Published on
March 14, 2026
Charitable Remainder Trusts for M&A Exits
A Charitable Remainder Trust lets business sellers defer capital gains, generate lifetime or term income, and preserve assets for charity.
Selling your business? A Charitable Remainder Trust (CRT) can help you reduce taxes, secure income, and support a cause you care about. Here's how it works:
- Tax Savings: Avoid immediate capital gains taxes (up to 30.8%) by transferring your business shares to a CRT before the sale.
- Income Stream: Receive steady payouts for life or up to 20 years, funded by reinvested sale proceeds.
- Charitable Deduction: Get an upfront income tax deduction (10%-40% of your business's value).
- Legacy Giving: At least 10% of the trust's assets go to a charity of your choice after the trust ends.
Timing is critical - set up the CRT before signing any binding sale agreements. Options like CRUTs, CRATs, and Flip CRUTs allow flexibility based on your income needs and asset type. Done right, a CRT can maximize your exit while aligning with your financial and philanthropic goals.
How A Charitable Remainder Trust (CRT) is Used for Capital Gains Tax Planning
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How Charitable Remainder Trusts Work
A Charitable Remainder Trust (CRT) is a type of irrevocable trust that splits its benefits between you (and possibly your spouse) and a charity. You retain the right to receive income for either your lifetime or a set term of up to 20 years. After that, the remaining assets in the trust go to the charity you’ve chosen. This division of benefits is what provides the tax advantages associated with CRTs.
It’s essential to coordinate with your M&A counsel early in the process, ideally during the Letter of Intent stage. You’ll need to transfer your business equity to the trust before signing any binding sale agreement. As MergersAndAcquisitions.net notes, "The transfer must occur before you sign a binding sale agreement." [1] This timing ensures the IRS treats the capital gains as trust income instead of personal income, preserving the tax benefits tied to your exit strategy.
Setting Up a CRT with Business Equity
Creating a CRT requires working with legal and tax professionals to draft the trust document. You’ll typically choose between two main types:
- Charitable Remainder Unitrust (CRUT): Pays a fixed percentage of the trust’s value, recalculated annually.
- Charitable Remainder Annuity Trust (CRAT): Pays a fixed dollar amount each year.
For private company stock or other illiquid assets, a Flip CRUT is often the preferred option. This structure starts as a net-income trust - distributing only the income generated by the asset - and switches to a standard percentage payout once the business is sold [5].
After finalizing the trust document, you’ll need a qualified appraisal to determine the fair market value of your business equity. This appraisal not only supports your charitable income tax deduction but also sets the stage for transferring your shares or LLC interests to the CRT. Once the equity is transferred, the trust becomes the legal owner, enabling it to execute the stock purchase agreement with the buyer. From there, the CRT handles the sale and manages income distribution.
Income Distribution and Charitable Remainder
One of the CRT’s key advantages is its tax-exempt status, which allows it to sell your business shares without triggering immediate capital gains taxes. Attorney Matthew Wiese of Carney Badley Spellman explains, "Because the CRT is the selling party and because the CRT is a charity for income tax purposes, there is no capital gains tax on the sale." [3] This ensures that the full sale proceeds stay in the trust for reinvestment, avoiding the typical 25% to 35% tax hit in a standard sale.
The trustee reinvests these proceeds into a diversified portfolio, which funds your income stream while also supporting your charitable goals. Annual distributions must fall between 5% and 50% of the trust’s value [4]. These payouts are taxed using a four-tier system: ordinary income first, followed by capital gains, then other tax-exempt income, and finally a tax-free return of principal [1]. Additionally, the IRS requires that the present value of the charity’s remainder interest must equal at least 10% of the initial fair market value of the assets contributed [1].
Types of Charitable Remainder Trusts for M&A Exits
Comparison of CRT Types for M&A Exits: CRAT vs CRUT vs Flip CRUT
Choosing the right Charitable Remainder Trust (CRT) depends on factors like your income requirements, the potential for asset growth, and the liquidity of your equity. Below, we break down the options to help align your M&A exit strategy with both financial and charitable goals.
Charitable Remainder Annuity Trust (CRAT)
A CRAT provides a fixed annual payment based on a percentage of the trust's initial value at the time of funding. For example, transferring $5 million into a CRAT with a 6% payout rate guarantees $300,000 annually. This setup is ideal if you prefer a predictable income that doesn't fluctuate with market changes.
