Charitable Remainder Trusts for Business Owners: Tax-Free Asset Sales and Lifetime Income

By Yarik Yarosh, CPA ·September 5, 2026 ·9 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

A charitable remainder trust (CRT) is one of the most powerful tools in the tax code for business owners who hold highly appreciated assets and want to sell without paying immediate capital gains tax. The structure is straightforward: the business owner transfers appreciated assets (stock, real estate, business interests) to an irrevocable trust, the trust sells the assets with no capital gains tax (because the trust is tax-exempt under IRC 664), and the trust pays the donor (or other non-charitable beneficiaries) an annual income stream for life or for a fixed term of up to 20 years. At the end of the payment period, the remaining trust assets pass to the designated charity. The donor receives an immediate income tax deduction for the present value of the charitable remainder interest, calculated using IRS actuarial tables and the Section 7520 rate. The CRT effectively converts a lump-sum taxable sale into a tax-free sale plus a stream of partially taxable income over decades.

✓Key takeaway

CRAT vs. CRUT comparison:

Feature	CRAT (Annuity Trust)	CRUT (Unitrust)
Annual payout	Fixed dollar amount (5-50% of initial FMV)	Fixed percentage of trust assets, revalued annually (5-50%)
Payout changes over time?	Never (same dollar amount every year)	Yes (increases if trust grows, decreases if trust shrinks)
Additional contributions allowed?	No	Yes
Inflation protection?	No (fixed payment loses purchasing power)	Yes (if trust assets grow faster than payout rate)
Best for	Donors who want guaranteed fixed income	Donors who want income that keeps pace with growth
10% remainder requirement	Must pass 10% probability test at funding	Must pass 10% probability test at funding

CRT requirements (IRC 664):

Requirement	Details
Payout rate	Minimum 5%, maximum 50% of initial (CRAT) or annually revalued (CRUT) FMV
10% remainder test	The present value of the charitable remainder must be at least 10% of the initial FMV at the time of contribution
Payment term	Life of one or more individuals, or a fixed term up to 20 years
Remainder beneficiary	Must be a qualified charity (IRC 501(c)(3))
Trust is tax-exempt	IRC 664(c): trust pays no income tax on asset sales or investment income (unless it has UBTI)
Irrevocable	Cannot be revoked or modified once established

Tax benefits to the donor:

Benefit	How It Works
Income tax deduction	Present value of the remainder interest (deductible up to 30% of AGI for appreciated property, 5-year carryforward)
Capital gains avoidance	Trust sells assets tax-free; no LTCG, no NIIT, no depreciation recapture
Estate tax reduction	Trust assets removed from the donor’s estate
Income stream	Annual payments for life or term

How does a CRT work for appreciated stock?

Hypothetical example

Round numbers. For current guidance, see IRS trust guidance. A business owner, age 60, holds $2,000,000 in highly appreciated stock (cost basis: $200,000). The owner wants to diversify and create retirement income but is facing $428,400 in capital gains tax (23.8% on $1,800,000 gain) if they sell outright.

Option A: Sell stock outright

Item	Amount
Sale proceeds	$2,000,000
Cost basis	$200,000
LTCG	$1,800,000
Federal tax (20% LTCG + 3.8% NIIT)	$428,400
Net after tax	$1,571,600
Invest at 5% annual return	$78,580/year income

Option B: Transfer stock to a 5% CRUT, sell inside the trust

Item	Amount
Stock transferred to CRUT	$2,000,000
Trust sells stock	$2,000,000 (no capital gains tax)
Trust invests $2,000,000	Full $2,000,000 at work
Annual payout (5% of trust FMV)	$100,000 (Year 1)

Immediate tax deduction:

Calculation Input	Value
FMV of assets contributed	$2,000,000
Payout rate	5%
IRC 7520 rate (current assumed)	5.2%
Donor’s age	60
Life expectancy factor	~24 years
Present value of annuity payments (non-charitable)	~$1,440,000
Present value of charitable remainder	~$560,000 (28% of FMV)
Income tax deduction	$560,000
Tax savings on deduction (37% bracket)	$207,200

The $560,000 deduction exceeds 30% of AGI in a single year, so the excess carries forward for up to 5 additional years.

Year	Deduction Used (assuming $400,000 AGI, 30% limit = $120,000/year)
Year 1	$120,000
Year 2	$120,000
Year 3	$120,000
Year 4	$120,000
Year 5	$80,000
Total deducted	$560,000

Comparison over 25 years (life expectancy):

Assumptions: trust earns 7% average annual return, 5% payout.

