Funding a Charitable Remainder Trust with Private Company Stock: Timing, the Prearranged Sale Doctrine, and the Acquisition Structure Problem

Jurisdiction

Federal, with California overlay

Primary Statutes

IRC §§ 170(b), 170(f)(11), 358, 368, 664, 1001, 1012, 1045, 1202, 2522, 4941, 4946, 4947, 7520

Key Authorities

Lucas v. Earl, 281 U.S. 111 (1930); Helvering v. Horst, 311 U.S. 112 (1940); Palmer v. Commissioner, 62 T.C. 684 (1974), aff'd on another issue, 523 F.2d 1308 (8th Cir. 1975); Ferguson v. Commissioner, 108 T.C. 244 (1997), aff'd, 174 F.3d 997 (9th Cir. 1999); Rauenhorst v. Commissioner, 119 T.C. 157 (2002); Estate of Hoensheid v. Commissioner, T.C. Memo. 2023-34; Rev. Rul. 78-197, 1978-1 C.B. 83; Treas. Reg. §§ 1.170A-16, 1.170A-17, 1.664-1(a)(7), 1.664-3(a)(1)(i)(c)-(d); SEC Rule 144, 17 C.F.R. § 230.144 (resale of restricted and control securities)

Last Reviewed

May 2026

Category

Charitable Planning -- CRT Funding

At a Glance

When the contribution timing is unproblematic (Green Zone)

• Before any letter of intent, term sheet, board approval, drag-along notice, or tender threshold

• Before the company has identified an acquirer or initiated any sale process

• Before any binding obligation on the donee to sell or surrender the shares

When the contribution timing is defensible but requires careful documentation (Yellow Zone)

• After a nonbinding letter of intent, with no binding obligation on the CRT trustee to participate

• With material contingencies still alive (financing, regulatory approval, due diligence, third-party consents)

• With the CRT trustee retaining genuine fiduciary discretion over any subsequent sale

• With contemporaneous documentation (trustee minutes, valuation memorandum, deal-status memo) memorializing the live risk of non-closing

When the contribution timing is dangerous (Red Zone)

• After a binding definitive purchase agreement

• After shareholder approval or drag-along consent has been obtained

• After a tender threshold has been crossed (Ferguson territory)

• After pre-closing dividends or bonuses paid, dividends stripped, or corporate formalities completed for the transaction (Hoensheid territory)

• When only ministerial closing conditions remain

Three drafting rules

• Contribute while the shares still represent equity subject to meaningful deal risk, not after they have effectively become a fixed right to receive sale proceeds. The Tax Court in Hoensheid put this affirmatively: the donor must bear at least some risk that the sale will not close.

• Confirm the expected liquidity structure (stock sale, statutory merger, reverse triangular merger, asset sale, redemption, § 368 reorganization, or initial public offering) before deciding when to contribute. The structure controls whether a post-closing contribution captures the gain-deferral benefit that is the CRT's primary economic engine for low-basis appreciated property.

• Screen for qualified small business stock treatment under IRC §§ 1202 and 1045 before concluding the CRUT is the best path. Do not miss the obvious tax shelter while building the fancier one. For some founder, early-employee, and accredited-investor positions, § 1202 exclusion or § 1045 rollover dominates the CRT analysis on after-tax dollars.
  

The short answer. For most private-company-stock-to-CRUT contributions, the cleanest path is to contribute before any letter of intent and to substantiate the deduction with a qualified appraisal that reflects realistic marketability and minority discounts. After an LOI, the contribution may still be defensible if the documents reflect no binding obligation on the donee to sell and the CRT trustee retains genuine discretion, but the analysis tightens with every additional deal-stage indicator. Post-closing contributions of acquirer stock are useful only when the acquisition qualifies as a tax-free § 368 reorganization that carries the donor's low basis forward; in a taxable closing, the built-in gain has already been recognized and most of the CRUT's economic engine is gone. An initial public offering is the exception that inverts the timing intuition: because going public is not a sale of the donor's shares, a post-IPO contribution preserves the low basis and the deferral while easing the valuation problem, and the binding constraints become securities-law constraints rather than the prearranged sale doctrine.

Scope note. This discussion assumes stock of a corporation, usually a domestic C corporation; § 1202, § 368 reorganizations, IPO stock, and the asset-sale corporate-tax analysis all turn on C corporation treatment. S corporation stock, LLC or partnership interests, profits interests, options, warrants, SAFEs, convertible notes, RSUs, and other compensatory or derivative interests require separate analysis of eligibility, assignment, valuation, and income recognition. It also assumes the contributed asset and its sale do not produce unrelated business taxable income. A CRT is generally exempt under § 664(c)(1), but § 664(c)(2) imposes a 100 percent excise tax on any UBTI, so pass-through equity, debt-financed property, and operating-business interests need separate review before funding.

Executive Summary

The decision to fund a charitable remainder unitrust with private company stock involves three overlapping doctrinal regimes and one structural variable that drives the answer. The doctrinal regimes are the anticipatory assignment of income doctrine (sometimes called the prearranged sale doctrine in this context), the qualified appraisal and substantiation requirements of IRC § 170(f)(11) and the regulations at Treas. Reg. §§ 1.170A-16 and 1.170A-17, and the CRT's parallel valuation rule for unmarketable assets at Treas. Reg. § 1.664-1(a)(7). The structural variable is the expected liquidity structure: whether the company will be sold for cash, acquired in a statutory or reverse triangular merger, taken in a stock-for-stock exchange that may or may not qualify under § 368, unwound through an asset sale and corporate liquidation, or taken public in an initial offering.

The doctrinal regimes pull in opposite directions on timing. Earlier contribution gives the cleanest answer under Rauenhorst v. Commissioner, 119 T.C. 157 (2002), because no LOI, definitive agreement, or shareholder commitment exists to argue from. But earlier contribution also produces the most uncertain valuation: the appraiser must apply marketability and minority discounts to closely held stock without an arm's length transaction price to anchor to, and the donor's deduction lands well below the eventual liquidation value. Later contribution narrows the discounts but pushes the donor into the assignment-of-income territory mapped out by Ferguson v. Commissioner, 108 T.C. 244 (1997), aff'd, 174 F.3d 997 (9th Cir. 1999), and Estate of Hoensheid v. Commissioner, T.C. Memo. 2023-34. The defensible window sits somewhere in the middle, and where exactly within that window depends on the documents.

