Navigating an exit in the fast-paced world of mergers and acquisitions (M&A) is exhilarating—until the tax bill shows up. For founders who have spent years, even decades, building value in a closely held company, capital-gains exposure can feel like a gut punch. That is why more owners are weaving Charitable Remainder Trusts (CRTs) into their transaction playbooks.
A CRT can help you convert illiquid stock into diversified income, reduce or defer taxes, and still carve out a meaningful gift to the causes you care about. In other words: sell, defer, and still leave a legacy.
What Is a Charitable Remainder Trust?
A Charitable Remainder Trust is a split-interest vehicle recognized by the IRS: you (and possibly a spouse) keep the income interest for life or a term of years, while a qualified charity receives what is left—“the remainder”—when the trust terminates. Think of it as a philanthropic retirement account fueled by appreciated assets. The trust sells the asset, reinvests the proceeds, pays you a stream of income, and leaves a final gift to charity upon its conclusion.
Basic Mechanics
- You contribute highly appreciated property—often pre-sale company stock—to an irrevocable trust.
- The trust, as a tax-exempt entity, can sell the shares without immediate capital-gains tax.
- Proceeds are reinvested in a diversified portfolio.
- You receive either a fixed dollar amount (CRAT) or a fixed percentage of the annual trust value (CRUT).
- When the trust ends, the remainder (at least 10 % of the initial funding amount) passes to the charity you name.
Two Common Flavors: CRUT vs. CRAT
- Charitable Remainder Unitrust (CRUT): Pays a set percentage—typically 5 %-8 %—of the trust’s value, recalculated each year. Your income can fluctuate with market performance.
- Charitable Remainder Annuity Trust (CRAT): Pays a fixed dollar amount, offering a more predictable paycheck but no chance to capture upside if the portfolio grows.
Why CRTs Shine When You Sell a Business
The intersection of a business sale and a CRT offers three unusually powerful advantages:
Capital-Gains Deferral
Because the trust—not you—executes the sale, no tax is triggered at closing. That means 100 % of the proceeds go to work inside the trust instead of a trimmed, after-tax remainder. The larger principal can compound for years, often replacing all or most of the tax saved and still leaving a robust charitable remainder.
Lifetime (or Term) Income
You exchange a lumpy liquidity event for a smoother, more predictable cash flow. For owners whose wealth is locked in one asset, that steady income can underwrite retirement, new ventures, or other investments without the pressure to generate yield elsewhere.
Philanthropic Leverage
Every withdrawal you receive is partially tax-deferred, and you also unlock an immediate charitable-income tax deduction—usually 10 %-40 % of the gift’s fair market value, depending on actuarial factors. Meanwhile, you cement a long-term gift that can endow a foundation, scholarship, or favorite nonprofit. It is legacy planning built directly into the sale.
Step-by-Step: Funding a CRT With Business Equity
Timing Is Everything
The transfer must occur before you sign a binding sale agreement. Once you are obligated to sell, the IRS treats the tax as already yours. Experienced deal counsel can craft a conditional letter of intent (LOI) that allows time to move shares into the trust ahead of closing.
Valuation, Transfer, and Sale
- Obtain a qualified appraisal to substantiate the charitable deduction.
- Draft and execute the CRT document, naming trustees (often yourself and a corporate co-trustee).
- Transfer the shares; minutes from your board or operating agreement should reflect the move.
- After the trust becomes the legal owner, it joins the purchase agreement and sells alongside you.
Post-Sale Cash Flow
Once cash hits the trust, a professional asset manager reallocates into a balanced portfolio—stocks, bonds, alternatives—tailored to your income target. Annual or quarterly distributions follow the formula in your CRT document, and each payment is taxed under the IRS’s “tier” system, blending ordinary income, capital gain, and tax-free return of principal. Over time the mix often becomes more favorable as earlier layers are exhausted.
Common Misconceptions and Practical Caveats
Loss of Control?
Yes, the trust is irrevocable, but you can:
- Serve as co-trustee or retain the power to replace a trustee.
- Change your charitable beneficiaries (within IRS limits).
- Influence investment policy in concert with a corporate fiduciary.
In short, you give up the right to pull assets back—but not the right to shape how they are managed or where the final gift lands.
Only for the Ultra-Wealthy?
CRTs are most efficient once gift assets top roughly $500,000, but they are hardly limited to billion-dollar exits. A founder selling a $5 million S-corp can still reap six-figure tax savings and reliable income. Costs—legal, admin, asset management—are often a modest percentage of overall benefit.
Liquidity for Heirs
Critics sometimes note that a CRT leaves nothing to children except goodwill. The standard remedy is a wealth-replacement life-insurance trust (ILIT) funded by a portion of your CRT income. In many cases, the death benefit going to heirs approximates what they would have inherited after capital-gains and estate taxes, effectively creating “charity-owned dollars” and “family-owned dollars” at the same time.
S-Corporations and LLCs
Special rules apply. An S-corporation cannot be a charitable remainder trust’s asset beyond two years because the trust itself is not an eligible S-corp shareholder long term. Therefore, the CRT typically converts to a CRUT designed to receive the S-shares and liquidate them promptly. LLC or partnership units can be contributed, but debt inside the entity can complicate tax calculations. Early coordination with tax counsel is essential.
Pulling It All Together
The call from your M&A adviser announcing a signed purchase agreement should be a moment of triumph, not trepidation. By lining up a Charitable Remainder Trust in advance, you can stride into closing knowing you have:
- Deferred a substantial slice of capital-gains tax
- Locked in a lifetime or term income stream
- Made a sizeable, irrevocable commitment to charity
- Created optional life-insurance strategies to protect heirs
- Diversified away from a single-asset risk profile in one elegant move
No single planning tool is perfect, and a CRT requires forethought, precision drafting, and disciplined investment oversight. Yet for many entrepreneurs, it is the linchpin that transforms an ordinary liquidity event into a multi-dimensional victory—tax, income, philanthropy, and legacy all harmonized in a single stroke.
If the next step in your journey involves selling a company, map out your charitable remainder strategy early. A well-timed CRT may be the difference between simply cashing out and achieving a legacy that outlives the business you built.
