Selling highly appreciated cryptocurrency can be one of the most expensive tax decisions you'll ever make. The same goes for appreciated real estate, stock, or even a closely held business. Before you sell, you should know there's a strategy that's been helping investors preserve more of their wealth for decades. It's called a Charitable Remainder Unitrust (CRUT).
A CRUT allows highly appreciated assets to be sold inside a charitable trust without triggering immediate capital gains tax. The result? More of your money stays invested, you create a lifetime income stream, you may qualify for a charitable deduction, and the remaining assets ultimately support a charity you choose.
What Is a Charitable Remainder Unitrust (CRUT)?
A Charitable Remainder Unitrust (CRUT) is a type of Charitable Remainder Trust (CRT) and one of the most powerful tax strategies available for someone holding highly appreciated assets. Whether it's cryptocurrency, real estate, stock, or even a closely held business, a CRUT allows you to transfer the asset into a charitable trust before it's sold. Here's why that matters.
The trust, not you, sells the asset. Because a Charitable Remainder Unitrust is a charitable trust, the sale doesn't trigger immediate capital gains tax inside the trust. Instead of writing a large check to the IRS on day one, the full value of the sale remains inside the trust to be invested.
In return, you receive an income stream from the trust for life or for a specified term of years. You may also qualify for a charitable income tax deduction when you transfer the asset into the trust. When the trust eventually ends, the remaining assets pass to the charitable organization you've chosen.
Charitable Remainder Trusts have been used for decades by investors selling highly appreciated real estate and stock. As cryptocurrency has created substantial wealth for many investors, the CRUT has become an increasingly popular strategy for reducing taxes while preserving more of those gains for future growth.
Why Crypto Investors Should Care
Cryptocurrency has created incredible wealth for many investors. Unfortunately, it's also created some incredibly large tax bills. The IRS treats cryptocurrency as property, not currency. That means every time you sell it, trade it, or exchange it, you've created a taxable event.
If you've held your crypto for more than a year, you'll typically qualify for the long-term capital gains rate. Sounds great, until you remember that's only part of the equation. Depending on your income, you could also owe the Net Investment Income Tax, plus state income tax. If you've held the asset for one year or less, those gains are generally taxed as ordinary income, which can be substantially higher.
The bottom line is simple. The more your crypto has appreciated, the bigger the tax problem becomes.
Example
Let's say you bought cryptocurrency for $50,000, and today it's worth $1 million. If you sell it personally, you've just created a $950,000 capital gain. Before you ever think about reinvesting, a significant portion of that money could disappear to federal and state taxes.
Now compare that to a properly structured CRUT.
Instead of selling the cryptocurrency yourself, you transfer it into the trust before the sale. The trust becomes the seller, allowing the full $1 million to remain invested inside the trust rather than the after-tax amount.
That's where a CRUT completely changes the conversation. Instead of starting with what's left after taxes, you're starting with the entire investment working for you.
The Five Biggest Benefits of a CRUT
When properly designed and implemented, a Charitable Remainder Unitrust can provide several significant benefits.
1. Avoid Immediate Capital Gains Tax
The trust sells the appreciated asset, not you. Because the sale occurs inside the charitable trust, there is generally no immediate capital gains tax due when the asset is sold. That leaves a significantly larger pool of assets available for future investment.
2. Receive a Current Charitable Income Tax Deduction
When you contribute appreciated assets to a CRUT, you may also receive a charitable income tax deduction. The deduction is based on several factors, including your age, the payout percentage, IRS interest rates, and the actuarial value expected to remain for charity. Every situation is different, but the deduction can become another valuable component of the overall strategy.
3. Create Lifetime Income
Unlike simply selling your cryptocurrency and hoping your investments last, a CRUT is designed to provide ongoing income. Each year, the trust distributes a fixed percentage of its annually revalued assets to you. As the value of the trust grows, your income has the opportunity to grow too. Unlike a Charitable Remainder Annuity Trust (CRAT), which pays a fixed dollar amount each year, a CRUT adjusts annually based on the value of the trust's assets.
4. Asset Protection
Assets held inside a properly established CRUT generally receive significant protection from your future personal creditors. As with most asset protection strategies, planning must occur before legal claims arise. Waiting until after a lawsuit or creditor issue develops is typically too late.
5. Continue Managing the Investments
One of the biggest misconceptions about a CRUT is that you lose all control over your investments. In many cases, you can continue serving as the investment trustee, making investment decisions for the trust while following the trust's terms and fiduciary responsibilities. For crypto investors who understand digital assets better than traditional investments, that's a significant advantage.
How Does a CRUT Work?
While every Charitable Remainder Unitrust is customized to fit the donor's goals, the process generally follows the same path.
Step 1: Create the CRUT
Timing is everything. The CRUT has to be created before you sell the asset or sign a binding agreement to sell it. If you sell first and try to move the money into a trust afterward, it's too late. You've already triggered the taxable event, and the strategy no longer works.
That's why planning comes first. A CRUT is an irrevocable trust with specific IRS requirements, so it needs to be drafted and implemented by an experienced attorney before any sale takes place.
Step 2: Transfer the Asset to the Trust
Once the trust is established, you transfer the appreciated asset into the CRUT.
