How to Use a CRT to Defer Capital Gains in 2026

How to Use a CRT to Defer Capital Gains in 2026

For the 2026 tax year, high-net-worth clients holding highly appreciated assets face immediate capital gains tax liability when selling. Using how to use CRT to defer capital gains on appreciated assets provides a powerful strategy to eliminate upfront tax burdens. A Charitable Remainder Trust allows clients to contribute appreciated property, avoid immediate capital gains recognition, and receive income for life while supporting philanthropic goals.

Table of Contents

• Key Takeaways
• What Is a Charitable Remainder Trust and How Does It Work?
• How Does a CRT Eliminate Immediate Capital Gains Tax?
• Which Appreciated Assets Work Best in a CRT?
• What Are the Income Tax Benefits of Using a CRT?
• How Do You Calculate the Tax Savings from a CRT?
• What Are the Differences Between CRUT and CRAT Structures?
• Who Benefits Most from CRT Capital Gains Deferral?
• What Are the IRS Compliance Requirements for CRTs in 2026?
• Uncle Kam in Action: Tech Executive Saves $1.2 Million in Capital Gains
• Next Steps
• Frequently Asked Questions
• Related Resources

 

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Key Takeaways

• CRTs eliminate immediate capital gains tax on appreciated assets in 2026
• Clients receive income for life while supporting charitable causes
• Charitable deductions offset ordinary income up to 30% of AGI
• Minimum 5% payout required under IRS Section 664 rules
• Best for clients with assets exceeding $500,000 in appreciated value

What Is a Charitable Remainder Trust and How Does It Work?

A Charitable Remainder Trust represents one of the most powerful strategies in tax strategy for high-net-worth clients. Under IRS Section 664, a CRT operates as a split-interest trust where the donor transfers appreciated assets into an irrevocable trust structure. The trust then sells the assets without triggering capital gains tax at the individual level.

The donor (or other named beneficiary) receives income distributions for a specified term. This can be for life or a fixed period up to 20 years. After the trust term ends, the remaining assets transfer to the designated charitable organization.

The Two-Phase Tax Advantage

CRTs provide dual tax benefits. First, the trust itself is a tax-exempt entity under IRC Section 664(c). When appreciated assets transfer into the trust and sell, no capital gains tax applies at that moment. The full proceeds remain available for reinvestment.

Second, the donor receives an immediate charitable income tax deduction. This deduction equals the present value of the charitable remainder interest. The IRS uses specific actuarial tables and the Section 7520 rate to calculate this amount. For 2026, this creates substantial ordinary income offset for high-net-worth clients facing elevated tax rates.

Lifetime Income Stream Requirements

The IRS mandates minimum payout percentages under Section 664 regulations. For 2026, the minimum annual payout remains 5% of trust assets. The maximum payout cannot exceed 50%. These distributions can be annual, semi-annual, quarterly, or monthly.

The payout structure depends on which CRT type you implement. Charitable Remainder Unitrusts recalculate annually based on trust value. Charitable Remainder Annuity Trusts pay a fixed dollar amount regardless of trust performance.

How Does a CRT Eliminate Immediate Capital Gains Tax?

The capital gains deferral mechanism operates through the trust’s tax-exempt status. Consider a client holding stock with a $100,000 cost basis now worth $1,000,000. An outright sale in 2026 triggers long-term capital gains tax on $900,000 of appreciation.

For 2026, long-term capital gains rates apply at 0%, 15%, or 20% depending on taxable income. High-net-worth clients typically face the 20% rate. Additionally, the 3.8% Net Investment Income Tax applies when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married filing jointly.

The Tax Calculation Without a CRT

Using the example above, here’s the immediate tax impact from an outright sale:

Tax Component	Rate	Tax Amount
Long-term Capital Gains	20%	$180,000
Net Investment Income Tax	3.8%	$34,200
Total Immediate Tax	23.8%	$214,200
Net Proceeds After Tax	—	$785,800

With a CRT, the full $1,000,000 remains available for reinvestment. The trust sells the appreciated asset tax-free and reinvests the entire proceeds. This creates a significantly larger investment base generating income distributions.

Tax Deferral vs. Tax Elimination

The CRT doesn’t permanently eliminate capital gains tax. Instead, it transforms the tax character through the tier system of IRC Section 664(b). Distributions to beneficiaries follow a specific ordering:

• Tier 1: Ordinary income
• Tier 2: Capital gains (long-term, then short-term)
• Tier 3: Tax-exempt income
• Tier 4: Return of principal

Beneficiaries pay tax on distributions based on this hierarchy. However, the tax spreads over the trust term rather than occurring immediately. This allows income smoothing across multiple years when rates may be lower.

