The Trust That Lets the Wealthy Sell a $5 Million Stock Position and Pay No Capital Gains Tax Up Front

A founder or longtime executive holding a $5 million block of low-basis stock has a familiar problem, as selling to diversify creates one large capital gains bill in a single year. A charitable remainder trust (CRT), governed by 26 U.S.C. § 664, lets the sale happen inside a tax-exempt trust. The cost is permanent: at the end of the term, whatever is left goes to charity. Plenty of households face this choice. The top 1% of U.S. households held 50.9% of household-sector corporate equities and mutual fund shares in 2026 Q2, according to the Federal Reserve’s Distributional Financial Accounts.

How the Trust Sells Stock Without Paying Tax on the Sale

Under § 664(c)(1), a charitable remainder annuity trust or unitrust is not subject to federal income tax for any taxable year. The donor contributes the appreciated shares, the trustee sells them, and the trust owes no capital gains tax on the sale. The full proceeds can be reinvested in a diversified portfolio. There is one exception. If the trust has unrelated business taxable income, § 664(c)(2)(A) imposes an excise tax equal to the full amount of that income.

Your Payments Carry the Deferred Gain

The gain is postponed, and it reaches the donor through the payments. § 664(b) sets a tiered order for how each payment is taxed. Payments come first from ordinary income (current and retained), second from capital gain, third from other income such as tax-exempt interest, and only then from tax-free principal. Treasury applies this in 26 CFR 1.664-1(d)(1)(ii). Gains are tracked on a cumulative net basis, and short-term gain comes out before long-term gain, and the gain realized on day one stays in the second tier and flows out to the donor until it runs out.

Annuity Trust or Unitrust: Choosing Between a Fixed and a Variable Payment

• Annuity trust (CRAT): pays a fixed dollar amount of at least 5% and at most 50% of the initial value. The term can be up to 20 years or the life of the beneficiary (§ 664(d)(1)(A)). Payments stay the same even if the market falls.
• Unitrust (CRUT): pays a fixed percentage, also between 5% and 50%, of the trust’s value as revalued each year (§ 664(d)(2)(A)). Payments rise and fall with the portfolio. Under § 664(d)(3), a net-income version can pay the lower of trust income or the unitrust amount and make up shortfalls in later years.

10% Minimum Remainder Rule

The value of the charity’s remainder interest, measured under Section 7520, must be at least 10% of the property’s starting value. This applies to annuity trusts at funding (§ 664(d)(1)(D)) and to unitrusts for each contribution (§ 664(d)(2)(D)). Younger donors, high payout rates and long terms all reduce the remainder and can cause the trust to fail the test.

Upfront Deduction Comes With Limits in 2026

§ 170(f)(2)(A) allows an income tax deduction for a remainder interest in trust only if the trust is a CRAT, CRUT or pooled income fund. The deduction equals the present value of the charity’s remainder, which is less than the full value contributed. For unitrusts, § 664(e) values the remainder by assuming at least 5% is paid out each year. The usual percentage-of-income limits under § 170(b) also apply. Starting in tax year 2026, the One Big Beautiful Bill limits the tax benefit of itemized deductions for taxpayers in the 37% bracket. For 2026, that bracket begins above $768,700 for married couples filing jointly. If a single noncash item is deducted at more than $5,000, the donor must complete Section B of Form 8283, according to IRS Publication 526 for tax year 2025.

Worked Example: A Hypothetical $5 Million Position

A retired executive owns stock worth $5,000,000 with a $400,000 cost basis, which leaves $4,600,000 of unrealized gain. The executive funds a lifetime CRUT with a 5% payout. The trustee sells the shares and the trust pays no tax on the sale.

1. Assuming the value is unchanged on the valuation date, the first-year payment is $250,000.
2. Assume the reinvested portfolio earns $100,000 in dividends and interest that year, and under the first tier, that $100,000 of the payment is taxed as ordinary income.
3. The remaining $150,000 is taxed as long-term capital gain under the second tier.
4. The trust carries $4,450,000 of retained gain into future years, and later payments keep carrying it out.

A direct sale would have made the entire $4,600,000 gain taxable in a single year. With the trust, the gain is taxed over many years, and the money that would have gone to tax up front stays invested inside the trust.

Traps That Can Undo the Benefit

• Arranging the sale first. If the donor has already committed to a binding sale before the shares go into the trust, the IRS can treat the donor as the seller.
• Irrevocability: the trust cannot be undone. The remainder must go to a charitable organization (§ 664(d)(1)(C) and (d)(2)(C)), and heirs get no share of the principal.
• Debt-financed or operating assets: these can generate unrelated business taxable income and trigger the excise tax.
• Payout set too high: high payouts drain principal and can fail the 10% test.

Who Should Skip This Structure

To decide, consider four factors. They are how large the gain is, how much you actually intend to give to charity, how long the payment stream would run, and whether you will need the principal later. A CRT is a poor fit for:

• People who may need the principal back, since the trust only releases scheduled payments.
• Families who want the entire position to pass to their children.
• Younger donors who want high payouts, because the 10% minimum remainder limits them.
• Holders whose stock has little built-in gain, where there is little tax to defer.

Two things to monitor: the Section 7520 rate in effect when the trust is funded, which drives both the deduction and the 10% test, and how the 2026 cap on itemized deductions for the top bracket affects the value of the upfront deduction. A CRT is one of several tax-smart ways to give, and we walked through the rest, from donor-advised funds to appreciated-stock gifts, in a free guide here.

Contact [email protected] for any questions or corrections.