The acquisition structure variable is often misunderstood. Donors and their advisors sometimes assume that a post-closing contribution of acquirer stock is functionally equivalent to a pre-closing contribution of target stock, because in both cases the trust ends up holding marketable securities that it can sell tax-free under § 664(c)(1). That is wrong in a taxable closing, where § 1001 recognition has already occurred at the donor level and § 1012 gives the donor cost basis at fair market value in the new asset. The built-in gain that the CRUT was designed to defer has already been recognized. The post-closing contribution may still produce a § 170 deduction and defer future appreciation, but the main engine is gone. In a § 368 reorganization, by contrast, § 358 carryover basis preserves the built-in gain in the donor's new acquirer stock, and a post-closing contribution can be a clean and even superior path: the gain-deferral benefit is intact, and valuation is far simpler because the acquirer is public.

One structure deserves separate mention because it inverts the usual timing intuition: the initial public offering. An IPO is not an acquisition and not a sale of the donor's shares. The company issues new shares to raise capital; the donor's shares simply become marketable, with no realization to the donor at the offering. The assignment-of-income doctrine has nothing to reach merely from the offering itself, and because the donor's low basis survives intact, a post-IPO contribution captures full gain deferral and a public-market-based deduction at once. The constraints that matter for an IPO are securities-law constraints, the underwriter lockup and Rule 144, not the prearranged sale doctrine. The IPO is treated in its own subsection below.

This briefing organizes the analysis into three timing zones (Green, Yellow, Red), then treats the structure variable separately because it cross-cuts all three zones, then addresses the QSBS overlay that can change the entire recommendation, then walks through the trust-design choice (typically a FLIP-NIMCRUT) and the self-trusteeship constraints that apply when the trust holds unmarketable assets. The companion piece in this series, "Funding a Charitable Remainder Trust with Real Estate: Doctrine, Traps, and Trustee Mechanics," covers the parallel real estate analysis; the doctrinal foundations overlap substantially, and readers seeking the underlying case law treatment may find the real estate post a useful cross-reference.

Governing Framework

The Anticipatory Assignment of Income Doctrine

The doctrinal foundation is Lucas v. Earl, 281 U.S. 111 (1930), and Helvering v. Horst, 311 U.S. 112 (1940). Lucas v. Earl held that earned income is taxed to the person who earns it and cannot be assigned away by contract; Horst extended the principle to interest coupons gifted before maturity, holding that the donor who "ripens" income through ownership cannot shift the tax by transferring the right to receive that income to another. The doctrine applies to charitable contributions of appreciated stock followed by a sale: if the donor has sufficiently ripened the right to sale proceeds before transferring the stock to the charity, the donor is taxed on the gain.

The "prearranged sale doctrine" is not a separate body of law. In the context of charitable contributions of stock before a sale, the IRS and courts use the terms interchangeably. The Tax Court in Rauenhorst spoke of "alleged prearranged sales" while applying assignment-of-income analysis. The Journal of Accountancy and other commentary uses "imputed prearranged sale doctrine" as a synonym for the same inquiry. Practitioners who try to draw a bright line between the two doctrines in this context are inventing a distinction the cases do not honor.

The Rev. Rul. 78-197 Concession

Palmer v. Commissioner, 62 T.C. 684 (1974), aff'd on another issue, 523 F.2d 1308 (8th Cir. 1975), held that a gift of stock followed by a redemption was not recharacterized as a sale by the donor where the donee charity was not legally obligated to participate in the redemption. The IRS acquiesced in part through Rev. Rul. 78-197, 1978-1 C.B. 83, which set out the IRS's concession: the proceeds of a redemption will be treated as income to the donor only if the donee is "legally bound, or can be compelled by the corporation, to surrender the shares for redemption." The revenue ruling adopted a bright-line standard tied to a binding legal obligation.

The Rev. Rul. 78-197 concession is narrower than it sometimes reads. It addresses redemptions, not third-party acquisitions, and the IRS has not formally extended the ruling beyond the redemption context. But the Tax Court has applied the underlying principle to charitable contributions followed by other forms of disposition, and the practitioner question is whether the donee charity is under a binding obligation to sell at the contribution date. Where there is no such obligation, the Rauenhorst principle (next section) protects the donor.

Rauenhorst and the Tax Court's Enforcement of IRS Concessions

Rauenhorst v. Commissioner, 119 T.C. 157 (2002), confirmed that the Tax Court will enforce Rev. Rul. 78-197 against the IRS as a binding concession in cases where its facts apply. The donors there had contributed stock to four charities shortly after the issuer signed a nonbinding letter of intent to be acquired, but before any definitive agreement. The IRS argued that the merger had become a practical certainty and that assignment-of-income principles should apply. The Tax Court rejected the argument and held the IRS to the standard in its own revenue ruling: in the absence of a legally binding obligation on the donees to sell, the doctrine did not apply.

Rauenhorst is the best taxpayer authority for a contribution made after a nonbinding LOI but before a definitive agreement, where the donee is not bound to participate in any subsequent sale. The case is invoked frequently in opinion letters supporting Yellow Zone contributions. Two practical points temper the result. First, Rauenhorst depends on facts that show the donee is genuinely free to hold or sell. Boilerplate trustee discretion language is not enough if the surrounding facts contradict it. Second, Rauenhorst predates Hoensheid by twenty-one years; the Tax Court's more recent emphasis on the substantive risk-bearing test means that legal-obligation analysis is not the entire inquiry.

Ferguson, Hoensheid, and the Ripening Analysis

Ferguson v. Commissioner, 108 T.C. 244 (1997), aff'd, 174 F.3d 997 (9th Cir. 1999), is the leading case where the doctrine applied. Shareholders contributed stock to charity during an ongoing tender offer for the issuer. By the contribution date, more than fifty percent of the company's shares had been tendered or guaranteed; the merger was a foregone conclusion; and the Tax Court held that the donors' interests had "ripened" from an equity interest in a viable corporation into a fixed right to receive the merger consideration. The Ninth Circuit affirmed. Ferguson sets the outer bound of Red Zone contribution: once shareholder approvals or tender thresholds reach the point that the transaction is a practical certainty, the assignment-of-income doctrine reaches the donor regardless of whether the donee charity is itself under any obligation to sell.

Estate of Hoensheid v. Commissioner, T.C. Memo. 2023-34, is the most recent and most demanding gloss. The donor there contributed shares of his closely held C corporation to Fidelity Charitable two days before closing. The court found that pre-closing distributions had been made, bonuses had been paid, dividends had been stripped, and the corporation no longer functioned as a going concern at the contribution date. The doctrine applied, and the court required the donor to recognize the gain on the appreciated stock under assignment-of-income principles. The court articulated the standard affirmatively:

The donor must bear at least some risk at the time of contribution that the sale will not close.

That language is the working test post-Hoensheid. Hoensheid is also a substantiation case, on a separate and independent ground. The Tax Court found that the donor's appraisal failed to satisfy the qualified appraisal requirements of § 170(f)(11) and the regulations, rejected the donor's reasonable-cause defense, and disallowed the charitable deduction on that ground alone. The case is therefore a warning on two analytically distinct fronts: doctrinal timing (which produced gain recognition) and appraisal substantiation (which independently disallowed the deduction). A donor can lose on either ground, and Hoensheid lost on both.

