Turn Your Tax Problem into Your Legacy: Charitable Remainder Trusts and Capital Gains

What if you could eliminate a million-dollar tax bill, create a substantial lifetime income stream, generate an immediate tax deduction, and leave a meaningful charitable legacy—all with a single strategy? For philanthropically-minded Washington residents with significant appreciated assets, Charitable Remainder Trusts (CRTs) offer exactly this powerful combination of benefits. 

While CRTs aren’t right for everyone, they represent one of the most compelling strategies available for families who want to support charity while solving their capital gains tax challenges. 

The Problem: When Success Creates a Tax Burden 

Many successful Washington families face a significant challenge when it comes to managing concentrated stock positions. Consider this common scenario: You own $5 million in Microsoft stock, originally purchased for $500,000 years ago through employee stock options. Your financial advisor recommends diversifying to reduce risk, but selling the stock would trigger a substantial tax hit.

Here’s the breakdown:

• • Federal capital gains tax: approximately $1.07 million

  • Washington state capital gains tax: about $385,000
  • Total taxes: $1.455 million

After paying these taxes, you would have only $3.545 million left to reinvest, nearly 30% less than your current holdings. This “tax friction” often keeps families locked into concentrated positions, exposing them to unnecessary risk and limiting their ability to diversify effectively.

Preserve More, Give More: The Power of a Charitable Remainder Trust

A Charitable Remainder Trust (CRT) offers an elegant solution that allows you to reduce taxes, generate income, and support the causes you care about.

Here’s how it works: You transfer your appreciated stock to an irrevocable charitable trust. The trust then sells the stock without incurring any capital gains tax because charities are tax-exempt. This means the full $5 million is reinvested, rather than being reduced by taxes, and begins generating income for you.

You receive regular payments from the trust for life (or for a specified term of years), providing a steady income stream. When the trust ends, the remaining assets go to the charities you’ve chosen. On top of that, you receive an immediate charitable income tax deduction based on the present value of the charitable remainder.

The transformation is remarkable: Instead of ending up with $3.545 million after taxes, you keep the full $5 million working for you, enjoy lifetime income, and gain significant tax benefits.

Real Numbers: The CRT Advantage

Let’s revisit our Microsoft stock example and compare two strategies: a traditional sale versus using a 5% Charitable Remainder Unitrust (CRUT).

Traditional Sale:

If you sell the stock outright, after paying federal and state capital gains taxes, you’re left with approximately $3.545 million. Assuming a 4% return, that translates to about $141,800 in annual income.

5% CRUT Strategy:

By transferring the stock to a CRUT, the full $5 million i reinvested without triggering capital gains tax. The trust then pays you 5% of its annual value, which would be $250,000 in the first year alone. In addition, you receive an immediate charitable deduction of roughly $1.2 million, which could save about $444,000 in federal income taxes.

The net benefit is clear: a higher income stream combined with substantial tax savings. Over 20 years, total payments could exceed $5 million (assuming modest growth), while still leaving approximately $2-3 million for charity.

Types of CRTs: Choosing the Right Structure 

When considering a Charitable Remainder Trust, it’s important to choose the structure that best aligns with your financial goals.

Charitable Remainder Annuity Trust (CRAT):

A Charitable Remainder Annuity Trust provides a fixed dollar amount annually, offering simplicity and predictability since payments remain constant regardless of trust performance. However, CRATs cannot accept additional contributions after they are established.

Charitable Remainder Unintrust (CRUT):

In contrast, a Charitable Remainder Unitrust pays a fixed percentage of the trust’s annual value, allowing payments to grow as the trust grows. CRUTs also permit additional contributions, making the more flexible for those varying income needs.

Net Income Makeup Charitable Remainder Unitrust (NIMCRUT): 

For maximum adaptability, the Net Income Makeup Charitable Remainder Unitrust pays the lesser of trust income or the unitrust percentage and can “make up” any shortfalls in future high-income years. This feature makes NIMCRUTs particularly appealing for retirement planning and those seeking the greatest flexibility. For many families, the NIMCRUT offers the most strategic value.

The NIMCRUT: A Retirement Planning Powerhouse

For many families, the Net Income Makeup Charitable Remainder Unitrust (NIMCRUT) offers exceptional strategic value. During the working years, the trust is typically invested for growth, generating minimal income. As a result, actual payments remain low, allowing assets to compound while any shortfalls accumulate in a “makeup account.” When retirement arrives, the trust shifts to income-generating investments, triggering higher payouts and releasing accumulated makeup amounts. This creates a substantial retirement income stream.

