Charitable Remainder Trust to Avoid Capital Gains: The Tax Is Deferred, Not Erased.

A founder with a signed letter of intent asked me whether a charitable remainder trust could make the capital gains tax on his sale disappear. It can defer most of that tax for twenty years, and it permanently erases the tax on the slice he agrees never to see again. It can't do both to the same dollar, and once a letter of intent is signed it's usually too late to do either.

The trust itself is exempt from income tax under §664(c)(1). You transfer the appreciated asset to the trust before the sale, the trustee sells it, and nothing is due in the year of sale. Every dollar of proceeds stays invested, including the roughly one quarter that would otherwise have gone to the IRS and your state that spring. That's the entire mechanical advantage, and it's real.

In exchange, §664(d)(2) imposes three hard limits. The trust has to pay out a fixed percentage of its assets, revalued every year, of not less than 5% and not more than 50%. The payments run for the lives of the individual beneficiaries or for a term of years no longer than 20. And under §664(d)(2)(D) the present value of the charity's remainder, computed under Treas. Reg. §1.664-4 using the §7520 rate (the IRS discount rate, published monthly), has to be at least 10% of the initial value. Fail that test and it isn't a charitable remainder trust at all: you get a taxable trust, no deduction, and a mess.

The deferral is real, but what comes back carries the worst character available. Under §664(b) and Treas. Reg. §1.664-1(d)(1)(i)(b), each payment carries out ordinary income first, then capital gain, then tax-exempt income, then principal, and inside each category it starts with the class taxed at the highest rate. Net investment income keeps its character on the way out under Treas. Reg. §1.1411-3(d), so the 3.8% surtax follows the gain rather than vanishing with it.

Read the second half of that table honestly. The $2,000,000 isn't yours anymore. What you own is a payment stream and a deduction, set against a remainder the actuaries value today at $755,200 that you can never take back.

The deduction equals the present value of the remainder interest, and for appreciated long-term property going to a public charity it's capped at 30% of your contribution base (adjusted gross income, for nearly everyone) under §170(b)(1)(C)(i), with a five-year carryforward under §170(d)(1). Two changes that took effect this year trim it further. The new 0.5%-of-AGI floor in §170(b)(1)(I) disallows the first slice of everything you give, and the rewritten §68 caps the benefit at 35 cents per dollar for anyone in the 37% bracket. I worked through both on the 2026 charitable deduction floor. A deduction this size does clear the 30% ceiling, which is the good news: under §170(d)(1)(C) the amount the floor eats carries forward only when you also exceed a ceiling that year.

The §7520 rate matters more than people expect. It was 5.20% for August 2026, and §7520(a) lets you elect the rate for the month of the transfer or either of the two months before it. For a unitrust a higher rate means a bigger remainder and a bigger deduction, the reverse of how the same rate behaves in a grantor retained annuity trust.

This is where most business sales die. A charitable remainder trust isn't an eligible S corporation shareholder: it doesn't qualify as a qualified subchapter S trust, and §1361(e)(1)(B)(iii) bars a CRAT or CRUT from electing to be an electing small business trust. Transfer S corp stock into one and the S election terminates the day the trust takes the shares, splitting the year into an S short year and a C short year for a company about to be sold. That's a worse outcome than the tax you were trying to avoid.

An interest in an operating LLC or limited partnership is nearly as bad. Under §512(c) the trust picks up its share of the entity's unrelated business income, and under §664(c)(2) a trust with any unrelated business taxable income in a year owes an excise tax equal to 100% of it. Partnership debt pulls in the debt-financed rules of §514 on top, and mortgaged real estate has the same problem.

What works is publicly traded stock, C corporation stock, and unencumbered real estate. For real estate the standard drafting answer is a FLIP unitrust under Treas. Reg. §1.664-3(a)(1)(i)(c), which pays only net income until the property sells and then converts to a straight percentage payout the following January 1. If the business you're selling is an S corporation, the tools that fit are an installment sale or a sale to an ESOP.

Rev. Rul. 78-197 draws the line at whether the recipient is legally bound, or can be compelled, to complete the sale. The courts added a gloss. In Ferguson v. Commissioner, 174 F.3d 997, the Ninth Circuit taxed donors on stock they had already given away, because by the transfer date a tender offer had drawn enough shares that the gain had ripened into a fixed right to cash. Practical certainty, not legal obligation, was enough. A signed purchase agreement with financing in place sits much closer to Ferguson than to the ruling.

One version of this strategy is now a listed transaction. Final regulations effective July 9, 2026 added Treas. Reg. §1.6011-15, aimed at an arrangement where appreciated property goes into a purported charitable remainder annuity trust, the trust sells it, and the proceeds buy a single premium immediate annuity the beneficiary reports under the §72 exclusion ratio as though the gain had evaporated. Participants file Form 8886 and material advisors file Form 8918, with penalties for staying quiet. An ordinary unitrust reported each year on Form 5227 is not that transaction. The promoters selling capital-gains-elimination packages often are.

The people this works for have three things in common: an asset the trust can legally hold, a real intention to give money away, and enough runway that no buyer has been identified yet. Take away the second one and it's an expensive way to defer tax on a shrinking pot. I've talked more clients out of these than into them.