The Shareholder-as-Seller Framing

A recurring confusion in practice is the question of who is "the seller" in a corporate acquisition for purposes of the assignment-of-income analysis. The intuition that the corporation is the seller, and that the shareholder is merely a passive bystander, draws on the redemption context (where the corporation is in fact the counterparty buying back its own stock) and on the asset-sale-plus-liquidation context (where the corporation sells its assets to a buyer and then distributes proceeds to shareholders in liquidation). In those contexts, the doctrine still reaches the shareholder, but the framing has some intuitive force.

It does not survive the most common acquisition structures for private companies. In a stock purchase, the shareholders sell their shares directly to the acquirer; they are the sellers. In a statutory merger, the target corporation merges into the acquirer (or into an acquisition subsidiary), the target's shareholders' stock is converted to cash or acquirer stock, and the shareholders' equity interest is extinguished or substituted. The Tax Court and the Ninth Circuit treat the conversion of shareholder stock to a right to receive cash as functionally equivalent to a sale by the shareholders. Ferguson was a tender offer followed by a reverse triangular merger, and the doctrine applied to the shareholder donors directly.

The practical correction is to abandon the "I am not the seller" argument in third-party acquisition fact patterns. The shareholders' stock is being converted to cash or to acquirer stock; the assignment-of-income doctrine reaches them as donors of an asset whose underlying transaction has ripened, regardless of whether the formal counterparty document names the corporation or the shareholders. Counsel who advise a donor to contribute on the theory that "the corporation is selling, not you" are giving advice the Tax Court has rejected.

Substantiation Under §§ 1.170A-16 and 1.170A-17

Treas. Reg. § 1.170A-16 sets out the substantiation requirements for noncash charitable contributions. For contributions exceeding $5,000 in value, the donor must obtain a qualified appraisal by a qualified appraiser as defined in § 1.170A-17, must attach a completed Form 8283 Section B (signed by the appraiser and the donee) to the return, and must retain the appraisal with tax records. For contributions exceeding $500,000 in value, the qualified appraisal itself must be attached to the return on which the deduction is claimed, not merely retained.

The qualified appraisal must be signed and dated by the appraiser no earlier than sixty days before the contribution date and no later than the due date (including extensions) of the return on which the deduction is claimed. If the appraisal is prepared after the contribution, the valuation effective date generally must be the contribution date itself. The appraisal must satisfy the content requirements of § 1.170A-17(a)(3), which include sufficient property description, valuation date, fair market value at the valuation date, the appraisal method and basis, the appraiser's qualifications, and a statement that the appraisal was prepared for income tax purposes. The qualified appraiser must satisfy the credential and independence requirements of § 1.170A-17(b), which exclude (among others) the donor, the donee, parties to the transaction, employees of any of the foregoing, and certain related parties.

Substantiation defects can destroy the deduction independent of any doctrinal challenge. Hoensheid lost on both grounds. The practical implication for private company stock is that the donor must engage a third-party valuation firm with experience in private company equity valuations for charitable contribution purposes, on a timeline that allows the appraisal to be signed within the regulatory window and to bear a valuation date matching the contribution date. The appraisal is not a clerical afterthought.

The CRT's Unmarketable Assets Valuation Rule

Treas. Reg. § 1.664-1(a)(7) imposes a parallel valuation requirement on the CRT itself. The trust must value any unmarketable assets it holds either through an independent special trustee or through a current qualified appraisal that satisfies the § 1.170A-17 standards. Closely held stock is unmarketable for these purposes by default. The rule applies on the funding date and on every subsequent annual valuation date for as long as the trust holds the asset.

"Independent" for this specific purpose is defined by reference to § 672(c), which covers the grantor, the noncharitable beneficiary, and related or subordinate parties to either. It is not defined by the broader § 4946 disqualified-person universe. The CRT remains independently subject to the § 4947(a)(2) split-interest trust rules and the § 4941 self-dealing constraints, but those rules operate separately from the § 1.664-1(a)(7) independence requirement. The donor who serves as trustee of her own CRUT (a configuration that is permissible after the trust holds marketable securities, subject to the trustee post analysis in this series) cannot qualify as the independent trustee for valuation purposes because the donor is the grantor and is therefore non-independent under § 672(c). The practical consequence is that a CRUT funded with closely held stock and trusteed by the donor must obtain a qualified appraisal each year the unmarketable asset is held, until the asset is sold or replaced with marketable securities.

The Timing Spectrum

The timing decision sits between the valuation pull (later is better) and the doctrinal pull (earlier is better). The spectrum below maps the practical decision points.

Green Zone: Pre-LOI Contribution

The cleanest position is contribution before the company has identified an acquirer or signed any letter of intent or term sheet. Rauenhorst protects this position directly; Rev. Rul. 78-197 protects it independently; Ferguson and Hoensheid do not apply because nothing has ripened. The CRT trustee's discretion over any subsequent sale is unconstrained by deal documents because no deal documents exist.

Valuation expectation. A qualified appraisal of pre-LOI private company stock applies discounts for lack of marketability (typically 25 to 40 percent for early-stage or pre-liquidity positions) and for lack of control (typically 10 to 25 percent for minority interests). The appraised value will sit well below the donor's expected liquidation price. For a position that may liquidate at $30 to $50 per share but is appraised at $10 to $20 per share in the Green Zone, the donor's § 170 deduction is computed from the appraised value, specifically as the actuarial present value of the charitable remainder interest derived from that appraised value under § 7520 and the § 664 valuation rules. The deduction is therefore not the appraised value itself; it is a fraction of the appraised value determined by the trust's payout rate, term, and beneficiary lives. The gap between the appraised value and the eventual sale price is real and represents the cost of doctrinal cleanliness, but it is then further compressed into the actuarial remainder interest, which for a typical joint-and-survivor CRUT runs in the 10 to 30 percent range of the contributed property's value.

Substantiation. Engage a qualified valuation firm with experience in private company equity valuations for charitable contribution purposes. The appraisal must be effective at the contribution date and signed within the § 1.170A-17 timing window. Form 8283 Section B must be completed and signed by the appraiser and the donee. The donor should retain the full appraisal package including underlying data and methodology, regardless of whether the deduction exceeds the $500,000 attachment threshold.

Trust design. A CRUT funded with illiquid stock before a liquidity event needs a structure that does not force fixed unitrust distributions from an asset that produces no cash. The FLIP-NIMCRUT (discussed below) is the standard answer.