Consider an example: David and Sarah, both 45, transfer $3 million of appreciated stock into a 5% NIMCRUT. For 20 years, the trust focuses on growth, making minimal payments while building $1.2 million in makeup credits. At retirement, they reallocate to income-producing assets and begin receiving significant distributions, including the accumulated makeup amounts. Essentially, this strategy functions like a tax-deferred retirement account, but with far higher contribution limits than traditional IRAs or 401(k)s.

Advance Strategies: Wealth Replacement and Family Benefits

A CRT doesn’t just reduce taxes and provide income, it can be paired with advanced strategies to preserve family wealth. One powerful approach is incorporating life insurance through an Irrevocable Life Insurance Trust (ILIT). Families often use the tax savings and improved cash flow from a CRT to purchase life insurance, effectively “replacing” the charitable assets for heirs while maintaining all the benefits of the CRT.

Here’s how the complete strategy works: 

The CRT eliminate capital gains tax and provides a steady income steam. The charitable deduction reduces income taxes, freeing up additional resources. Meanwhile, the life insurance trust creates an estate-tax-free inheritance for children. At the same time, your chosen charity receives a substantial gift. The result? Your family retains more wealth than with a traditional sale, while you establish a lasting charitable legacy.

For those seeking even greater impact, multi-generational CRTs can be created. Advanced families sometimes establish multiple CRTs for different family members or design sequential trusts that continue to benefit children after the parents’ payments end.

State-Specific Advantages in Washington

For Washington residents, Charitable Remainder Trusts (CRTs) offer unique advantages. The state’s capital gains tax makes CRTs particularly compelling, as the combined federal and state tax savings can exceed 33% on large gains—making the charitable trade-off even more attractive. Additionally, Washington’s lack of an income tax means the federal charitable deduction provides pure benefit without state-level complications.

Important Considerations

While Charitable Remainder Trusts (CRTs) offer powerful tax and estate planning benefits, they also come with important considerations. First and foremost, the decision is irreversible. Once you create a CRT, you cannot reclaim the assets. The charitable remainder is permanent, so it’s essential to be certain about your philanthropic goals.

CRTs also involve complexity. They require ongoing administration, annual tax filings, and strict compliance with detailed IRS regulations. Additionally, there are minimum requirements that must be met:

• •  The remainder going to charity must equal at least 10% of the trust’s initial value
  • Payout rates typically range from 5% to 8%
  • The trust must pass IRS probability tests to ensure the charitable remainder is viable

Finally, consider investment responsibility. As the income beneficiary, you often serve as trustee, which means you’ll make investments decisions that directly impact your future payments.

Is a CRT Right for You?

Charitable Remainder Trusts (CRTs) are not for everyone, but they can be an excellent fit for families with the right circumstances and goals. CRTs work best for those who have substantial appreciated assets—typically at least $1 million—combined with a genuine charitable intent. They are ideal for individuals looking to diversify concentrated stock positions, plan for retirement income, and reduce large capital gains tax liabilities. It’s also important to have sufficient other assets to maintain your lifestyle needs outside the trust.

However, CRTs may not be the right choice if charity is an afterthought, if you require maximum control over investments, or if you want to preserve specific assets for heirs. They can also be problematic for those who lack adequate retirement resources outside the trust.

Beyond Tax Benefits: The Legacy Component

While the tax advantages of CRTs are significant, many families find the charitable legacy just as rewarding. Your CRT can support causes that matter most to you, such as:

• • Educational institutions (universities, schools)
  • Healthcare organizations (hospitals, research foundations)
  • Community foundations for local impact
  • Religious organizations
  • Enviornmental or social initiatives

Many families choose to name multiple charities or even create scholarship funds in their names, building a legacy that extends far beyond tax planning.

The Bottom Line 

For families with substantial appreciated assets and charitable inclinations, CRTs offer a rare combination of immediate tax benefits, enhanced cash flow, and meaningful legacy creation. While not suitable for everyone, they represent one of the most powerful tools available for addressing capital gains tax challenges. 

The key is proper planning and realistic expectations. CRTs work best when viewed as part of a comprehensive wealth management strategy rather than simply a tax avoidance technique.