Charitable Remainder Trusts: How Retirees Can Turn Big Capital Gains Into Lifetime Income

For retirees holding a stock or other asset with a large built-in gain, a sale can create a heavy tax bill all at once. A lesser-known trust arrangement can help avoid that one-year hit while converting years of appreciation into a regular income stream.

Take the example of a 71-year-old retiree, used here as a composite case, who bought stock many years ago for far less than it is worth now. She wants to sell it and move the money into an investment that produces income. The challenge is taxes. Because the shares are a low-basis asset, the original purchase price is tiny compared with today’s market value, so nearly all of the sale may be treated as taxable gain in a single year.

She is far from alone. Federal Reserve data show that households headed by someone age 70 or older held 40.5% of all household stock and mutual fund shares outside workplace plans in the second quarter of 2026. Those headed by people ages 55 to 69 held another 39.3%. For investors with large unrealized gains, a charitable remainder trust, or CRT, under 26 U.S.C. § 664 can transform that one-time tax bill into a stream of payments, with the gain taxed gradually as income is distributed.

How a Charitable Remainder Trust Can Sell Assets Without Immediate Tax

The process follows a set sequence. First, the stock, real estate or business interest is transferred to the trust. That transfer is irrevocable, meaning it cannot be undone and the asset cannot be taken back. The trustee then sells the property.

At that point, the tax rules change. Under § 664(c)(1), a qualifying CRT is not subject to federal tax under that subtitle, so the trust keeps the full sale proceeds and reinvests them. It then makes payments to you, or to you and your spouse, either for life or for a term of years that cannot exceed 20 years. When the payment period ends, any remaining assets, known as the remainder, pass to charity.

There is one important exception. If the trust earns unrelated business taxable income, often from debt-financed real estate, § 664(c)(2) applies an excise tax to that income. For that reason, mortgaged property deserves special scrutiny before it is contributed.

Choosing Between an Annuity Trust and a Unitrust

A charitable remainder annuity trust pays a fixed dollar amount each year. The payment must be at least 5% and no more than 50% of the property’s initial value. Market changes do not affect the check, which can be attractive to retirees who want certainty.

A charitable remainder unitrust works differently. It pays a fixed percentage, also within the 5% to 50% range, of the trust’s value as it is revalued each year. If the portfolio grows, the payout increases. If the portfolio declines, the payment drops as well. That structure may suit younger retirees who want income that can better track inflation. Under § 664(d)(3), a unitrust can also be drafted to distribute only the income the trust actually earns, which can be useful for land or a business that may take time to sell.

How the Tax Rules Spread the Gain Over Time

The tax benefit comes from the way each distribution is classified. Section 664(b) sets a four-tier ordering system. Payments are treated first as ordinary income, then as capital gain, then as other income such as tax-exempt interest, and finally as a tax-free return of principal.

As a result, the gain from the sale remains inside the trust and is reported gradually over time as part of each payment rather than all at once. That means the tax hit is spread out instead of landing in a single filing year.

The donor also receives an upfront charitable deduction equal to the estimated value of what charity will eventually receive. Section 170(f)(2)(A) permits that deduction for a remainder gift in trust only when the trust is a qualifying CRT or a pooled income fund. The amount is calculated using IRS actuarial tables and the Section 7520 interest rate, which is 6.20% for November 2026. For annuity trusts, a higher rate generally increases the charity’s projected share. Usual limits on charitable deductions based on income still apply, and any unused deduction may be carried forward.

Key Rules and Trade-Offs Families Should Understand

The projected remainder must be worth at least 10% of the property’s initial value, using the Section 7520 rate. A high payout or younger beneficiaries can cause the trust to miss that threshold.

Other points to weigh include:

• Heirs give up the asset. Any remaining value goes to charity rather than to children or other family members.
• Costs can be significant. There may be legal fees to create the trust, along with ongoing trustee, investment and tax-preparation expenses.
• Medicare can still be affected. CRT payments increase income. For 2026, the base Part B premium is $202.90 a month. It rises to $284.10 once income exceeds $109,000 for single filers or $218,000 for married couples filing jointly. Even so, spreading the gain over time often keeps income lower than a one-time sale would.

Some families use a CRT together with life insurance to help offset the lost inheritance. Part of the trust income may be used to pay premiums on a policy, often held inside an irrevocable life insurance trust, so the benefit reaches heirs outside the taxable estate.

There is also a smaller option for IRA owners. In 2025, a one-time qualified charitable distribution of up to $54,000 could fund a charitable remainder annuity trust, a unitrust or a charitable gift annuity, provided qualified charitable distributions were the only source of funding.

Who Benefits Most From a CRT

A charitable remainder trust tends to work best for a retiree who wants to support charity, owns a large low-basis asset, needs dependable income and already has a plan for heirs, either through other assets or insurance. If keeping the asset in the family is the top priority, the strategy usually makes less sense. The payout rate, trust type and funding timing all affect both the deduction and the income, so the numbers should be reviewed with a CPA or fiduciary tax advisor before any documents are signed.