Yellow Zone: Post-LOI, Pre-Definitive Agreement

After a nonbinding letter of intent but before a binding definitive purchase agreement, the contribution remains defensible if the documents and facts support it. Rauenhorst is the direct authority. The conditions for a defensible Yellow Zone contribution are factual:

• The letter of intent is genuinely nonbinding as to the substantive transaction terms, with binding effect only as to ancillary provisions (exclusivity, confidentiality, expense allocation). Most well-drafted LOIs are constructed this way, but some have substantive binding provisions that pull the contribution closer to Red Zone exposure.

• Material contingencies remain alive: financing, regulatory approvals, governmental consents, due diligence outcomes, third-party consents to assignment, key-employee retention, indemnification negotiation, escrow terms. Any of these can collapse the deal.

• The CRT trustee retains genuine discretion to participate in or decline any subsequent sale. No side agreement obligates the trustee to sell.

• The trustee's acceptance of the contributed stock is documented in trustee minutes that acknowledge the LOI, recite the trustee's fiduciary duty to evaluate any future sale on its merits, and confirm the absence of any prearranged commitment to participate.

Valuation. A Yellow Zone appraisal has a price reference (the LOI valuation) but still applies discounts. The discounts are smaller than in the Green Zone, because the LOI provides an arm's length data point, but they are real. A typical Yellow Zone appraisal lands closer to the LOI price than to the eventual closing price, reflecting the contingencies that may reduce or eliminate the deal value.

Documentation discipline. Yellow Zone contributions require contemporaneous documentation that the Tax Court can credit. The trustee minutes should be drafted with the contribution date in mind, not reconstructed afterward. The valuation memorandum should explicitly address the LOI and the remaining contingencies. The donor's tax return should attach the qualified appraisal (above $500,000) and report the contribution on Form 8283 Section B with full documentation.

Red Zone: Post-Definitive Agreement and Beyond

After a binding definitive purchase agreement, the donor is in Hoensheid territory. The case-by-case analysis turns on the factors the Tax Court emphasized in that case and that Ferguson developed: the percentage of shareholder approvals obtained, the tender threshold crossed (if any), the executed status of the definitive agreement, the payment of pre-closing dividends or bonuses, the stripping of corporate assets in anticipation of closing, the removal of material contingencies, and the time remaining to closing.

A contribution executed after the definitive agreement but with substantial closing contingencies still open may be defensible. A contribution executed days before closing, with all material conditions satisfied and only ministerial steps remaining, is Hoensheid on the facts. The Tax Court found assignment of income in that case, and the donor lost the deduction.

The advisable course in the Red Zone is to consider whether the contribution should be deferred until after closing, particularly if the acquisition is expected to be a § 368 reorganization that will carry the donor's basis forward (next section). In a taxable closing, post-closing contribution is rarely a strong play; in a § 368 closing, it can be the cleanest path of all.

The Trustee Discretion Requirement

Across all three zones, the CRT trustee's discretion over any subsequent sale is the structural protection the doctrine looks for. A trust whose terms or surrounding facts commit the trustee to sell on closing is a trust that has been "prearranged" in the assignment-of-income sense, regardless of how favorable the contribution date looks. The drafting and operational rule is:

• The trust instrument should not name a specific subsequent transaction or commit the trustee to participate.

• The trustee should not enter into any side letter, voting agreement, support agreement, or tender commitment that binds the trust to sell.

• The trustee's acceptance of the contributed stock should be documented in minutes reciting the fiduciary duty to evaluate any sale on its merits.

• If a sale is later presented, the trustee should evaluate it as a fiduciary, sign consents only in trustee capacity, and document the decision-making process. The donor should not sign sale documents for shares already transferred to the trust except in a clearly representative trustee capacity.

Trustee discretion must be tested against the documents that already bind the shares, not just the CRT instrument. If the donor has already signed a stockholder agreement, voting agreement, drag-along, support agreement, tender commitment, or lockup, the trust may take the shares subject to those obligations, and the trustee's "independent discretion" over a later sale can be fictional. Shares already bound to vote for, tender into, or support a transaction are a constrained asset in the trust's hands, and that constraint bears directly on whether the underlying right has ripened for assignment-of-income purposes.

The Acquisition Structure Variable

The expected acquisition structure does not change the timing analysis under the assignment-of-income doctrine, but it changes the calculus on whether to contribute before or after closing. The structures most common in private company acquisitions produce materially different shareholder-level outcomes. The initial public offering, treated last, is not an acquisition at all, and that difference is exactly what makes it behave differently.

Taxable Stock Sales and Mergers

In a taxable stock purchase or a taxable statutory or reverse triangular merger, the shareholders' stock is converted to cash, acquirer stock, or a mix. The transaction is a realization event under § 1001(a), and the shareholders recognize the built-in gain on their target stock. Under § 1012, any property they receive (cash or acquirer stock) takes a cost basis at the fair market value at closing. There is no free step-up; the basis reset is the byproduct of paying the tax.

For a donor holding low-basis target stock, a pre-closing contribution to the CRUT captures the built-in gain inside the trust, where the trust's § 664(c)(1) exemption permits the trustee to sell without immediate gain recognition and to defer the gain into the § 664(b) tier-system distributions over decades. A post-closing contribution, after the gain has already been recognized, retains some value but loses the engine: the donor receives a § 170 deduction for the contributed property (cash or acquirer stock at fair market value), and the trust defers any future appreciation, but the deferred-gain component (which for low-basis stock is the dominant economic driver) is gone.

Tax-Free § 368 Reorganizations

In a transaction that qualifies as a reorganization under § 368 (including certain statutory mergers under § 368(a)(1)(A), stock-for-stock acquisitions under § 368(a)(1)(B), and certain asset reorganizations under § 368(a)(1)(C)), the shareholders generally recognize no gain at closing to the extent they receive stock of the acquirer (with separate rules for boot under § 356). Their basis in the acquirer stock carries over from their basis in the target stock under § 358(a)(1). They still hold low-basis stock, just in a different issuer.

A post-closing contribution of acquirer stock in a § 368 transaction can be a clean and even preferable path. The built-in gain is preserved (so the trust's gain-deferral engine is intact), valuation is far simpler because publicly traded acquirer stock is valued by market quotation and is generally excepted from the qualified-appraisal requirement that applies to closely held stock (though Form 8283 reporting and the ordinary substantiation rules still apply), and the assignment-of-income doctrine is no longer a concern because the acquirer stock has no pending transaction of its own. The donor's § 170 deduction is computed from the acquirer's market price (as the actuarial remainder interest derived from that price), not from a discounted closely held valuation, so the deduction is meaningfully larger than a comparable Green Zone contribution of target stock would produce.

This is the scenario donors sometimes describe in lay terms as "I will donate the Microsoft stock after the acquisition closes." The intuition is right when the deal qualifies under § 368. The intuition is wrong when the deal is taxable. The structure of the closing controls the answer.

