Tax Tips
The Charitable Remainder Trust (CRUT): Bypassing Capital Gains Tax on Highly Appreciated Assets
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Result: The CRUT preserves $297k more capital to generate income.
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The Charitable Remainder Trust (CRUT): Bypassing Capital Gains Tax on Highly Appreciated Assets
CORE INSIGHTS
- The Problem: Selling a highly appreciated asset (Bitcoin, Property) triggers a massive Capital Gains Tax bill (up to 37%), shrinking your nest egg.
- The Solution: A CRUT is a tax-exempt trust. Transfer the asset, sell it inside the trust for $0 tax, and reinvest the full proceeds.
- The Payoff: You get a lifetime income stream from the trust and an immediate income tax deduction. It’s the ultimate “Have your cake and eat it too” strategy.
For investors with assets near zero cost basis, the tax code creates a “Lock-In Effect.” The Charitable Remainder Unitrust (CRUT) offers an escape hatch, converting illiquid assets into a tax-free, diversified income stream.
What-If Scenario: The $1M Exit
| Strategy | Taxes Paid | Investable Capital |
|---|---|---|
| Standard Sale | -$297,000 | $703,000 |
| CRUT Strategy | $0 | $1,000,000 |
Visualizing Capital Preservation
*Figure 1: Net Proceeds Comparison. The CRUT (Green) keeps 100% of the principal working for you.*
Strategic Action Steps
1
Transfer Before Sale
This is critical. You must transfer the asset to the Trust BEFORE signing a binding sales contract. If you line up a buyer first, the IRS disallows the tax break.
This is critical. You must transfer the asset to the Trust BEFORE signing a binding sales contract. If you line up a buyer first, the IRS disallows the tax break.
2
Define Payout Rate
Set a payout percentage (5% to 50%). This is your annual income. If the trust investments grow, your income check grows.
Set a payout percentage (5% to 50%). This is your annual income. If the trust investments grow, your income check grows.
3
Select the Charity
Name a public charity or your own Donor-Advised Fund (#101) as the remainder beneficiary. This keeps philanthropic control in the family.
Name a public charity or your own Donor-Advised Fund (#101) as the remainder beneficiary. This keeps philanthropic control in the family.
The Bottom Line: Who Should Choose What?
- Choose CRUT: Investors with >$500k capital gains who want income and hate taxes.
- Choose Direct Sale: If you need the lump sum cash immediately for spending. The CRUT locks up principal.
Frequently Asked Questions
How does a CRUT avoid Capital Gains Tax?
The CRUT is a tax-exempt entity. When it sells an asset, NO capital gains tax is triggered. The full proceeds are available for reinvestment.
Do I lose control of the money?
Partially. The asset is irrevocable. However, you can be the Trustee, managing the investments, and you receive income for life.
What happens when I die?
The remainder goes to charity. Smart investors use the tax savings to buy Life Insurance (ILIT) to replace the asset’s value for heirs.
Disclaimer: This content is for informational purposes only. CRUTs are complex. Consult an estate attorney.