Most retirees sitting on heavily appreciated stock face an uncomfortable choice: hold it and accept the concentration risk, or sell it and hand roughly a quarter of the gain to the IRS.
A Charitable Remainder Annuity Trust offers a third path that converts that appreciated position into a lifetime income stream, generates a substantial tax deduction, and ultimately benefits a charity the donors care about, without triggering the capital gains tax that would otherwise consume a significant portion of the asset’s value.
For a 72-year-old with $1.7 million in stock carrying a $400,000 cost basis, that third path produces approximately $85,000 per year for life, a deduction worth up to $510,000 spread over six years, and avoidance of a capital gains bill that would have exceeded $300,000 on an outright sale.
How the Trust Works
A Charitable Remainder Annuity Trust is an irrevocable vehicle funded with an asset, in this case, the appreciated stock, that pays the donor a fixed annual amount for life. The “annuity” designation means the payment is fixed in dollars rather than floating as a percentage of the trust’s value, so the income is predictable regardless of what markets do after the trust is funded.
At a 5% payout rate on a $1.7 million trust, the annual payment is $85,000, paid for as long as the donor lives, after which the remaining trust assets pass to the designated charity. The trust, not the donor, sells the appreciated stock after the contribution is made. Because the trust is a tax-exempt entity, the sale does not trigger capital gains at the time of the transaction. On $1.3 million of long-term gain that would have been subject to a combined federal rate of 23.8%, including the net investment income tax, the deferral avoids approximately $309,000 in immediate tax.
In this situation, the donor will owe ordinary income tax on distributions received each year, but the tax is spread across her lifetime rather than due in a single year on the full gain.
The Deduction and How It Works
The income tax deduction available in the year of contribution equals the preset value of the remainder interest, meaning the estimated value of what the charity will eventually receive.
The calculation depends on the donor’s age, the payout rate, and the IRS §7520 rate, which for May 2026 is 5.0% and at age 72, with a 5% payout rate and a 5.0% §7520 discount rate, the present value of the remainder interest is approximately 30% of the trust corpus, or roughly $510,000.
Deductions for appreciated property contributed to the charitable remainder trust are limited to 30% of adjusted gross income per year, with a five-year carryforward for any unused amount. A donor with $597,000 in AGI could deduct the full $179,100 in year one, carrying the remaining $330,900 forward across the subsequent five years.
A donor with lower AGI would deduct a smaller amount each year and use more of the carry-forward period. The full $510,000 deduction is available in either case, just distributed differently across time.
What This Accomplishes That a Straight Sale Cannot
Selling the stock outright and donating the after-tax proceeds to charity is arithmetically inferior in almost every dimension. An outright sale at $1.7 million generates a $309,000 tax bill immediately, leaving $1.391 million to reinvest or donate. The charitable remainder annuity trust preserves the full $1.7 million within the trust, generates $85,000 per year for life from a larger base, and simultaneously produces a deduction against the donor’s other income.
The tradeoff is irrevocability, as once the trust is funded, the donor cannot reclaim the principal, as the $1.7 million now belongs to the trust structure and ultimately to the charity. Of course, for a 72-year-old who has already decided this asset will eventually go to charity anyway, that constraint is largely theoretical.
The trust accelerates the benefit to the donor while preserving the full charitable intent, which is what makes it worth the planning complexity involved.
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