Mixed Consideration: Cash Plus Stock

Many acquisitions involve mixed consideration: part cash, part acquirer stock, sometimes with rollover equity, earnout, or escrow components. The § 368 analysis can survive if the transaction satisfies the continuity-of-interest doctrine, which is a substantive judicial doctrine requiring preservation of a substantial part of the target shareholders' proprietary interest. Forty percent stock consideration is a common planning and IRS ruling benchmark (rooted in Rev. Proc. 77-37 and reinforced in subsequent guidance and modern practice), not a statutory bright-line requirement. The cash portion is generally taxable boot under § 356 to the extent of the realized gain. The shareholder recognizes gain on the cash component at closing; the acquirer-stock component carries over basis under § 358.

For CRT planning, the practical implication is that mixed-consideration deals can be analyzed by component. The cash component is taxable at closing; a pre-closing contribution of a portion of the stock captures gain deferral on that portion. The acquirer-stock component carries over basis and can be contributed post-closing for that portion. The optimal split between pre-closing and post-closing contributions depends on the expected mix and the donor's deduction-capacity analysis under the § 170(b) percentage limits.

Asset Sales and Corporate-Level Tax

An asset sale by the C corporation, followed by a liquidating distribution to shareholders, is structurally different. The corporation sells its assets to the buyer and recognizes corporate-level gain on the appreciation. The corporation then distributes the after-tax proceeds to the shareholders in a § 331 liquidation, and the shareholders recognize a second-tier capital gain (or loss) on the difference between their basis in the stock and the liquidating distribution.

The CRT does not eliminate the corporate-level tax in an asset sale. A pre-closing contribution of shareholder stock to a CRUT defers the shareholder-level tax on liquidating distributions received by the trust, but the corporate-level tax has already been paid by the corporation before any distribution reaches the trust. The economics of a CRUT funded with shareholder stock of a corporation that is being liquidated through an asset sale are accordingly weaker than those of a CRUT funded with stock of a corporation being acquired through a stock purchase or merger. The donor and counsel should confirm the expected structure before committing to the CRUT path; in some asset-sale scenarios, alternative planning (such as § 1202 if available, or a direct charitable gift of cash post-liquidation) may dominate.

Redemptions

A stock redemption is a transaction in which the issuing corporation acquires its own stock from a shareholder. The Palmer/Rev. Rul. 78-197 framework directly addresses redemptions: a gift of stock followed by a redemption is not recharacterized as a sale by the donor where the donee charity is not legally bound to participate. Redemptions are uncommon in third-party acquisition contexts but appear in family business succession, founder buyout, and S corporation (for unrelated reasons) planning. For CRT planning, the redemption analysis is the cleanest application of Rev. Rul. 78-197, and the donor's position is generally strong if the trust trustee retains genuine discretion to hold or surrender.

The Initial Public Offering: Not an Acquisition, and Not a Sale of the Donor's Shares

An initial public offering is the structure most likely to be misread, because the intuition that drives the timing analysis for an acquisition runs backward when applied to an IPO. In an acquisition, the donor's shares are converted into a right to receive cash or acquirer stock, and the assignment-of-income concern grows as the deal approaches certainty. An IPO does none of that. In a primary offering, the company issues and sells new shares to the public to raise capital. The donor's existing shares are not sold, not converted, and not exchanged; they remain outstanding equity. They do not become freely tradeable merely because the company goes public: pre-IPO shares are typically restricted or control securities, and they become practically saleable only after the lockup expires, the legends are removed, and a resale registration or an available exemption such as Rule 144 is in place. What matters for the income tax is narrower: the donor recognizes no gain when the company goes public. Realization occurs only when the donor, or the trust, later sells.

That distinction controls the doctrine. The anticipatory assignment of income doctrine reaches a donor whose shares have ripened into a fixed right to sale proceeds. Going public does not ripen anything. The donor's equity remains equity, now liquid and volatile rather than illiquid and volatile. Ferguson and Hoensheid, both built on shares that had been or were about to be converted into a fixed right to merger or sale consideration, do not describe the IPO holder's position. A pending IPO is therefore not the closing window that a pending merger is, and the instinct that "the train has left the station once the offering is announced" is wrong.

The consequence for timing is the reverse of the acquisition analysis, and it is favorable. Because the IPO is not a realization event for the existing holder, a post-IPO contribution preserves the donor's low basis intact, since there has been no recognition to reset it, and the trust sells the now-public shares free of immediate tax under § 664(c)(1). The gain-deferral engine is fully intact, exactly the opposite of the taxable cash merger, where a post-closing contribution arrives after the gain has already been recognized and the engine is gone. And because the shares are now publicly traded, valuation is far simpler: publicly traded stock is generally excepted from the qualified-appraisal requirement and is valued by market quotation, so the § 170 deduction is based on public-market value rather than on a closely held valuation carrying steep marketability and minority discounts, though a locked-up or restricted affiliate block may warrant an adjustment for the binding restriction and ordinary Form 8283 substantiation still applies. Post-IPO, in other words, the donor captures both a larger deduction and full gain deferral. A pre-IPO contribution, by contrast, locks in those discounts and shrinks the deduction without buying any doctrinal protection the donor needed, because the IPO never created an assignment-of-income exposure to protect against.

One caveat narrows the clean case. The analysis above applies to shares the donor retains through the offering. If the donor is a selling stockholder whose specific shares are sold into the offering's secondary component, or has committed shares in a company-run tender or secondary sale running alongside the offering, those particular shares can present the ordinary ripening exposure, and the timing analysis for them follows the acquisition framework, not this one.

The binding constraints move from the Internal Revenue Code to the securities laws. Two in particular govern the sequence:

• The underwriter lockup. Officers, directors, and significant pre-IPO holders typically sign a lockup agreement, commonly about 180 days, that restricts not only sales but transfers, frequently including bona fide charitable gifts, unless the underwriters consent or the agreement carves out a transfer to a donee who agrees to be bound by the remaining lockup. A donor who intends a post-IPO contribution must read the lockup before assuming the shares can move, and a trust that takes locked-up shares cannot sell them until the lockup expires, leaving it holding a concentrated, volatile position in the interim.

• Rule 144 and affiliate status. A founder, officer, director, or large holder is an affiliate, and an affiliate's resales of the now-public stock are subject to Rule 144's volume limits, manner-of-sale conditions, current-public-information requirement, and Form 144 filing. A CRT that the donor controls can itself be treated as an affiliate, and its sales may be aggregated with the donor's, so a contribution to the trust does not necessarily free the position for rapid liquidation. The donor's pre-IPO holding period generally tacks to the trust under the gift rules, which helps satisfy the Rule 144 holding period, but the volume throttle on an affiliate remains.