Which Appreciated Assets Work Best in a CRT?

Not all appreciated assets make suitable CRT contributions. The ideal candidates share several characteristics. They must have significant unrealized gains relative to cost basis. They should be liquid or readily convertible to cash. And they must be permissible under IRS unrelated business income rules.

Publicly Traded Securities

Stocks held in taxable brokerage accounts represent the most common CRT contribution. These work particularly well for executives with concentrated positions from company stock grants. A tech executive holding $2 million in employer stock with a $200,000 basis faces $427,600 in immediate tax using 2026 rates.

Contributing this stock to a CRT eliminates the immediate tax hit. The trust sells the position and diversifies across a broader portfolio. The executive receives lifetime income while eventually supporting a charitable cause aligned with their values.

Investment Real Estate

Rental properties and commercial real estate transfer effectively into CRTs. However, several complications require careful planning. The property must sell within the trust to avoid debt-financed income issues. Any existing mortgage creates unrelated business taxable income exposure.

For real estate investors, timing matters significantly. Consider paying off mortgages before the contribution or structuring installment sales to the trust. Environmental assessments and title insurance become trust expenses rather than donor costs.

Private Business Interests

S corporation stock and partnership interests require special attention. S corporations can only have specific types of trusts as shareholders. A CRT doesn’t qualify as an eligible S corporation shareholder under IRC Section 1361.

For business owners planning exit strategies, consider converting to C corporation status before the CRT contribution. Alternatively, sell the business interest to the trust in an installment sale. The trust then pays the purchase price over time from other income-producing assets.

Assets to Avoid

Certain assets create problems in CRT structures. Personal property like artwork or collectibles lack liquidity and require costly appraisals. Retirement accounts transferred to CRTs trigger immediate income recognition and lose tax-deferred status.

Asset Type	CRT Suitability	Key Considerations
Publicly Traded Stock	⭐⭐⭐⭐⭐	Excellent liquidity, easy valuation
Real Estate (No Debt)	⭐⭐⭐⭐	Requires sale within trust, appraisal needed
C Corp Stock	⭐⭐⭐⭐	Works well, may lack liquidity
Real Estate (Mortgaged)	⭐⭐	Creates UBTI complications
S Corp Stock	⭐	Ineligible shareholder, requires conversion
Retirement Accounts	❌	Triggers immediate income, poor strategy

What Are the Income Tax Benefits of Using a CRT?

Beyond capital gains deferral, CRTs provide substantial income tax benefits. The donor receives an immediate charitable contribution deduction in the year of the transfer. This deduction equals the present value of the amount eventually passing to charity.

Calculating the Charitable Deduction

The IRS uses specific actuarial calculations under Section 7520. The deduction depends on several factors. These include the donor’s age, the payout percentage, the trust term, and the Section 7520 rate published monthly.

For 2026, the Section 7520 rate fluctuates based on federal mid-term rates. A higher Section 7520 rate produces a larger charitable deduction. This is because the present value calculation discounts future payments at this rate.

Consider a 65-year-old donor contributing $1,000,000 to a 5% CRUT. Using mid-2026 rates, the charitable deduction approximates $450,000 to $550,000. This varies based on the specific Section 7520 rate at the time of contribution.

AGI Limitation Rules

The charitable deduction faces annual limitations. For contributions of appreciated property to CRTs, the limit is 30% of adjusted gross income. Any excess deduction carries forward for five additional tax years.

For a high-net-worth client with $2,000,000 AGI, the immediate deduction caps at $600,000. A $550,000 charitable deduction from the CRT contribution fully applies in year one. The client still benefits from the full deduction amount.

Estate Tax Benefits

CRTs also provide estate planning advantages. The present value of the charitable remainder removes from the donor’s taxable estate. For ultra-high-net-worth clients approaching estate tax thresholds, this creates meaningful tax savings.

Additionally, clients often pair CRTs with wealth replacement trusts. The donor uses a portion of the income tax savings to fund life insurance. This insurance replaces the asset value for heirs while still achieving the charitable and tax goals.

How Do You Calculate the Tax Savings from a CRT?

Tax professionals need precise calculation methods when advising clients on CRT strategies. The total tax benefit combines multiple components. Each requires careful analysis using current 2026 tax law parameters.

Our Charitable Remainder Trust Calculator provides comprehensive analysis for tax professionals. The tool models various payout scenarios, calculates precise charitable deductions, and projects lifetime income streams using 2026 tax rates.