"CRATs provide fixed income payments throughout the trust term... locked in at the trust's creation." – Avidian Wealth Solutions [6]
However, CRATs come with some limitations. You can't add assets after the trust is established, and your payments remain unchanged even if the trust's value increases. Additionally, CRATs must meet the IRS's 5% exhaustion test to ensure the trust retains enough assets to fulfill its charitable obligations [12]. If you're looking for a structure that adjusts for growth or inflation, a CRUT might be a better fit.
Charitable Remainder Unitrust (CRUT)
A CRUT offers payments that adjust annually based on the trust's value. For instance, if the trust starts at $5 million with an 8% payout rate, you'd receive $400,000 in the first year. If the trust grows to $6 million in the second year, your payment would increase to $480,000. This flexibility allows you to benefit from potential investment gains while also protecting against inflation.
In a January 2026 analysis, Valur compared a CRUT and CRAT for a 36-year-old donor in New York. Assuming 8% annual growth, a CRUT with an 11.04% payout generated $1,483,400 over 20 years - more than double the CRAT's $647,268 [7]. CRUTs also allow for additional contributions over time, making them more adaptable [6]. They suit sellers with a longer investment timeline who want their income to grow alongside the trust's value. For scenarios involving delayed liquidity, a Flip CRUT offers a phased payout option.
Flip CRUT for Illiquid or Pre-IPO Equity
A Flip CRUT starts as a net income unitrust, meaning it pays out only the income generated by the trust. If the assets are illiquid, this initial income may be minimal. Once a liquidity event occurs (e.g., the closing of an M&A deal), the trust "flips" to a standard CRUT with fixed percentage payouts. The flip is triggered on January 1 of the year following the liquidity event [8][9].
"The flip unitrust structure gives you minimal income during the first phase but reliable income after the triggering event, which works well for retirement planning." – Sahil Vakil, Founder, MYRA [10]
This structure is particularly useful for assets like pre-IPO shares or closely held business equity, where selling prematurely to meet payout requirements isn't ideal. However, any unpaid distributions accrued before the flip are forfeited once the trust transitions [9][11].
| Feature | CRAT | CRUT | Flip CRUT |
|---|---|---|---|
| Annual Payout | Fixed dollar amount | Fixed percentage of annual value | Net income until flip, then fixed percentage |
| Growth Potential | None - payments stay fixed | Yes - adjusts with trust growth | Yes - after the flip |
| Funding | Not permitted | Permitted anytime | Permitted anytime |
| Ideal For | Liquid stock, stable income needs | Post-sale diversification, inflation hedge | Illiquid business equity |
For personalized advice on selecting the CRT structure that best suits your M&A exit strategy, reach out to the experts at Phoenix Strategy Group.
Tax Benefits of CRTs in M&A Transactions
CRTs (Charitable Remainder Trusts) offer three standout tax perks when used in M&A exits: deferral of capital gains taxes, an immediate charitable income tax deduction, and a reduction in estate taxes.
Capital Gains Tax Deferral
When a CRT sells your business equity, it benefits from its tax-exempt status under IRC Section 664. This means capital gains taxes are deferred, and the 3.8% Net Investment Income Tax (NIIT) is avoided, allowing the full proceeds to be reinvested over time [14]. Instead of losing 25%–35% of your sale proceeds to taxes immediately, the entire amount remains in the trust, ready for reinvestment.
"The trust (not you) sells the stock in the closing transaction, avoiding immediate capital-gains tax. That means 100% of the proceeds go to work inside the trust instead of a trimmed, after-tax remainder." – Mergersandacquisitions.net [1]
This deferral becomes especially attractive in high-tax states. For instance, in California, combined federal and state capital gains rates can hit 37.1% [15]. In Washington, the total rate, including federal capital gains (20%), NIIT (3.8%), and state tax (7%), can reach 30.8% [3].
To take advantage of this benefit, it’s critical to transfer your business equity to the CRT before signing any binding sale agreements. Otherwise, the IRS may invoke the "assignment of income" doctrine, taxing you directly. Now, let’s look at how this deferral works hand-in-hand with another benefit: an immediate charitable income tax deduction.