For a pre-IPO holder who can clear the lockup and affiliate analysis, the strong default is to contribute and let the trust sell after the offering and the lockup expiry, valuing at the market price. The contribution should still use the FLIP-NIMCRUT structure described below, with the flip triggered by the lapse of the lockup and resale restrictions, or the earlier of that lapse and a disposition, rather than solely by the trustee's later sale of already marketable stock. A pre-IPO contribution makes sense mainly where the lockup or stockholder agreement makes a post-IPO charitable transfer impractical, and the donor accepts the discounted deduction as the price of getting the shares into the trust before restrictions attach.

The QSBS screen still runs first. For late-acquired secondary shares, late-stage preferred, or equity issued after the issuer had already exceeded the § 1202 gross-assets ceiling, the screen often comes up empty. But founder and early-employee shares can still qualify if they were acquired at original issuance when the issuer satisfied the gross-assets test; later growth into a large IPO candidate does not, by itself, destroy QSBS status for stock that validly qualified when issued. The practical limit in the megacap case is not qualification but the per-issuer cap: for legacy founder stock issued well before the 2025 amendments, the exclusion is capped at the greater of $10 million or ten times a typically negligible basis, a rounding error against a multibillion-dollar gain. So the screen should be run and documented, and it may surprise on qualification, but it rarely changes the recommendation for a large soon-to-be-public position.

Issue	Pre-IPO Contribution	Post-IPO Contribution (after lockup)
Assignment-of-income exposure	Low (the IPO is not a sale of the donor's shares)	Low (ordinary gift of public stock; no sale or exchange of the donor's retained shares merely from the IPO)
Valuation difficulty	High (full marketability and minority discounts; annual appraisal required while held)	Low for freely tradable shares; additional analysis for affiliate blocks, lockup, or other resale restrictions
Deduction size	Smaller (discounted closely held value)	Larger (full public price)
Gain deferral captured	Yes (low basis carries; trust sells post-IPO under § 664(c))	Yes (no recognition at the offering; basis intact; trust sells under § 664(c))
Binding constraint	Company transfer restrictions, rights of first refusal, issuer consent	Underwriter lockup; Rule 144 affiliate volume limits and aggregation
Typical recommendation	Only where a post-IPO transfer is impractical under the lockup or stockholder agreement	Preferred for shares retained through the IPO where the lockup, affiliate, and resale analysis permits a clean transfer and orderly sale

The QSBS Overlay

Qualified small business stock under IRC § 1202 and the rollover provisions of § 1045 can change the analysis fundamentally. Donors holding stock that qualifies as QSBS and meets the holding period and other requirements may obtain a complete federal exclusion of gain on sale (or partial exclusion, depending on the acquisition date and § 1202's evolving exclusion percentages). The CRT's gain-deferral benefit, which is the dominant economic engine for non-QSBS low-basis stock, is substantially less valuable if the gain is already excludable.

§ 1202 Exclusion

Section 1202 permits noncorporate taxpayers to exclude gain on the sale of qualified small business stock acquired at original issuance from a qualified small business and meeting the § 1202(c) issuer requirements: domestic C corporation, active business in a qualifying industry, and several other operational requirements. The gross-assets test is applied at issuance, before and immediately after the stock is issued, not as a continuing test; later growth does not retroactively strip QSBS status from stock that validly qualified when issued. For stock acquired on or before July 4, 2025, the issuer's aggregate gross assets could not exceed $50 million, and gain on stock held more than five years is excludable at 50, 75, or 100 percent depending on the acquisition date (100 percent for most stock acquired after September 27, 2010).

For stock acquired after the July 4, 2025 applicable date under the One Big Beautiful Bill Act, § 1202 provides a tiered exclusion, generally 50 percent after at least three years, 75 percent after at least four years, and 100 percent after at least five years; the gross-assets ceiling rises to $75 million and the per-issuer dollar cap rises to $15 million, each indexed for inflation for tax years after 2026. The per-issuer limit is, in every case, the greater of that dollar cap or ten times the taxpayer's aggregate adjusted basis in the stock disposed of during the year.

For a donor whose stock qualifies under § 1202 and is held long enough at the planned sale date, the exclusion can produce an economic outcome that approaches or matches the CRT's gain deferral, without the CRT's irrevocability, administrative cost, distribution constraints, or complexity. The screening question is whether the stock qualifies and whether the holding period will be satisfied before the expected sale; donors who screen early may be able to delay a sale to capture § 1202 treatment that would otherwise be lost. But the per-issuer cap matters as much as qualification. For a founder or early employee with very low basis and a very large gain, the exclusion is limited to the greater of the dollar cap or ten times a small basis, so a position worth hundreds of millions or more sees only a modest fraction sheltered, and the CRT analysis remains live for the unsheltered balance.

§ 1045 Rollover

Section 1045 permits a noncorporate taxpayer to roll over gain from QSBS held more than six months into other QSBS purchased within sixty days of the sale, deferring the gain into the replacement stock. The rollover is an alternative to § 1202 exclusion when the holding period is not yet met, or when the donor wants to remain invested in qualifying small business positions.

For CRT planning, § 1045 is rarely a direct substitute (the CRT is designed for income production, not for continued investment in early-stage equity), but the screening exercise should include § 1045 as an alternative path that may dominate the CRT analysis for a donor whose principal goal is gain deferral rather than charitable disposition.

Interaction with CRT Planning

The screening rule is: before concluding that the CRUT is the best path for a donor holding private company stock with a pending or anticipated liquidity event, run the § 1202 and § 1045 analysis. For some donors, the QSBS treatment dominates and the CRUT should not be used. For others, the QSBS treatment is unavailable (the issuer fails the § 1202(c) requirements, the holding period is too short, or the stock was not acquired at original issuance), and the CRUT path remains the strongest planning option. For a third group, the QSBS treatment is available for part of the position but not all, and a hybrid strategy (capture § 1202 on the qualifying portion, contribute the non-qualifying portion to a CRUT) may dominate either pure approach.

The CalCRUT practice raises the QSBS question as a standard part of the intake conversation for any donor whose contributed asset is private company stock. Donors and their CPAs should be prepared to provide acquisition-date and issuer-qualification documentation early.

California nonconformity. California does not conform to either § 1202 (gain exclusion) or § 1045 (rollover). California taxable income for a QSBS sale includes the full capital gain regardless of federal treatment. For California-resident donors, the QSBS analysis therefore eliminates federal tax on the qualifying gain but leaves the California tax fully payable: up to 12.3 percent, plus the 1 percent mental health services tax under Revenue and Taxation Code § 17043 on taxable income over $1 million, for an effective top marginal rate of 13.3 percent. The CRT path, by contrast, defers both federal and California capital gains tax inside the trust under § 664(c)(1) and the California conformity to that section for trust-level taxation. For California donors, the comparative analysis between a § 1202 sale and a CRT contribution must therefore factor in the California-only tax that QSBS treatment leaves unaddressed, which can swing the recommendation back toward the CRT path in cases where federal-only treatment would have favored the § 1202 sale.

