If you're sitting on a highly appreciated stock position, a direct sale may not be the only path. For founders and early employees with near-zero basis, the tax cost of selling can be enormous.
Take a founder with $50 million of stock. Even after any QSBS exclusion, the remaining gain is still exposed to federal and - likely - state capital gains taxes. On a large position, the tax bill on a direct sale can be significant.
A charitable remainder trust (CRT) can change how and when you pay that tax. Here's how it works.
You contribute the stock to the CRT before any sale. The trust can sell the shares without triggering an immediate capital gains tax at the trust level, which allows more of the value to stay invested upfront. In exchange, you receive an income stream — for life or for a term of years — and the remainder passes to charity at the end. You may also receive a partial charitable deduction when the trust is funded. The gain doesn't disappear. It's deferred and recognized over time as distributions are made to you.
There's a version of this — called a Flip CRUT — designed for stock that can't be sold just yet. The "flip" refers to a built-in switch in the trust's payout rules. It may pay little or nothing before the flip if the trust has little distributable income, then switches to regular distributions once a triggering event occurs. That makes it more practical for pre-IPO planning. But it's not simple to set up with private company stock. How you value the shares, whether the company allows the transfer, and whether a deal is already underway all affect whether the structure works.
What's the catch with these strategies? Once you contribute the shares, you no longer own them — the trust does. You keep the income stream, not the principal. At the end of the term, the remainder goes to charity. CRTs work best when three things are true: the position is large, the tax drag on a direct sale is significant, and the charitable intent is real.
If part of the position qualifies for QSBS, the interaction with CRT planning is nuanced. How QSBS applies depends on entity structure and timing, and the tax outcome can vary significantly across different fact patterns. The question is usually which shares to sell directly, which to use for QSBS, and which belong in a CRT — and that allocation decision is worth working through carefully with professional advisors.
For educational purposes only. Not tax, legal, or investment advice.