That asset could be:
- Cryptocurrency
- Real estate
- Highly appreciated stock
- A closely held business
- Other qualifying appreciated property
At this point, the trust becomes the owner of the asset.
Step 3: The Trust Sells the Asset
Here's where the strategy becomes so powerful. Because the trust, not you, owns the asset, the trust can sell it without paying immediate capital gains tax. Instead of losing a substantial portion of the proceeds to taxes on day one, the entire sales price remains available for investment inside the trust.
For many investors, that's the difference between investing hundreds of thousands of dollars versus investing the full value of the appreciated asset.
Step 4: Invest the Proceeds
Once the asset is sold, the trustee reinvests the proceeds according to the trust's investment strategy. One of the advantages of a CRUT is that you're not locked into the investment you originally contributed. The trust can diversify into other investments that better fit your long-term goals and income needs.
CRUT vs. CRAT: What's the Difference?
There are two primary types of Charitable Remainder Trusts:
- Charitable Remainder Annuity Trust (CRAT)
- Charitable Remainder Unitrust (CRUT)
While both can be effective planning tools, I generally prefer the CRUT, especially when working with highly appreciated assets like cryptocurrency.
A CRAT pays a fixed dollar amount every year. That payment never changes, regardless of whether the trust grows or declines in value. A CRUT, on the other hand, is revalued every year. Your annual distribution is calculated as a fixed percentage of the trust's value. That means if the trust grows over time, your income has the opportunity to grow with it. It's one of the biggest reasons more investors are choosing a CRUT over a CRAT when planning for highly appreciated assets.
What Taxes Do You Pay?
One of the biggest misconceptions about a CRUT is that it's completely tax-free. It isn't. The benefit is that you avoid paying capital gains tax upfront when the appreciated asset is sold inside the trust.
As the trust makes distributions to you over time, those payments are taxable. The character of the income depends on the earnings generated inside the trust and follows the IRS's distribution ordering rules. In other words, you don't eliminate taxes forever. You change when you pay them, often allowing significantly more money to remain invested and compounding for years before distributions are made.
That's an important distinction and one of the reasons a CRUT should be viewed as a comprehensive wealth-planning strategy, not simply a way to avoid taxes.
Pairing a CRUT with an Irrevocable Life Insurance Trust (ILIT)
One concern I hear from clients is, "If the remainder goes to charity, what does my family receive?" That's where an Irrevocable Life Insurance Trust (ILIT) can become a valuable part of the overall strategy.
Many donors use a portion of the income they receive from the CRUT to fund a life insurance policy owned by an ILIT. When structured correctly, the life insurance proceeds are paid to your heirs income tax-free, effectively replacing the assets that will ultimately pass to charity.
It's a strategy that allows you to accomplish multiple goals at the same time:
- Reduce or defer capital gains tax on appreciated assets
- Create an income stream for yourself
- Support a charitable organization or family foundation
- Leave a meaningful inheritance for your family
When designed properly, a CRUT and ILIT can work together to create both a charitable legacy and a family legacy.
Is a CRUT Right for You?
A Charitable Remainder Unitrust isn't one size fits all. Generally, it makes the most sense for individuals who:
- Own highly appreciated cryptocurrency, real estate, stock, or a closely held business
- Plan to sell those assets in the near future
- Want to reduce the immediate tax impact of the sale
- Would benefit from a predictable lifetime income stream
- Have charitable goals as part of their long-term estate plan
- Want to preserve more wealth for future investment rather than paying a large tax bill upfront
The Bottom Line
A Charitable Remainder Unitrust isn't just a way to reduce taxes. It's a way to keep more of your wealth working for you instead of handing it over to the IRS. But like many of the best tax strategies, it only works if you plan ahead.
Once you've sold appreciated cryptocurrency, real estate, stock, or a business, you can't go back and put those assets into a CRUT. The opportunity is gone. If you're even thinking about selling a highly appreciated asset, book a free call with my team at KKOS Lawyers before you sign a contract or complete the sale. They’ll help you determine whether a CRUT is the right strategy, design it correctly, and coordinate every step so you don't miss one of the most powerful tax planning opportunities available.
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Frequently Asked Questions
What is a Charitable Remainder Unitrust (CRUT)?
A CRUT is an irrevocable trust that allows you to transfer appreciated assets before they're sold, receive lifetime income, and leave the remaining assets to a qualified charity.
Can I put cryptocurrency into a CRUT?
Yes. If structured properly before the sale, cryptocurrency can be transferred into a CRUT and sold by the trust without triggering immediate capital gains tax.
What assets can I put into a CRUT?
A CRUT can hold many appreciated assets, including cryptocurrency, real estate, stock, and closely held business interests.
Do I ever pay taxes with a CRUT?
Yes. A CRUT doesn't eliminate taxes altogether. You'll generally pay tax on the income distributions you receive from the trust over time.
What's the difference between a CRUT and a CRAT?
A CRAT pays a fixed dollar amount each year. A CRUT pays a fixed percentage of the trust's value, so your distributions can increase as the trust grows.
When should I create a CRUT?
Before you sell the asset. Once you've completed the sale, it's generally too late to use this strategy.
Is a CRUT only for cryptocurrency?
No. A CRUT can also be used with appreciated real estate, stock, business interests, and other qualifying assets.
