Interval Funds: How to Capture the ‘Illiquidity Premium’ Without Locking Up Cash for 10 Years
Charitable Remainder Trusts (CRTs): Sell Assets Tax-Free and Create Lifetime Income
COACHING POINTS
- The Problem: You have an asset (Real Estate, Crypto, Startup Stock) worth $2M with a $0 cost basis. Selling it triggers a ~$500k tax bill (Fed + State + NIIT), leaving you with only $1.5M to reinvest.
- The Solution: Transfer the asset to a Charitable Remainder Trust (CRT). The trust sells the asset tax-free. The full $2M is reinvested. You receive an income stream (e.g., 5-8%) for life.
- The Bonus: You get an immediate Charitable Income Tax Deduction in the year you fund the trust, which can offset your other ordinary income.
Why volunteer to pay taxes? If you plan to leave money to charity eventually, the CRT allows you to “rent” that money for your lifetime.
Instead of the IRS taking 25-30% of your hard-earned appreciation upfront, you keep that capital working for you, generating compound interest for decades.
Source: IRC Section 664
Comparing a Direct Sale vs. CRT Sale of a $1M Asset (Zero Basis).
- Scenario A (Sell Yourself):
Sale Price: $1,000,000.
Tax Bill (23.8% Fed + 5% State): -$288,000.
Capital Working for You: $712,000. - Scenario B (CRT Sale):
Sale Price: $1,000,000.
Tax Bill: $0.
Capital Working for You: $1,000,000. - Impact: You start with 40% more principal. A 6% return on $1M is far greater than a 6% return on $712k.
What-If Scenario: 20-Year Income Projection
Assumption: 6% Annual Growth, 5% Annual Payout to You.
| Metric | Sell & Pay Tax | CRT Strategy |
|---|---|---|
| Initial Principal | $712,000 | $1,000,000 |
| Year 1 Income | $35,600 | $50,000 |
| Total Income (20 Yrs) | ~$850,000 | ~$1,200,000 |
| Legacy to Charity | $0 | ~$1,400,000 |
Result: The CRT generates $350k more income for you, while still leaving a massive legacy. The loser is the IRS.
Visualizing the Income Gap Over Time
| Year | Sell & Pay Tax ($) | CRT Strategy ($) |
|---|---|---|
| Year 0 | 0 | 0 |
| Year 5 | 190000 | 260000 |
| Year 10 | 400000 | 560000 |
| Year 15 | 630000 | 890000 |
| Year 20 | 850000 | 1200000 |
*By deferring taxes, the CRT allows for a larger principal to compound, creating a widening income gap over decades.
Execution Protocol
You must transfer the asset to the CRT BEFORE you sign a binding sales contract. If you sign a deal to sell your business and then try to set up a CRT, the IRS will apply the “Assignment of Income” doctrine and tax you anyway.
CRUT (Unitrust): Pays a % of the trust value (e.g., 5%). Income rises if the portfolio grows. (Inflation Hedge).
CRAT (Annuity Trust): Pays a fixed dollar amount. Safe, but loses purchasing power over time.
You will receive a charitable tax deduction in Year 1 (often 10-30% of the asset value). Use this tax refund to buy Life Insurance (Wealth Replacement Trust) if you want to leave an inheritance to kids instead of just charity.
COACHING DIRECTIVE
- Do This: If you have a highly appreciated asset ($1M+) and want to convert it into a diversified retirement income stream without a tax hit.
- Avoid This: If you need the lump sum cash immediately to buy a house. The CRT locks up the principal; you only get the income stream.
Frequently Asked Questions
What is a Charitable Remainder Trust (CRT)?
A CRT is an irrevocable trust that lets you donate assets to receive a tax deduction and an income stream for life. The ‘Remainder’ goes to a charity of your choice after you die.
How does it avoid Capital Gains Tax?
The CRT is a tax-exempt entity. When you transfer your asset to the trust, the trust sells it tax-free. The full proceeds are reinvested to generate income for you. You only pay tax on the distributions you receive.
Can I change the charity later?
Yes. While the trust itself is irrevocable, most CRTs allow you to change the designated charitable beneficiary at any time. You retain the power to decide who eventually gets the remaining funds.