Trust Design for Pre-Liquidity Funding

The FLIP-NIMCRUT Structure

A CRUT funded with illiquid private company stock cannot reliably produce the cash needed to make annual fixed-percentage unitrust payments. A standard CRUT under Treas. Reg. § 1.664-3(a)(1)(i)(a) requires payment of the unitrust amount in cash or in kind from the trust corpus regardless of the trust's actual income. For a trust holding closely held stock that pays no dividend and cannot be sold without triggering the doctrinal timing concerns discussed above, a standard CRUT can fail in the first year.

The solution is a net-income-with-makeup CRUT (NIMCRUT) under Treas. Reg. § 1.664-3(a)(1)(i)(c), with a flip provision under § 1.664-3(a)(1)(i)(d) that converts the trust to a standard fixed-percentage CRUT after a defined triggering event. The NIMCRUT structure during the pre-liquidity period permits the trustee to pay out only the trust's actual net income (with a makeup account for years when net income falls below the stated unitrust percentage), avoiding the forced-distribution problem. After the triggering event (most commonly the sale or disposition of the unmarketable asset), the trust "flips" to standard fixed-percentage operation, with any makeup amount forgiven.

The Triggering Event

Treas. Reg. § 1.664-3(a)(1)(i)(d) requires that the triggering event be a specific date or a single event whose occurrence is not within the discretion of the trustee or any other person. For unmarketable closely held stock, "the sale or other disposition of the contributed shares" works. For stock headed to an IPO the trigger should be drafted more carefully, because a trigger keyed only to the trustee's later sale of stock that has already become marketable is problematic: that sale is within the trustee's discretion. The safer anchor is the earliest objectively determinable event that ends the unmarketable period, such as the lapse or release of the transfer restrictions, the date the shares become readily marketable under the applicable resale-registration, lockup, and Rule 144 framework, or the earlier of that date and a disposition. The regulation also permits a triggering event tied to a specific date or specific age of the income beneficiary, though these are less common in the private-stock context.

The makeup account that accrues during the NIMCRUT phase is forgiven on the flip; the post-flip CRUT operates as a standard fixed-percentage trust without reference to the prior makeup. This treatment is favorable to the income beneficiary because it avoids any catch-up distribution obligation after the liquidity event.

The Standard Drafting Posture

For a donor funding a CRUT with closely held stock before a liquidity event, the recommended structure is a FLIP-NIMCRUT with the triggering event tied to the sale or disposition of the contributed shares. This structure satisfies the § 664 qualification requirements, avoids the forced-distribution problem during the pre-liquidity period, captures full unitrust distributions after the flip, and aligns the trust's cash flow with the underlying asset's economic profile. The same structure accommodates a pre-IPO contribution, with one drafting adjustment: because the shares will become marketable on their own once the lockup and resale restrictions lapse, the flip should be triggered by that lapse, or the earlier of that lapse and a disposition, not solely by a later discretionary sale by the trustee.

Self-Trusteeship and the Independent Trustee Requirement

A CRT is a split-interest trust subject to many of the private foundation rules under IRC § 4947(a)(2). The § 4941 self-dealing rules apply to transactions between the trust and disqualified persons under § 4946. The donor is generally a disqualified person as a substantial contributor under § 4946(a)(1)(A), with "substantial contributor" defined by § 507(d)(2). The donor's family members and certain controlled entities are also disqualified persons under § 4946.

The § 4947(a)(2)(A) Carve-Out

Section 4947(a)(2)(A) carves out payment of the unitrust or annuity amount to the income beneficiary from the § 4941 self-dealing rules. Without the carve-out, the entire CRT structure would be a per se self-dealing violation, since the donor is both a disqualified person and the income beneficiary. The carve-out makes donor-as-income-beneficiary work.

The carve-out is narrower than it sounds. It covers payment of the unitrust amount to the income beneficiary in that capacity. It does not cover transactions between the trust and the donor (or other disqualified persons) in any other capacity. A donor who is the trustee cannot also sell property to the trust, lend money to or borrow from the trust, rent property to or from the trust, or buy assets from the trust except in limited circumstances permitted by § 4941(d)(2)(F) for narrow classes of transactions. The donor-trustee should treat the trust as a fiduciary entity with arm's length boundaries, not as a personal asset pool.

The Independent Trustee Issue for Annual Valuation

The annual valuation requirement for unmarketable assets under Treas. Reg. § 1.664-1(a)(7) requires an independent special trustee or a current qualified appraisal. The donor-trustee cannot serve as the independent special trustee for this valuation function because Treas. Reg. § 1.664-1(a)(7) excludes the grantor, the noncharitable beneficiary, and related or subordinate parties within the meaning of § 672(c). That independence test is separate from the § 4946 disqualified-person rules, which govern self-dealing.

The practical implication is that a donor-trustee of a CRUT funded with closely held stock must obtain a qualified appraisal of the stock on each annual valuation date until the stock is sold or replaced with marketable securities. This is a meaningful ongoing cost and an administrative burden that affects the calculus of whether to fund pre-liquidity at all. Appointing an independent special trustee solely for the valuation function is an alternative; the special trustee need not be the general trustee and can be limited by the trust instrument to the valuation function alone.

The Post-Sale Transition

Once the trust sells the contributed stock and holds publicly traded securities (or cash and marketable securities generally), the unmarketable-assets valuation requirement no longer applies. The donor-trustee can value the trust's assets each year using market quotes, without third-party appraisal. The self-dealing constraints continue to apply, but the practical administrative burden drops substantially. For a donor with CPA or CFP credentials, post-sale self-trusteeship is workable and is a common configuration.

California Overlay

Community property analysis. Property acquired during marriage while domiciled in California is presumptively community property under Family Code § 760. Counsel must determine whether the contributed stock is community or separate, obtain appropriate spousal consent for the contribution, and document any transmutation under Family Code § 852 if the contribution changes the property's characterization or the spouses' beneficial interests. The CRT instrument terms and the transfer documents control how the community character carries into the trust; the default is not automatic, and a CRT instrument that names only one spouse as income beneficiary while accepting community-funded stock raises a transmutation question that should be addressed contemporaneously, not after the fact.

Probate Code § 15800. California's revocable trust beneficiary rule (during the donor's lifetime, the trustee's duty runs to the donor, not to the remainder beneficiary) does not apply to a CRT, because a CRT is irrevocable from inception. The trustee owes fiduciary duties to the income beneficiary and the remainder charity from the moment of funding, not from any later date.