Charitable Income Tax Deduction
Contributing assets to a CRT provides an immediate income tax deduction in the year of the transfer. This deduction is based on the present value of the charitable remainder interest and is capped at 30% of Adjusted Gross Income (AGI) for public charities (20% for private foundations). If the deduction exceeds these limits, the unused portion can be carried forward for up to five years [16].
For example, a 58-year-old tech executive in San Jose transferred $750,000 of low-basis stock into a 5.5% Charitable Remainder Unitrust (CRUT) in March 2026. The CRT sold the stock tax-free, avoiding $198,000 in federal and California capital gains taxes. This move also provided an immediate $210,000 income tax deduction and generated $41,250 in first-year income [15].
To qualify for the deduction, the charitable remainder must have a present value of at least 10% of the initial fair market value of the contributed assets. Additionally, for non-cash assets valued over $5,000, such as business equity, a qualified appraisal is required. The deduction is calculated using the IRS Section 7520 interest rate, and you can select the rate from the funding month or either of the two preceding months [16].
Estate Tax Reduction
Assets transferred to a CRT are excluded from your taxable estate. Additionally, the charitable deduction for the remainder interest can offset estate taxes on those assets [12]. If you are the sole non-charitable beneficiary, this deduction can effectively eliminate estate taxes tied to the transferred assets.
Many business owners also combine CRTs with Irrevocable Life Insurance Trusts (ILITs). In this approach, a portion of the CRT's income funds a life insurance policy, with the death benefit passing to heirs free of both income and estate taxes [1].
"The belief that heirs are disinherited ignores how insurance-backed wealth-replacement strategies can restore family capital with dollars that are both income- and estate-tax free." – Mergersandacquisitions.net [2]
Together, these tax advantages make CRTs a powerful option for structuring M&A exits. For expert advice on how to align a CRT with your specific goals, consider reaching out to Phoenix Strategy Group.
Step-by-Step Guide to Implementing a CRT for M&A
If you're considering a Charitable Remainder Trust (CRT) as part of your M&A strategy, here's a straightforward breakdown of the process. It involves three main stages: designing the trust, transferring your business equity, and managing the sale through a trustee.
Designing the Trust and Choosing the Charity
Start by selecting the CRT structure that aligns with your business equity's liquidity. For illiquid assets, a Flip-CRUT is often ideal. This type of trust begins as a net-income trust and later transitions into a unitrust. You'll also need to decide on your payout rate, which typically ranges from 5% to 50% of the trust's value annually. Keep in mind, the charitable remainder must equal at least 10% of the initial asset's value.
As for the remainder beneficiary, you have several options: a public charity, a private foundation, or a donor-advised fund (DAF). A DAF, in particular, gives you the flexibility to influence how the funds are distributed over time. To ensure everything is set up correctly, consult with tax counsel to draft the trust document. This step is crucial to meet IRS requirements and align the trust with your financial and philanthropic goals.
Once the trust is designed and the charity is chosen, it's time to move quickly to transfer your business equity and take advantage of the tax benefits.
Transferring Business Equity to the Trust
The next step is transferring your business equity into the CRT. Timing is critical here. The transfer must occur before executing any binding sale agreement. Otherwise, the IRS could apply the assignment of income doctrine, which would tax you personally rather than allowing the trust's tax-exempt status to apply.
"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." – Mergersandacquisitions.net
To make this transfer, use a conditional Letter of Intent (LOI) to move shares into the trust before the definitive sale agreement is signed. You'll also need a qualified appraisal to determine the fair market value of your equity. This appraisal not only substantiates your charitable income tax deduction but also ensures compliance with IRS regulations. Finally, update your company’s board minutes or operating agreement to reflect the CRT as the new legal owner of the shares.
Trustee's Role in the Sale and Reinvestment
Once the equity is transferred, the trustee steps in to handle the sale and reinvest the proceeds. In the transaction, the trustee - not you - acts as the legal seller. The CRT is listed in the purchase agreement and receives 100% of the gross sale proceeds.
"The CRT trustee, and not the donors, are responsible for such investment decisions." – FSG LLP
After the sale, the trustee reinvests the proceeds in a diversified portfolio. This ensures a steady income stream for you while preserving the trust's value. Collaborate with the trustee to create an Investment Policy Statement (IPS) that balances your need for lifetime income with the requirement to leave at least 10% of the initial asset value for the charitable remainder. The trustee can adjust investments over time, allowing returns to compound more effectively.
