrust (CRUT)

A CRUT pays a fixed percentage of the trust's value, recalculated annually. Payments rise and fall with the portfolio, and additional contributions can be made over time. Most CRTs set up today are CRUTs, largely because the variable payout adjusts with the trust's actual performance instead of locking in a number that may not age well.

The rules that shape the payout

Two IRS requirements limit how a CRT can be structured, and both are worth understanding before locking in a payout rate or term.

• The payout rate must fall between 5% and 50% of trust value. In practice, most CRTs are set in the 5% to 8% range, because a higher payout rate erodes the charitable remainder and can conflict with the next rule.
• The present value of the charitable remainder must equal at least 10% of the trust's initial funding. This is calculated using IRS actuarial tables and the applicable federal rate at the time the trust is funded (the Section 7520 rate). A higher payout rate, a longer term, or a younger income beneficiary all make it harder to clear this threshold — sometimes forcing a lower payout rate than originally planned.

How distributions get taxed

CRT distributions follow a specific ordering system often described as 'worst in, first out.' Each dollar paid to the income beneficiary is characterized, in order, as: ordinary income first, then capital gains, then any tax-exempt income, and finally a tax-free return of principal. Practically, this means a CRT funded with a large embedded capital gain will typically distribute several years of capital-gains-taxed income before any principal comes out tax-free — so a CRT rarely eliminates the tax on the original gain. It spreads that tax over the years the income is received instead of triggering it in a single year.

An illustration

Consider a hypothetical business owner, Marcus, age 58, holding a concentrated position of company stock worth $1.5 million with a cost basis of $200,000. Selling outright would trigger a substantial long-term capital gains bill in a single tax year, on top of his ordinary income from the business he still runs. Instead, Marcus funds a CRUT with the stock, structured to pay him 6% of trust value annually for life. The trust sells the stock without an immediate tax event, reinvests in a diversified portfolio, and begins paying Marcus roughly $90,000 in the first year, adjusting annually with the trust's value. He also receives an upfront income tax deduction for the present value of the eventual gift to his chosen charity — subject to IRS limits based on his adjusted gross income and the type of asset contributed. When the trust term ends, the remaining balance goes to the university scholarship fund he named at the outset.

This is a hypothetical example for illustration only, not an actual client outcome, and every CRT's numbers depend on the asset, the payout rate, the beneficiary's age, and prevailing interest rates at funding.

Is a CRT the right fit for your situation?

A charitable remainder trust asks you to give something up — the assets are irrevocably out of your estate once the trust is funded, and the income stream, while often substantial, isn't the same as owning the asset outright. The questions worth answering before signing anything: How large is the embedded gain relative to your other planning goals? Does the charitable intent stand on its own, separate from the tax benefit? Would a donor-advised fund or an outright sale accomplish more with less complexity? These are questions worth exploring with both a financial planner and a tax or estate attorney, since a CRT is a legal structure with drafting costs and ongoing administration, not a form you fill out once.

Schedule a complimentary consultation with Ben Loughery

Ben Loughery is a CERTIFIED FINANCIAL PLANNER® and founder of Lock Wealth Management, based in Atlanta, GA. He specializes in retirement income planning, tax optimization, and helping clients build financial confidence at every stage of life.