Case Studies and Articles

Converting Appreciated Stock Efficiently

Converting Appreciated Stock Efficiently

Converting Appreciated Stock Efficiently


David (63) and Jean (62) Grant opted for early retirement and possess an estate comprised primarily of publicly traded stock. Faced with a declining income stream, the Grants are concerned that almost all of their estate is tied up in just one company stock, valued in excess of $1 million. Like others who benefited from stock options and familybusiness interests, this high risk lack of diversity was a motivation to seek other alternatives. However, in order to have a diversified portfolio the Grants must typically sell and pay tax on their paper profits. While appreciation is a great way to accumulate wealth, now that they need to spend it in retirement, the 1.4 % dividend rate is just not adequate. So, a §664 CRT was suggested as a tool to assist them in meeting their goals to cut capital gains taxes.

Although the Grants are charitably inclined, there was some mention that the eventual transfer to charity probably would exceed $1.1 million, and that seemed a little more than the family initially desired. So they asked about increasing the payout to generate more income while they could enjoy their retirement. There were three comments made by their planning staff that answered those objections:

1. The future value of the capital gains liability of $147,192 at 9% over 29 years would be $1.79 million and so the charity is actually receiving less than the present value of just the capital gains tax. In a CRT, the Grants will have the right to control and generate income from capital that otherwise would have gone to the IRS. In a typical transaction, a seller of appreciated assets pays the tax and doesn’t think about conserving it. This is a great example of recognizing opportunities to do good works with the IRS’ money.

2. A lower payout CRUT generates a higher income tax deduction; over time, if the investment portfolio performs well, it will also produce more net income for the Grants. This is contrary to logic for many prospective donor-clients, but they need to remember how assets compound in a tax-exempt trust during their lifetime.

3. Since the portfolio of stock is liquid, by contributing only 75% of their stock holdings to the CRUT, the Grants have the remaining 25% that may be sold outside of the CRT and offset any taxable sale with some of the tax deductions generated by the deferred gift to charity. This provides back-up income.

While the Grants are concerned about their children, they intend to spend their retirement taking care of their own income and security needs, and if there is a little something extra left for heirs, that will be fine. However, they have no intention of impoverishing themselves to leave a windfall for their children. As a result, they purchased only a small life insurance contract and gifted it directly to their children to replace some of the wealth they were transferring into their §664 Trust. The remainder of their trust will go to three favorite charities and a local college as a way to shift something back to their community and keep control of their “social capital”.

Partial Stock Sale CRT Strategy

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Keep Asset and Do NothingSell Asset and Reinvest the Balance (A)Gift Asset to §664 CRT and Reinvest (B)
Fair Market Value of Publicly Traded Appreciated Stock




Less: Tax Basis 


Equals: Gain on Sale 


Less: Capital Gains Tax (federal and state combined @ 23%) 


Net Amount of Capital at Work




Current Net Return at 1.4% Dividend Rate


Annual Return From Asset Reinvested in Balanced Acct @ 9% 


Avg. Annual Return From Asset in 6.5% CRUT Reinvested @ 9%  


After-Tax (31%) Avg. Spendable Income For Each Scenario




Years of Projected Cash Flow for Income Beneficiaries 



Taxes Saved from $186,923 Deduction at 31% Marginal Rate  


Added Tax Savings and Cash Flow over Joint Life Expectancies 



Transfer to Family Charitable Interests




Henry & Associates designed the Grant scenario* and compared the options. Option (A) sell stock and pay the capital gains tax on the appreciation and reinvest the balance at 9% or Option (B) gifting the property to an IRC §664 Trust and reinvesting all of the sale proceeds in a 9% balanced portfolio. A SCRUT was used instead of a NIMCRUT to assure the income beneficiaries of a more reliable income stream. For younger donors with a desire to control the timing and amount of income, the NIMCRUT may be a better tool.

* Hypothetical evaluations are provided as a professional courtesy to members of the estate planning community. Call for suggestions or schedule a workshop for your professional advis60213084102/, development officers or charitable board members.

or try your own at Donor Direct