The purpose of estate tax planning is to maximize the assets you pass on to future generations by minimizing gift and estate taxes. Estate-tax strategies revolve around the use of irrevocable trusts. This article discusses the most common types of irrevocable trusts that are used to minimize gift and estate […]
This article provides a detailed comparison of two strategies that are commonly used to tax efficiently diversify appreciated assets: Charitable Remainder Unitrusts (CRUTs) and Opportunity Zones (OZ).
A CRUT is an irrevocable trust that mitigates capital gains tax on the sale of appreciated assets like stock, crypto, real estate, or privately held businesses and then generates income for a beneficiary (or beneficiaries) for a specified period, after which the remaining assets are distributed to a designated charity.
The basic idea is that a person (the “grantor”) transfers appreciated property to a CRUT and, in return, the CRUT pays the grantor (or another beneficiary) a fixed percentage of the assets in the trust each year for either a set number of years or the beneficiary’s lifetime. When the appreciated assets are sold inside the CRUT, there is no immediate federal or state capital gains tax on the sale; the trust can reinvest and grow the assets pre-tax. Instead, the capital gains tax will be paid by the beneficiary (probably the grantor) when the beneficiary receives distributions from the CRUT. While the capital gains tax is eventually paid, in the meantime the grantor is able to reinvest any untaxed amount inside of the CRUT, generating returns on that entire amount. At the end of the term, anything left over in the trust passes to a charity of the grantor’s choice. In addition, the grantor gets a charitable deduction typically equal to ~10% of the assets they contributed to the trust in the first place. The amount that passes to charity is roughly equal to the 10% charitable deduction the grantor receives adjusted for the growth of the assets over time.
Thanks to the combination of this tax deduction and the powerful tax deferral described above, the grantor typically ends up with significantly more post-tax money than he or she would have had without the CRUT — and a charity gets money, too! That’s a win-win. (You can learn more about CRUTs here and you can estimate the potential returns here.)
Imagine that Bob, a 40-year-old California resident, has a $1,000,000 asset with a cost basis of zero. He wants to sell the asset in a tax-efficient way so he can receive some of the sales proceeds every year to support his lifestyle. If he contributes that asset to a standard CRUT that is designed to last for his lifetime, he’ll get annual distributions from the CRUT equal to about 7% of the value of the CRUT’s assets. So, in Year 1, he’ll get a $70,000 distribution (7% of $1,000,000), in Year 2 he’ll get a distribution equal to about 7% of the value of the CRUT’s assets at that time, and so on. In the meantime, Bob, as Trustee of the CRUT, will generate returns investing the ~$350,000 that would have been taxed immediately without the CRUT. Over his life, Bob will be able to receive about $1,400,000 more after taxes (a 124% additional return) by using the CRUT than he would have been able to generate without it.
Opportunity Zones are a popular tax-advantaged investment strategy. Investors who have realized capital gains (from the sale of stocks, real estate, business interests, or other investments) can roll those gains into a special type of real estate investment fund called a Qualified Opportunity Fund (”QOF”). QOFs invest in government-designed geographic areas called “Opportunity Zones” — areas with a lot of poverty and under-investment. An investor who invests in a QOF within 180 days of realizing the gain will receive two valuable tax benefits. First, he or she will be able to defer capital gains on the QOZ investment until it is sold or exchanged, or the end of 2026, whichever comes earlier. Second, the investor will be able to adjust the cost basis of their investment. If the investor holds the investment for at least 10 years, he or she can avoid taxes entirely on the sale of the Opportunity Zone investment. Once the money is in the QOF, the investor’s returns are tied to how well the real estate projects in the QOF perform.
Imagine that Kyle, a 45-year-old California resident, has a $1 million property with a cost basis of zero. He wants to diversify the asset because it has appreciated so much, but he doesn’t need the cash proceeds from the sale. He wants to invest in a QOF, in part because he doesn’t have much real estate exposure in his portfolio. If Kyle doesn’t take distributions for 11 years, rolling his gains into a QOF will increase his post-tax returns by 45% (from $2.2 million to $3.2 million).
The choice between a CRUT and an Opportunity Zone often depends on an individual’s financial goals, tax considerations, and philanthropic intentions.
Sometimes, the choice is less clear cut. What if an individual is looking to sell an appreciated asset, but isn’t sure if they’ll need the income stream or to what extend they’ll need it? Here are two other factors to consider:
Consider Jane, a tech entrepreneur with a $5 million concentrated public stock position in a successful company she co-founded. Jane is 55 years old and has plans for retirement, with a strong desire to contribute to environmental causes. Her stock has appreciated significantly, and she wants to sell it to support her lifestyle but is concerned about the tax implications of selling her shares.
Assumptions:
Results:
| Opportunity Zone | CRUT | Nothing | |
|---|---|---|---|
| Distributions | $14,694,091 | $29,311,737 | $10,938,782 |
| Capital Gain Taxes | $4,162,246 | $10,750,439 | $3,186,148 |
| Charitable Donation | $0 | $5,491,394 | $0 |
| Net distributions after taxes (to you) | $10,531,846 | $18,561,298 | $7,752,634 |
Choosing between a CRUT and an Opportunity Zone requires careful consideration of various factors, including tax efficiency, income needs, philanthropic goals, and control over assets. Both strategies offer unique advantages and potential drawbacks, making it essential to align the chosen approach with the individual’s broader financial objectives. You can use our Comparison Calculator here to understand the financial trade-offs.
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From picking the best strategy to taking care of all the setup and ongoing overhead, we make things simple. The results are real: We have helped create more than $3 billion in additional wealth for our customers. If you would like to learn more, please feel free to explore our Learning Center. You can also see your potential tax savings with our online calculators or schedule a time to chat with us!
