Charitable Remainder Trusts for Concentrated Stock: The Inside-the-Trust Diversification

A Charitable Remainder Trust is an irrevocable trust that pays an income stream to a non-charitable beneficiary (typically the donor) for a term of years or for life, with the remainder passing to charity at the end. It’s one of the most powerful tools for concentrated-stock holders who want to diversify without triggering the full capital gains bill at once.

The mechanics use three tax rules:

1. Contribution of appreciated stock to a CRT is a charitable gift (partial deduction under IRC §170)
2. Sale of stock inside the CRT is tax-exempt to the trust (the trust is §664-exempt)
3. Income distributed to the beneficiary is taxed based on the trust’s character (“tier” rules)

For a senior IC with $3M of appreciated employer stock, a CRT can convert that stock to a diversified portfolio inside the trust, produce a 5-7% annual income stream for 20 years, and leave $1.5M-$2.5M to charity at termination.

How a CRT works

Step by step:

1. Donor creates an irrevocable trust document naming a trustee and charity as remainder beneficiary
2. Donor contributes appreciated stock to the trust
3. Donor receives federal charitable deduction equal to the present value of the charitable remainder (calculated using IRS §7520 rate)
4. Trust sells the stock, tax-free, because the trust is §664-exempt
5. Trust reinvests proceeds in a diversified portfolio
6. Trust pays annual income to the donor (or other beneficiary) per the trust terms
7. At end of trust term, remainder passes to charity

Two main CRT structures

Charitable Remainder Annuity Trust (CRAT). Pays a fixed dollar amount each year. Must pay at least 5% and no more than 50% of initial value. Simpler to administer. The fixed annuity means income doesn’t grow but doesn’t shrink either.

Charitable Remainder Unitrust (CRUT). Pays a fixed percentage of the trust’s current-year value. Annual payment fluctuates with investment performance. Can grow over time if trust investments outperform the payout rate. More common for tech donors.

Both must satisfy §664’s 5% minimum payout and 10% minimum charitable remainder test.

The deduction math

The charitable deduction equals the present value of the remainder interest going to charity. Calculation factors:

• Trust term (years or lifetime)
• Payout rate (annuity or unitrust percentage)
• IRS §7520 rate (120% of federal midterm rate, published monthly)
• Trust type (CRAT or CRUT)

Higher §7520 rates produce larger charitable deductions for CRATs (less present value of income stream, more remainder). Lower rates favor CRUTs.

As of 2026, §7520 rates have moved with interest rates, currently around 5-5.5%. A CRUT with 5% payout and 20-year term, at 5.2% §7520, produces a charitable deduction of roughly 35-40% of contribution value.

Example: $3M concentrated stock into 20-year CRUT

Senior IC contributes $3M of appreciated tech stock (basis $500K) to a 20-year CRUT with 5% payout:

• Charitable deduction: roughly $1.2M (40% of $3M)
• Deduction subject to 30% AGI limit for appreciated stock to public charity remainder beneficiary; or 20% if non-public charity
• First-year income: 5% of $3M = $150K
• Capital gains tax on $2.5M gain at contribution: $0

Over 20 years, at 7% gross return and 5% payout, the trust grows modestly. Total income to donor over 20 years: roughly $3.5M nominal (averaging $175K/year as the trust grows). Remainder to charity at year 20: approximately $2.8M.

Tier rules and ongoing taxation

Income distributed from the CRT is taxed to the beneficiary based on the trust’s “tiers”:

1. Ordinary income (interest, non-qualified dividends), taxed at ordinary rates
2. Capital gains (trust’s realized capital gains), taxed at capital gains rates
3. Other income (tax-exempt), tax-free
4. Principal, tax-free

If the CRT generates primarily capital gains (from the original stock’s gain being realized over time), the beneficiary’s income is mostly capital-gain-taxed. This is more tax-efficient than ordinary distributions from a traditional IRA.

The 10% charitable remainder test

Under IRC §664(d), the trust must pass a mathematical test: the present value of the charitable remainder must equal at least 10% of the contribution value. This prevents donors from setting payout rates so high that little remains for charity.

For a 20-year CRUT with 5% payout at 5% §7520 rate, the remainder is approximately 47%, well above the 10% minimum. For shorter or higher-payout trusts, the test can constrain structure.

Diversification inside the trust

The single most powerful feature: the trust can sell concentrated stock and diversify without triggering capital gains tax. The donor’s concentrated position becomes a diversified portfolio held by the trust, producing income back to the donor.

For a senior IC with $3M in one tech stock and no way to sell without a $500K+ tax bill, the CRT achieves diversification at zero current tax cost. The gain is effectively spread over 20 years of income taxation (tier 2 capital gain treatment) rather than lumped in year 1.

State tax considerations

CRTs generally follow residence-state tax for the donor’s income stream. California taxes the income distributions at California rates. No-tax states (Texas, Florida, Nevada) don’t.

Contribution of appreciated stock to a CRT is generally not a sale for state tax purposes, so no state capital gain tax at contribution.

Irrevocability and loss of control

The biggest downside: CRTs are irrevocable. Once stock goes in, you can’t take it back. You can’t change the charity beneficiary easily (though some flexibility exists in donor-advised remainder structures). You’re committed to the payout structure for the full term.

For donors with moderate charitable intent and desire for liquidity flexibility, a DAF may be a better fit.

Flip CRUT variation

A “flip CRUT” starts as a net-income-only CRUT (pays lesser of stated percentage or actual income) and “flips” to standard CRUT after a triggering event (sale of illiquid asset, date certain, etc.). Useful for donating illiquid pre-IPO stock to the trust: no income paid until stock is sold by trust, then normal unitrust payments begin.

Frequently asked

Can I donate pre-IPO stock to a CRT? Yes, but private stock requires independent valuation. Some CRT trustees won’t accept illiquid stock. Flip CRUT structure addresses the liquidity issue. Check trustee policies first.

What if I change my mind about the charity? Most CRTs allow donor to change the designated charity as long as it’s qualified under §501(c)(3). Some CRTs are structured with DAF as remainder beneficiary, providing maximum flexibility.

Does §7520 rate change during the trust term? No. The §7520 rate at contribution fixes the deduction calculation. Future §7520 changes don’t affect an existing CRT.

Can I serve as trustee of my own CRT? Yes, though this creates additional complexity. Self-trusteed CRTs must still follow all fiduciary rules. Many donors use a corporate trustee for simplicity.

How does this interact with §6501 statute? Normal 3-year assessment on the contribution year. Keep trust document and contribution valuation records permanently, the IRS can audit distributions in later years.