For personalized assistance in integrating a CRT into your M&A strategy, Phoenix Strategy Group specializes in guiding growth-stage companies through this process. Their expertise can help you navigate the complexities of CRTs and maximize the benefits for your exit plan.
When to Use CRTs in M&A Exits
A Charitable Remainder Trust (CRT) can be a powerful tool when you're looking to save on taxes, secure a steady income, and support charitable causes during an M&A exit.
High-Gain, Low-Basis Business Equity
CRTs are particularly effective if you're holding business equity with large unrealized gains and little to no tax basis. For founders with a near-zero cost basis, an outright sale could mean losing 25%-35% to taxes. In high-tax states like Washington, the combined tax rate can climb to roughly 30.8% [3].
For instance, a Washington-based business owner saw a significant boost in net proceeds on a $10 million exit by using a CRT instead of a direct sale [3].
"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." – MergersAndAcquisitions.net [1]
CRTs generally work best for assets valued at $500,000 or more. While C-corporation stock is ideal for CRTs, S-corporation stock presents challenges since a CRT cannot hold S-corp stock as a long-term shareholder [1].
The next step is to evaluate how CRTs can align with your income needs and charitable intentions.
Balancing Income Needs and Charitable Goals
Beyond tax savings, a CRT can be tailored to meet your financial needs by structuring payouts to replace the income you previously drew from your business. This creates a steady income stream for life or for a set term, while also supporting your charitable objectives.
- CRUTs (Charitable Remainder Unitrusts): Adjust payouts as the trust's value changes, making them ideal if you expect growth in trust assets.
- CRATs (Charitable Remainder Annuity Trusts): Provide fixed payments, offering stability for those seeking predictable income.
Payout rates typically range from 5% to 8% of the trust's value. Since the trust is irrevocable, at least 10% of the initial contribution must eventually go to the designated charity. To offset any potential impact on heirs, many business owners use part of their CRT income to fund a Life Insurance Trust.
"The CRT allows for an immediate reduction in the asset concentration without incurring an immediate, large taxable gain." – Chad O'Brien, Partner and Wealth Advisor, Corient [17]
Timing is key. To maximize the tax benefits, you must establish the CRT before signing a binding sale agreement. Many advisors suggest starting CRT planning at the Letter of Intent stage, ensuring the trust legally owns the shares before the final sale.
For those navigating an M&A exit, consulting with experts like Phoenix Strategy Group can help determine if a CRT aligns with your financial and philanthropic goals.
Challenges and Limitations of CRTs
Charitable Remainder Trusts (CRTs) can deliver tax benefits during an M&A exit, but they come with strings attached. These constraints can limit your financial flexibility and complicate estate planning, so understanding them is crucial.
Irrevocability of CRTs
When you transfer business equity into a CRT, there’s no turning back - it’s permanent. Assets placed in the trust cannot be retrieved to cover unexpected expenses, fund new ventures, or adapt to life’s curveballs.
"A charitable remainder trust (CRT) must be irrevocable if it is to provide the income and estate tax benefits that are intended by its settlor." – George F. Bearup, J.D., Senior Legal Trust Advisor, Greenleaf Trust [18]
Take Herb’s story, for example. A retired CFO, Herb found himself in urgent need of liquidity due to a health crisis. Despite having $1,500,000 in his CRT, the trust’s irrevocable nature forced him to sell his income interest at a discount. After fees, he walked away with just $1,060,000 [18].
Another limitation is the fixed payout structure. Whether you opt for a 5% or 8% distribution rate, that decision is set in stone. If your cash-flow needs change, you won’t be able to adjust it. To avoid financial strain, it’s wise to keep liquid assets outside the CRT for emergencies or opportunities.
Impact on Heirs' Inheritance
One major trade-off with CRTs is the charitable remainder - the portion of the trust that eventually goes to charity. This means those assets won’t pass to your heirs, which can significantly alter your estate planning strategy.
By law, at least 10% of the fair market value of the initial contribution must go to charity [1]. If you include your children as income beneficiaries, the present value of their interest is treated as a taxable gift and must be reported on IRS Form 709 [20].
