Selling $500K of Stock Through a CRAT Instead of Directly Avoids $80,000 in Capital Gains Tax
We ran a common scenario through the calculator: $500,000 of appreciated stock, originally purchased for $100,000, contributed to a charitable remainder annuity trust paying 5% annually for 20 years, at a 5.2% IRS §7520 discount rate. Because the trust is tax-exempt, selling the stock inside it avoids the $80,000 in capital gains tax a direct sale of the $400,000 gain would have triggered — money that stays invested and working rather than going to the IRS immediately. On top of that, the donor takes an immediate income-tax deduction of $193,661 (the present value of what the charity eventually receives), worth $67,781 in tax savings at a 35% marginal rate, while still collecting $25,000 a year for 20 years.
Three benefits from one structure
| Benefit | Amount |
|---|---|
| Capital gains tax avoided on the $400,000 gain | $80,000 |
| Annual income to the donor, for 20 years | $25,000/year |
| Immediate charitable deduction (present value of remainder) | $193,661 |
| Tax savings from the deduction (35% bracket) | $67,781 |
None of these numbers require the donor to give up anything they weren’t already planning to eventually give to charity — the trust just resequences when the tax benefits and income arrive relative to a simpler, direct approach.
The constraint that actually limits the structure
It’s tempting to think a higher payout rate is strictly better for the donor — more income now. But the IRS requires the present value of the remainder interest to be at least 10% of the initial funding value for the structure to qualify as a CRT at all. Push the payout rate too high relative to the term (say, 7.5% instead of 5% on the same 20-year term), and the remainder falls to about 8.1% — below the threshold, disqualifying the trust as configured. The real design question isn’t “how much income can I get,” it’s “what’s the highest payout rate that still clears the 10% floor for this specific term and discount rate.”
Where this framework breaks
- You want lifetime payments, not a fixed term. A life-estate CRT uses IRS mortality tables based on age instead of a fixed number of years — a fundamentally different calculation this term-of-years model doesn’t cover.
- The payout rate and term combination fails the 10% test. As shown above, some combinations simply don’t qualify — the fix is lowering the payout rate or shortening the term, not forcing the numbers.
- Immediate liquidity matters more than an income stream. A CRT converts a lump sum into payments over time plus a deduction; it’s not a way to access a large amount of cash quickly.
- The deduction exceeds the AGI limitation for the year. Appreciated-property gifts to a public charity are generally capped at 30% of AGI, with unused amounts carried forward up to 5 years — a large deduction relative to income may take multiple years to fully use.
What to actually do
- Check the current month’s IRS §7520 rate before running the numbers — it changes monthly and directly affects the income/remainder split.
- Confirm the payout rate and term combination clears the 10% remainder test before committing to a structure.
- Talk to a tax professional about whether the full deduction is usable in the funding year given your AGI, and the 5-year carryforward if not.
- Get an attorney to draft the trust and identify a trustee — this is an irrevocable structure with real administrative requirements.
- Compare against simpler alternatives (a QCD for IRA assets if 70½+, or a donor-advised fund) if the income-stream feature isn’t actually needed.
For a simpler charitable mechanism for IRA assets, see the QCD strategy’s IRMAA-saving side effect, and for the alternative to selling an appreciated asset at all, see hold vs sell and the step-up basis at death.
Open the Charitable Remainder Trust Calculator → and run your own asset value, payout rate, and term.
Quick answers
How does a charitable remainder trust avoid capital gains tax?
The donor contributes an appreciated asset to the irrevocable trust rather than selling it directly. Because the trust itself is a tax-exempt entity, it can sell the asset without triggering the capital gains tax a direct sale by the donor would owe — the full sale proceeds stay invested in the trust rather than being reduced by tax first.
How much of a tax deduction do you get from a charitable remainder trust?
Not the full asset value — only the present value of what the charity will eventually receive (the 'remainder interest'), calculated using the IRS's published monthly §7520 discount rate. A higher payout rate or longer term to the donor means a smaller remainder and a smaller deduction; the IRS requires the remainder to be at least 10% of the initial funding value.
What's the difference between a CRAT and a CRUT?
A CRAT (charitable remainder annuity trust) pays a fixed dollar amount each year, set once at funding. A CRUT (charitable remainder unitrust) pays a fixed percentage of the trust's value, revalued annually, so payments fluctuate with the trust's investment performance. This calculator models the CRAT's simpler, fixed-annuity math.
Is a charitable remainder trust revocable?
No — it's irrevocable. Once funded, the donor can't take the asset back; they receive the agreed income stream for the term (or their lifetime, for a life-estate CRT), and the remainder is legally committed to the named charity.