Step-by-Step Tax Savings Analysis

Begin with the immediate capital gains tax avoidance. Calculate the unrealized gain on the appreciated asset. Multiply by the combined federal capital gains rate plus NIIT. For 2026, this totals 23.8% for high-income clients.

Next, determine the charitable income tax deduction. Use IRS Publication 1457 or professional software to calculate the present value. Apply the donor’s marginal tax rate to this deduction. For 2026, the top federal rate remains 37% for ordinary income.

Finally, model the lifetime income stream. Project annual distributions based on the chosen payout percentage. Calculate the after-tax value of these distributions using the tier ordering rules.

Complete Example Calculation

A 60-year-old client owns stock worth $2,000,000 with a $400,000 basis. They establish a 6% CRUT. Here’s the complete tax analysis:

• Avoided capital gains: $1,600,000 × 23.8% = $380,800
• Charitable deduction: $750,000 (approximately)
• Tax savings from deduction: $750,000 × 37% = $277,500
• Annual income: $120,000 (6% of $2,000,000)
• Total first-year tax benefit: $658,300

Compare this to an outright sale where $380,800 disappears to capital gains tax immediately. The CRT preserves this capital for income generation while providing the additional deduction benefit.

What Are the Differences Between CRUT and CRAT Structures?

 

 

Selecting between a Charitable Remainder Unitrust and a Charitable Remainder Annuity Trust significantly impacts client outcomes. Each structure offers distinct advantages depending on client goals and circumstances.

CRUT Characteristics and Benefits

A CRUT pays a fixed percentage of the trust’s value as revalued annually. If the trust value grows to $2,500,000, a 5% CRUT distributes $125,000 that year. This creates inflation protection through equity participation.

CRUTs accept additional contributions over time. This makes them ideal for clients expecting ongoing windfalls or annual bonus compensation. Each new contribution generates a separate charitable deduction calculated at the time of transfer.

Several CRUT variations exist. The standard CRUT pays the fixed percentage annually. A NIMCRUT (Net Income with Makeup CRUT) limits distributions to trust income and allows makeup of shortfalls in later years. A FLIPCRUT converts from NIMCRUT to standard CRUT upon a triggering event.

CRAT Characteristics and Benefits

A CRAT pays a fixed dollar amount regardless of trust value. A $100,000 CRAT annuity payment remains constant whether the trust holds $1,500,000 or $2,500,000. This provides predictable income for budgeting purposes.

CRATs do not accept additional contributions. The initial funding represents the only opportunity to transfer assets. This limitation makes CRATs suitable for single-event liquidity moments like business sales or property dispositions.

CRATs require careful attention to the exhaustion test under Section 664(d)(2). The trust must maintain at least a 10% projected charitable remainder value. If the payout percentage is too high relative to trust value and term, the CRAT fails this test.

Feature	CRUT	CRAT
Payment Amount	% of annual value	Fixed dollar amount
Inflation Protection	Yes (if trust grows)	No
Additional Contributions	Allowed	Prohibited
Annual Revaluation	Required	Not needed
Best For	Growing portfolios	Predictable income needs

Choosing the Right Structure

Client age and income needs drive the selection. Younger donors benefit from CRUTs with growth potential over multi-decade terms. Older donors seeking stable retirement income often prefer CRATs with fixed payments.

Asset type also matters. Highly appreciating assets like concentrated stock positions work well in CRUTs. The growth potential translates to increasing income. Income-producing assets like bonds suit CRATs where fixed payments match investment returns.

Who Benefits Most from CRT Capital Gains Deferral?

CRT strategies deliver exceptional results for specific client profiles. Understanding these ideal scenarios helps tax professionals identify opportunities and provide targeted tax advisory services.

Business Owners Planning Exits

Entrepreneurs selling businesses face massive capital gains events. A founder who built a company from scratch typically has minimal cost basis in the stock. Sale proceeds trigger enormous tax liability that can exceed 23.8% at federal level plus state taxes.

Contributing a portion of business stock to a CRT before the sale eliminates capital gains tax on that portion. The trust participates in the sale transaction tax-free. The former owner receives lifetime income while reducing overall tax burden significantly.

Real Estate Investors with Appreciated Property

Property owners holding assets for decades face substantial depreciation recapture and capital gains. A commercial property purchased for $500,000 now worth $2,500,000 generates $2,000,000 of taxable gain plus recaptured depreciation at 25%.

Transferring the property to a CRT eliminates this tax hit. The trust sells the property and reinvests proceeds into diversified income-producing investments. The former property owner enjoys steady income without property management responsibilities.