Year	Trust Value (start)	5% Payout	Trust Growth (7%)
1	$2,000,000	$100,000	Trust grows by ~$40,000 net
5	~$2,175,000	~$108,750	Growing income
10	~$2,425,000	~$121,250	Growing income
15	~$2,700,000	~$135,000	Growing income
20	~$3,010,000	~$150,500	Growing income
25	~$3,355,000	~$167,750	Passes to charity

25-year totals:

Metric	Sell Outright	CRUT
Capital gains tax paid	$428,400	$0
Amount invested	$1,571,600	$2,000,000
Income tax deduction	$0	$560,000 (saves ~$207,200)
Total income over 25 years	~$1,964,500 (5% on $1.57M)	~$3,125,000 (5% on growing base)
Remaining to heirs/estate	~$3,180,000	$0 (passes to charity)
Amount to charity	$0	~$3,355,000

The CRT provides $1,160,500 MORE in lifetime income ($3,125,000 vs. $1,964,500), plus a $207,200 tax deduction benefit, in exchange for the remaining trust assets passing to charity instead of heirs.

The wealth replacement trust (offsetting the estate impact): The owner can use a portion of the increased income to fund an irrevocable life insurance trust (ILIT) that purchases a life insurance policy to replace the wealth passing to charity:

Item	Amount
Increased annual income from CRT vs. outright sale	~$21,000/year ($100,000 vs. $78,580)
Annual life insurance premium (for $2,000,000 policy, age 60, healthy)	~$15,000-$20,000
Death benefit to heirs (tax-free, outside estate)	$2,000,000

With the wealth replacement trust, the owner gets: higher lifetime income, a $560,000 tax deduction, $0 capital gains tax, $3,355,000 to charity, AND $2,000,000 to heirs through the insurance policy.

CRT income taxation (4-tier system, IRC 664(b)): Trust distributions are taxed to the beneficiary in this order:

Tier	Income Type	Tax Rate
1	Ordinary income (dividends at ordinary rates, interest)	Up to 37%
2	Capital gains (LTCG and STCG)	20% (LTCG) or ordinary (STCG)
3	Other tax-exempt income	0%
4	Return of corpus (tax-free)	0%

In the early years after the trust sells the appreciated stock, the distributions carry out the capital gain from the sale (Tier 2). Once the accumulated capital gain is distributed, distributions shift to ordinary income from the trust’s investments.

Illustrative numbers only, not a real client and not advice for your facts.

What are the deduction limits for charitable contributions by businesses?

C-Corporations can deduct charitable contributions up to 10% of taxable income (computed before the deduction, NOL carrybacks, and certain other items), with excess contributions carried forward for 5 years. Sole proprietors, partners, and S-Corp shareholders deduct charitable contributions on their personal returns, subject to limits based on the type of property donated and the type of recipient: cash to public charities is limited to 60% of AGI, appreciated capital gain property to public charities is limited to 30% of AGI, and contributions to private foundations face lower limits. Donating appreciated property held more than one year (such as stock) lets you deduct the full fair market value while avoiding the capital gains tax you would owe if you sold it first. A donor-advised fund lets you bunch multiple years of charitable giving into a single tax year to exceed the standard deduction threshold, then recommend grants from the fund over time.

Should I use a revocable or irrevocable trust for estate planning?

A revocable living trust avoids probate and provides management continuity if you become incapacitated, but offers no tax benefits because the assets are still in your taxable estate. An irrevocable trust removes assets from your estate, potentially reducing estate tax, and can protect assets from creditors. The trade-off is control: you cannot easily modify or revoke an irrevocable trust. For most small business owners below the estate tax exemption ($13.61 million in 2024), a revocable trust paired with proper beneficiary designations is sufficient. Business owners above the exemption (or expecting to exceed it before the 2026 sunset) should consider irrevocable structures like GRATs, SLATs, or intentionally defective grantor trusts.

Related guides:

Charitable Giving Tax Strategies for Small Business Owners
Like-Kind Exchange (IRC 1031) for Small Business Real Estate
Section 1031 Like-Kind Exchange for Small Business Real Estate

How does the lifetime gift and estate tax exemption work for business owners?

The combined lifetime gift and estate tax exemption for 2025 is $13.99 million per individual ($27.98 million for married couples), meaning you can transfer this amount during life or at death without owing federal gift or estate tax. Gifts to individuals up to the annual exclusion ($19,000 per recipient for 2025) don’t count against your lifetime exemption and don’t require a gift tax return. The current elevated exemption is set to sunset after 2025 under the Tax Cuts and Jobs Act, potentially dropping to approximately $7 million (indexed for inflation), which creates urgency for business owners to lock in transfers at today’s higher levels. Transferring discounted interests in a family business entity (LLC or FLP) can leverage the exemption because valuation discounts for lack of marketability and lack of control can reduce the taxable value of the transferred interest by 25-40%.

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Cite this page

Yarik Yarosh, CPA. "Charitable Remainder Trusts for Business Owners: Tax-Free Asset Sales and Lifetime Income." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-charitable-remainder-trust-business-owner

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.