Consider a real-life example from November 2025. A family of real estate investors placed two commercial buildings worth $3,500,000 into a CRT. To safeguard their children’s inheritance, they used the $18,000 annual gift exclusion to manage a $1,560,000 taxable gift. The children then used the funds to purchase a life insurance policy with a $112,400 annual premium, ensuring they’d receive a tax-free death benefit to replace the assets allocated to charity [20].
This approach, often called a Wealth Replacement Trust, is a common workaround. By funding an Irrevocable Life Insurance Trust (ILIT) with CRT income, you can provide heirs with a financial cushion to offset the assets redirected to charity.
Balancing Payouts and Charitable Remainder
Striking the right balance between your income needs and charitable goals is another challenge. The IRS requires that annual payouts fall between 5% and 50% of the trust’s value [19]. However, setting the rate too high can jeopardize the trust’s tax-exempt status if it fails the 10% remainder test.
"The Atkinson case famously showed that missing even one payment (or paying the wrong amount) ruins the CRT status." – TaxShark Inc. [19]
For Charitable Remainder Annuity Trusts (CRATs), there’s an additional hurdle: the "5% exhaustion test." If there’s more than a 5% chance the trust will run out of funds before the remainder passes to charity, it won’t qualify [19]. A 2024 survey revealed that nearly 40% of estate plans involving testamentary CRTs had critical drafting errors [19].
Given these complexities, it’s essential to work with seasoned professionals to get the structure right from the start. If you’re planning an M&A exit and considering a CRT, consulting experts like Phoenix Strategy Group can help you navigate these trade-offs and align your financial and philanthropic goals.
Conclusion
A Charitable Remainder Trust (CRT) provides an effective way to optimize your M&A exit by turning it into a tax-savvy legacy plan. It offers a unique opportunity to defer capital gains taxes, ensuring the entire sale proceeds are available for reinvestment. This approach generates a steady income stream - either for life or up to 20 years - while allowing you to claim an immediate charitable deduction, typically ranging from 10% to 40% of the asset's fair market value. Additionally, it removes business equity from your taxable estate, helping preserve the full value of your exit while advancing your philanthropic goals [1][2].
Without a CRT, tax liabilities can eat up 25% to 35% of your sale proceeds [2][13]. A CRT eliminates that immediate tax burden, letting the full sale amount work for you while simultaneously supporting causes you care about.
Timing is everything. To avoid triggering immediate taxation, the trust must be created and funded before signing a binding sale agreement [1][13]. Ideally, planning should begin at the Letter of Intent (LOI) stage. This process involves working closely with qualified appraisers and tax advisors to determine the best trust structure - whether a CRUT, CRAT, or Flip CRUT - based on your income needs and the type of assets involved [1][2]. For those focused on preserving their heirs' inheritance, using a portion of the CRT income to fund an Irrevocable Life Insurance Trust (ILIT) can serve as an effective wealth replacement strategy [1][13].
If you're preparing for an M&A exit and want to see how a CRT can align with your financial and charitable goals, consulting with experts like Phoenix Strategy Group can guide you through the process. Early planning and collaboration with qualified advisors are essential to seamlessly incorporate a CRT into your exit strategy.
FAQs
How early do I need to set up a CRT before my business sale?
Establishing a Charitable Remainder Trust (CRT) well in advance - ideally several months to a year before selling your business - is a smart move. This timeline gives you enough room to plan carefully, structure the trust appropriately, and meet all IRS requirements. Starting early ensures you can make the most of the CRT's advantages while aligning it with both your financial objectives and charitable aspirations.
Can I use a CRT if my company is an S-corp or an LLC?
Yes, businesses organized as S-corporations or LLCs can utilize a charitable remainder trust (CRT). These irrevocable trusts are designed to hold appreciated assets from such entities. By doing so, they can help reduce tax liabilities while also aligning with philanthropic objectives.
How do CRT payouts affect my personal taxes after the sale?
Charitable Remainder Trusts (CRTs) offer a way to manage taxes when selling appreciated assets. By using a CRT, you can defer or even reduce capital gains taxes on the sale proceeds. Beyond that, CRTs provide a steady income stream - either for your lifetime or a specific term - and may allow for charitable tax deductions as well. However, the exact tax benefits depend on how the trust is set up and your unique financial situation. It's a good idea to consult a financial advisor to determine if a CRT aligns with your goals and needs.