Tech Executives with Concentrated Stock

Employees of successful technology companies often accumulate substantial wealth through equity compensation. Stock options exercised years ago now represent millions in value. Selling to diversify triggers capital gains tax that drastically reduces net proceeds.

A CRT allows diversification without immediate tax cost. The executive contributes highly appreciated shares to the trust. The trust sells systematically over time and builds a diversified portfolio. Annual distributions provide income while avoiding the concentrated position risk.

Retirees Seeking Income and Tax Efficiency

Clients approaching retirement with low-basis appreciated assets face a timing dilemma. They need income but selling triggers substantial taxes. Traditional retirement income strategies assume you start with after-tax proceeds.

CRTs solve this problem elegantly. The full asset value converts to income-producing investments. The higher investment base generates more income than after-tax proceeds would produce. The beneficiary receives this income stream for life or a term certain.

What Are the IRS Compliance Requirements for CRTs in 2026?

Proper CRT administration requires strict adherence to IRS requirements. Tax professionals must ensure clients understand ongoing compliance obligations before implementing these strategies.

Annual Tax Return Filing

Every CRT must file Form 5227 annually. This Split-Interest Trust Information Return reports all trust income, deductions, and distributions. The form is due by April 15 following the calendar year end, with extensions available.

The trustee also issues Schedule K-1 (Form 1041) to each beneficiary. This K-1 reports the character of distributions under the tier ordering system. Beneficiaries use this information to properly report income on their individual returns.

Payout Requirement Monitoring

The trust must make distributions meeting the minimum 5% threshold annually. For CRUTs, this requires annual valuation of all trust assets. For CRATs, the fixed payment must occur on schedule regardless of trust performance.

Failure to meet payout requirements can jeopardize the trust’s tax-exempt status. Trustees must monitor cash flow carefully and plan investment strategies that generate sufficient liquidity for required distributions.

Prohibited Transaction Rules

CRTs must avoid self-dealing and prohibited transactions under Section 4941. The donor cannot receive additional benefits beyond the specified income stream. Transactions with disqualified persons create excise tax penalties.

Common violations include using trust assets for personal benefit, selling property to the trust at inflated prices, or receiving services from the trust. Professional trustees familiar with these rules help avoid costly mistakes.

Unrelated Business Taxable Income

While CRTs enjoy tax-exempt status, they remain subject to unrelated business taxable income rules. Debt-financed property and operating businesses within the trust create UBTI exposure.

UBTI within a CRT triggers a 100% excise tax under Section 664(c)(2). This draconian penalty effectively disqualifies the trust. Careful asset selection and investment management prevent these issues.

Uncle Kam in Action: Tech Executive Saves $1.2 Million in Capital Gains

Michael, a 58-year-old software engineer at a successful tech company, faced a significant tax challenge in early 2026. Through stock options exercised over fifteen years, he accumulated $5,000,000 in company stock. His cost basis totaled only $800,000, creating $4,200,000 in unrealized long-term capital gains.

The Problem

Michael wanted to diversify his concentrated position and create retirement income. However, selling the stock outright would trigger devastating tax consequences. At 2026 rates, the combined federal capital gains tax and NIIT totaled 23.8%. State taxes added another 9.3% in California.

Total tax liability: $4,200,000 × 33.1% = $1,390,200. This left only $3,609,800 for diversification and income generation. Michael also lost the investment returns on the $1,390,200 paid in taxes.

The Uncle Kam Solution

Working with our tax strategy team, Michael established a 6% CRUT. He contributed $3,000,000 of the appreciated stock to the trust, retaining $2,000,000 for personal liquidity needs. The CRT structure provided several immediate advantages.

The trust sold the $3,000,000 position completely tax-free. The full proceeds diversified into a balanced portfolio generating 6% annually. This created $180,000 in annual income for Michael’s lifetime. Additionally, Michael received a $1,150,000 charitable income tax deduction in 2026.

The Results

Michael’s tax savings exceeded $1,200,000 in total benefit. The avoided capital gains tax on the $2,520,000 gain within the trust saved approximately $834,600. The charitable deduction at his 37% federal rate plus 9.3% state rate saved an additional $532,950 in income taxes.

The strategy provided $180,000 annual income versus $144,392 from after-tax proceeds invested at 4%. Over a 25-year life expectancy, Michael receives an additional $890,200 in lifetime income. The university he designated as remainder beneficiary will ultimately receive approximately $2,000,000.

Michael invested part of his tax savings into permanent life insurance within a wealth replacement trust. This $3,000,000 policy ensures his children receive the full value transferred to the CRT, effectively making the strategy cost-free to his heirs.

