Imagine you invested $100,000 in a company several decades ago. Today, those shares are worth $2 million.
That’s an extraordinary investment success, but it may also create a difficult planning problem.
Perhaps the stock now represents too much of your portfolio. You would like to diversify, but selling it would mean recognizing a $1.9 million capital gain. For a high-income investor, federal capital-gains tax and the net investment income tax alone could consume more than $450,000, before accounting for any state taxes.
So you keep holding the stock. Not necessarily because you believe it is still the best investment, but because selling it feels too expensive.
For someone who is also charitably inclined, there may be more than two choices.
Option One: Sell the Stock
The simplest approach is to sell the shares, pay the taxes and reinvest what remains.
This provides complete flexibility. You retain control of the proceeds and can build a more diversified portfolio. But after recognizing the gain and paying the associated taxes, you may have substantially less than the original $2 million available to invest.
The exact tax bill would depend on your income, filing status, state of residence, available capital losses and other circumstances. Still, the immediate cost could easily reach several hundred thousand dollars.
Option Two: Donate the Stock
Instead of selling the shares, you could donate them directly to a qualified charity.
By donating the stock itself rather than selling it first, you can generally avoid recognizing the embedded capital gain. You may also qualify for a charitable deduction based on the stock’s fair market value, subject to applicable limitations.
The charity can then sell the shares and put the full proceeds toward its mission.
This can be an excellent strategy when you are ready to make a substantial gift. But it also means giving away the entire $2 million. You no longer control the assets or receive income from them.
A Charitable Middle Ground
A charitable remainder trust, or CRT, can offer another possibility.
You transfer the appreciated shares into an irrevocable trust. The trust sells the stock, diversifies the proceeds and makes payments to you for life or for a specified period. When the trust ends, whatever remains passes to charity.
For example, assume the $2 million stock position is contributed to a CRT with a 5% payout. The initial annual payment could be approximately $100,000.
The trust can generally sell and reinvest the full $2 million without requiring you to personally recognize the entire $1.9 million gain in the year of the sale. Instead, taxable income and capital gains are generally carried out gradually through the trust’s future payments.
In other words, the tax is usually deferred and spread over time—not erased.
You may also receive an upfront charitable deduction. Because you retain the right to receive payments, however, the deduction is not equal to the full $2 million. It is based on the calculated value expected to remain for charity.
Fixed Income or Variable Income?
A CRT commonly takes one of two forms.
A charitable remainder annuity trust, or CRAT, pays a fixed dollar amount each year. A charitable remainder unitrust, or CRUT, pays a percentage of the trust’s value, recalculated annually.
A CRAT provides greater income predictability. A CRUT’s payments can increase if the portfolio grows, but they can also decline when its value falls.
The appropriate structure depends on the donor’s age, cash-flow needs, investments and charitable objectives.
It Is Still a Charitable Gift
A CRT is not simply a way to escape capital-gains taxes.
The transfer is irrevocable. You retain the defined payment stream, but you cannot later withdraw the trust principal or leave the remainder to your family. The assets remaining at the end must pass to charity.
That means a CRT works best for someone who already has meaningful charitable intentions but may not be ready to give away the entire asset today.
For the right investor, it can transform a concentrated, low-basis stock position into diversified investments, ongoing income, a current tax deduction and a future charitable legacy. Rather than choosing between a large tax bill and an immediate outright gift, a charitable remainder trust may provide a smarter way to accomplish both financial and philanthropic goals.