Case Study

A CRT can reduce single-stock exposure risk

Leia's portfolio consists of $1.5 million in a single publicly traded stock (from when her company went public) with a low tax basis and other securities valued at $500,000. She feels the time is right to diversify her portfolio, but she’s been reluctant to do so because of the tax she’d have to pay on the gain.

After consulting her tax advisor, she decides to contribute $1 million of the stock that has only a $100,000 basis to a charitable remainder trust (CRT). The trust can sell the stock without paying any current capital gains tax on the $900,000 gain — avoiding the $214,200 in tax that Leia would have owed had she sold the stock herself (assuming a 23.8% tax on capital gains). The trust can use the sale proceeds for other investments, which in turn helps diversify Leia's portfolio because of her income interest in the trust. She can also use her trust payouts to make investments to further diversify her portfolio.

Leia will receive a payment each year for the trust’s term, part of which will be taxable depending on the trust’s net income and provisions for reserving long-term capital gains. When she establishes the trust, Leia also will receive a current-year charitable deduction for the present value of the remainder amount going to charity.