See more transformational results in our client success stories.

Next Steps

Implementing a CRT strategy requires careful planning and professional guidance. Here’s how to move forward:

• Identify clients with appreciated assets exceeding $500,000 in value
• Calculate potential tax savings using the CRT calculator tool for 2026 rates
• Coordinate with estate planning attorneys specializing in charitable trusts
• Model multiple scenarios comparing CRUT versus CRAT structures
• Schedule a strategy session at https://unclekam.com/book-strategy-session/ to discuss advanced implementation

Frequently Asked Questions

Can a CRT be revoked if circumstances change?

No, Charitable Remainder Trusts are irrevocable by design. Once assets transfer to the trust, they cannot be returned to the donor. This irrevocability is essential for the tax benefits. However, trustees may modify distribution percentages within IRS limits or change remainder beneficiaries under certain circumstances. Clients must be absolutely certain about their charitable intent before funding a CRT.

What happens if the trust runs out of money before the term ends?

This risk primarily affects CRATs with high payout rates. If a CRAT depletes before the term expires, payments simply stop. The trust terminates and the remaining assets (if any) transfer to charity. This is why the IRS requires the 10% remainder test. CRUTs face less risk because payments adjust with trust value. Conservative payout rates between 5% and 6% typically ensure sustainability.

Can multiple beneficiaries receive income from one CRT?

Yes, CRTs can name multiple income beneficiaries. Common structures include both spouses as joint beneficiaries. The trust can specify consecutive beneficiaries or simultaneous beneficiaries. Each additional beneficiary affects the charitable deduction calculation because it extends the expected payout period. The Section 7520 calculation accounts for the ages of all beneficiaries when determining the present value of the charitable remainder.

How does the 10% remainder requirement work?

The IRS mandates that the actuarially calculated charitable remainder must equal at least 10% of the initial trust value. This requirement prevents donors from claiming charitable deductions while retaining nearly all economic benefit. The calculation uses the Section 7520 rate, beneficiary ages, payout percentage, and trust term. Younger beneficiaries or higher payout rates reduce the remainder percentage. Professional software or IRS publication tables determine if a proposed CRT meets this test.

What investment restrictions apply to CRT assets?

CRTs enjoy broad investment flexibility compared to private foundations. They can hold stocks, bonds, mutual funds, and real estate. However, the trust must avoid unrelated business taxable income. Leveraged real estate creates UBTI exposure. Operating businesses within the trust trigger the 100% excise tax. Most trustees maintain diversified portfolios of marketable securities to ensure liquidity for required distributions while avoiding UBTI complications.

Can donors change the charitable beneficiary after funding?

The trust document governs this flexibility. Donors often retain the right to change charitable remainder beneficiaries. This allows adjustment if the original charity dissolves or the donor’s philanthropic priorities change. The trust must always name at least one qualified charitable organization under Section 170(c). Private individuals cannot become remainder beneficiaries. Donors considering this flexibility should work with experienced estate planning attorneys.

How do state taxes affect CRT benefits?

State tax treatment varies significantly. Most states follow federal rules and exempt CRTs from state income tax. However, some states impose income tax on trust income or distributions. California taxes CRUT distributions despite federal exemption. The charitable deduction typically works at both federal and state levels. Tax professionals must analyze state-specific rules when calculating total benefits. High-tax states like California and New York amplify CRT advantages.

What qualifies as an acceptable charitable remainder beneficiary?

The remainder beneficiary must be a qualified organization under IRC Section 170(c). This includes public charities, private foundations, government entities, and certain religious organizations. The charity must exist when the trust terminates. Donors often name university endowments, hospital foundations, or donor-advised funds. Some trusts specify the creation of a new private foundation to receive the remainder. The designated charity should be investigated for financial stability and mission alignment.

Can a CRT be used with retirement account assets?

Generally no during lifetime. Transferring IRA or 401(k) assets to a CRT triggers immediate income recognition and loses tax-deferred status. However, naming a CRT as retirement account beneficiary at death creates powerful benefits. The retirement account avoids estate tax. The CRT receives the proceeds income-tax-free. Named individuals receive CRT income for a specified term. Then the remainder passes to charity. This strategy works exceptionally well for charitably inclined clients without heirs.

Related Resources

• Comprehensive Tax Strategy Services
• Entity Structuring for Tax Optimization
• The MERNA Method for Advanced Tax Planning
• Free Tax Planning Calculators
• Latest Tax Strategy Insights

Last updated: June, 2026

This information is current as of 6/18/2026. Tax laws change frequently. Verify updates with the IRS or a qualified tax professional if reading this later.