How It Actually Works
You create an irrevocable trust and transfer some or all of your equity into it — before the sale is binding. The trust now owns that stake, not you.
You take a charitable income tax deduction in the year of funding, calculated on the present value of what charity is projected eventually to receive. That figure depends on the payout rate, the term, and IRS rate assumptions.
The sale closes and the trust sells its stake. Because the trust is tax-exempt, no tax is due at that moment, so the entire proceeds — not the after-tax remainder — are reinvested inside the trust.
The trust pays you the specified income stream for life or a fixed term. Those payments are taxable to you as they arrive, under the ordering rule below.
At the end of the term, whatever remains passes to the charity you named. That portion is the part of the gain that genuinely never gets taxed to anyone.
The engine here is step three. Selling inside a tax-exempt vehicle means a larger base is compounding from day one, and over a long term that difference does real work. It is not a magic trick — you have given away the remainder to get it.
CRAT or CRUT
| Annuity trust (CRAT) | Unitrust (CRUT) | |
|---|---|---|
| Your payment | A fixed dollar amount, set at funding | A fixed percentage of assets, revalued each year |
| If investments do well | You get the same amount | Your payment rises |
| If they do badly | You get the same amount, until the trust runs dry | Your payment falls |
| Additional contributions | Not permitted after funding | Permitted |
| Inflation | No protection | Participates in growth |
| Fit for a business sale | Rare — the asset's value is uncertain until closing | Usual choice, and variants can defer payouts until the sale settles |
The Deadline That Kills Most CRT Plans
If you transfer equity into the trust after the sale is effectively locked in, the IRS can treat the gain as yours regardless of who holds legal title — you assigned away income you had already earned the right to receive. The trust structure survives; the tax benefit does not. That makes this a planning decision measured in months before a deal, not days, and it is why waiting for a letter of intent is waiting too long.
The practical implication is that a CRT belongs to the same category as every other structural move: it is a before strategy. The full timeline of what closes when is in how to reduce capital gains tax when selling a business.
How Your Payments Get Taxed
Distributions from a CRT follow a four-tier ordering rule, and it is deliberately unfavorable to you. Each category is exhausted before the next begins:
- Ordinary income — including interest and non-qualified dividends
- Capital gain — including the large embedded gain from selling your business
- Tax-exempt income
- Return of principal — untaxed
Worst first, in other words. A trust funded with a substantial business-sale gain will be distributing that gain to you for a long time before anything gentler appears. This is often glossed over in presentations that describe a CRT as "tax-free," which it is not for you — it is tax-free to the trust at the moment of sale, which is a different and still valuable thing.
Three things, in order of size: the full proceeds compounding from day one instead of an after-tax remainder; the gain spread across many years rather than landing in one; and a deduction at funding. What you are paying is the remainder itself, permanently and irrevocably. If the charitable outcome has independent value to you, this is efficient. If it does not, you have bought a deferral at the price of the principal, and there are cheaper deferrals.
Who This Suits, and Who It Does Not
It suits someone with genuine charitable intent, clearly surplus capital, a long horizon, and a large embedded gain — particularly a founder who already gives meaningfully and would rather direct the remainder than have it default into an estate. For that person the constraint the trust imposes is one they wanted anyway, which is the cleanest test of fit for any structure.
It does not suit anyone whose motivation is purely tax reduction. Giving away a remainder to defer a gain is an expensive way to defer a gain, and the arithmetic rarely favors it once you value the principal you surrendered. It also does not suit anyone who might need the capital, anyone uncomfortable with irrevocability, or anyone whose heirs are the intended destination — that last case usually points toward different planning entirely.
The honest test is simple: would you still want this if the tax treatment were neutral? A yes means the structure is doing two jobs. A no means it is doing one job badly.
What Most People Miss
The first is that a CRT is frequently presented alongside a wealth replacement plan — an irrevocable life insurance trust funded from the income stream, so heirs receive something equivalent to the remainder. That can be sensible, and it also means you are now buying two products, with two sets of costs, to solve a problem you may not have had. Price them separately before agreeing to them together.
The second is that the deduction at funding is often smaller than people expect. It is the present value of a remainder that will not arrive for decades, discounted under IRS assumptions, and it is subject to the usual limits on charitable deductions with a carryforward for the excess. It is a real benefit and it is rarely the main one.
The third is that this is a legal instrument, not a financial product. It is drafted by an attorney, administered by a trustee, and filed for annually. Whoever raises the idea with you may be an excellent advisor and is not the person who will draft it, and the drafting is where the payout rate, the term, and the flexibility you keep are actually decided.
A charitable remainder trust is excellent at what it does and narrow about who it does it for. If you already intend to give, funding it with appreciated equity before the sale is binding puts the entire proceeds to work instead of the after-tax remainder, and that is hard to beat. If you do not intend to give, the remainder is a very high price for a deferral you can get more cheaply elsewhere. Decide the charitable question first; the tax question answers itself afterward.