Cal. Probate Code §§ 16000 et seq. California trust law fiduciary duties apply to CRTs as to any other California trust. The income beneficiary has standing to compel proper administration; so does the remainder charity. The California Attorney General has oversight authority over the charitable interest under the Supervision of Trustees and Fundraisers for Charitable Purposes Act, Government Code § 12591 et seq. A CRT trustee in California should be prepared for the possibility of AG inquiry on charitable administration, particularly where the remainder charity is a public charity or community foundation registered with the AG's Registry of Charitable Trusts.

Securities law overlay. Private company stock contributed to a CRT typically remains subject to the issuer's transfer restrictions, rights of first refusal, drag-along provisions, and stockholder agreement obligations. The CRT trustee takes the stock subject to these restrictions and must comply with them. The contribution itself typically requires issuer consent (or at least notice) under standard private company stockholder agreements. Where the issuer is heading toward a registered public offering, the securities analysis extends past funding: the trust will hold restricted or control securities subject to the underwriter lockup and to Rule 144 on resale, and an affiliate's trust may be subject to volume limits and aggregation with the donor. The drafting and contribution process should confirm and document the issuer's consent, the transfer restrictions, and any lockup terms before the contribution is made.

Summary Table: Timing and Structure

Scenario	Assignment-of-income exposure	Valuation difficulty	Gain deferral captured	Typical recommendation
Pre-LOI Contribution (Green)	Low (Rauenhorst controls; no LOI to argue from)	High (full discounts)	Yes	Preferred if doctrine clearance is the priority
Post-LOI, Pre-Definitive (Yellow)	Low, with documentation	Moderate (LOI anchor)	Yes	Preferred for valuation-doctrine balance
Post-Definitive, Pre-Closing (Red)	High (Ferguson, Hoensheid)	Low (definitive price)	Yes if doctrine doesn't apply; otherwise no	Generally avoid; wait for post-closing analysis
Post-Closing (Taxable)	N/A (gain already recognized)	Trivial (market quote)	No (gain already recognized at closing)	Generally not worthwhile
Post-Closing (§ 368 Reorganization)	N/A (no pending transaction in acquirer stock)	Trivial (market quote)	Yes (§ 358 carryover basis)	Preferred when § 368 qualification is confirmed
Post-IPO (after lockup)	N/A from the IPO itself (going public is not a sale of the donor's retained shares)	Low for freely tradable shares; more for affiliate blocks or restricted stock	Yes (no recognition at the offering; basis intact)	Preferred for shares retained through the IPO where the lockup, affiliate, and resale analysis permits a clean transfer

Strategic Implications for Practice

The timing decision is irreversible. Once the stock is contributed, the contribution date is fixed. The doctrinal analysis runs against the facts at that date. Counsel should document the contribution decision contemporaneously, with attention to the LOI status, definitive agreement status, trustee discretion, and absence of any prearranged commitment to sell. The Tax Court in Hoensheid found the donor's after-the-fact characterization unpersuasive; counsel who document well before the contribution date have a substantially stronger position.

Confirm the expected structure before drafting. The § 368 versus taxable distinction controls whether a post-closing contribution is a useful play, and the acquisition-versus-IPO distinction controls whether a post-event contribution is the strongest play of all. Counsel should ask the donor and the donor's M&A or capital-markets counsel for the expected structure and consideration mix, and should treat the answer as a primary input to the timing recommendation. A donor who expects a taxable cash sale should contribute pre-closing; a donor who expects a tax-free stock-for-stock reorganization or a public offering may benefit from waiting until after the event.

Screen QSBS at intake. For any donor contemplating a CRT funded with private company stock, the § 1202 and § 1045 analysis should be run as a screen before the CRT recommendation is finalized. Counsel who default to the CRT recommendation without running the QSBS screen risk leaving substantial after-tax value on the table. For a late-stage issuer headed to a public offering, the screen will usually come up empty, but it should still be run and documented.

Engage the appraiser early. The qualified appraisal is not a clerical step. The valuation firm should be engaged early enough to produce an appraisal effective at the contribution date and signed within the § 1.170A-17 regulatory window. For pre-LOI contributions, the appraiser needs time to develop the valuation methodology and apply the discounts; for Yellow Zone contributions, the appraiser needs the LOI documents and a clear understanding of the deal contingencies. For a post-IPO contribution, valuation collapses to the market quote, which is one of the structure's advantages.

Document trustee discretion. The trustee's discretion over any subsequent sale is the structural protection the doctrine looks for. Trustee minutes accepting the contribution should recite the trustee's fiduciary duty to evaluate any sale on its merits. Trust instrument language should not name a specific transaction or commit the trustee. No side agreements should bind the trustee to sell.

Plan for ongoing valuation if the trust holds stock through a fiscal year end. The § 1.664-1(a)(7) annual valuation requirement applies for as long as the trust holds unmarketable assets. A donor-trustee will need a qualified appraisal each year until the stock is sold. The carrying cost is real and should be factored into the overall economic analysis.

Coordinate with the donor's overall tax picture. The § 170(b) percentage limitations apply to the CRT deduction. For closely held C corporation stock contributed to a CRUT with a public charity remainder, the deduction is generally subject to the 30 percent of AGI limit under § 170(b)(1)(C), with a five-year carryforward under § 170(d)(1). The donor's expected AGI in the contribution year and the five subsequent years determines whether the full deduction is usable; for donors with a single large contribution and modest AGI, the carryforward may not absorb the full deduction.

Practice Notes

Intake Questions

• Is the issuer a domestic C corporation? Has its tax classification been confirmed?

• What is the donor's basis and acquisition date for each lot of the contributed stock?

• Was the stock acquired at original issuance from the issuer (relevant to § 1202)?

• Does the issuer satisfy the § 1202(c) requirements (gross assets test, active business test, qualifying industry)?

• What is the current status of any liquidity event? Has any LOI, term sheet, definitive agreement, or registration statement been signed or filed?

• What is the expected structure (stock sale, statutory merger, reverse triangular merger, asset sale, stock-for-stock § 368 reorganization, or initial public offering)?

• What is the expected consideration mix (cash, acquirer stock, rollover, earnout, escrow)?

• If an IPO is anticipated, what is the expected timeline, and what are the lockup terms? Does the lockup permit a charitable transfer, with or without underwriter consent?

• Is the donor an affiliate of the issuer (founder, officer, director, controlling stockholder, or other control person; ten-percent ownership is a practical screening flag, not a statutory bright line) for Rule 144 purposes, such that the trust's post-IPO sales may be volume-throttled and aggregated with the donor's?

• Will the donor sell any shares into the offering's secondary component, or has the donor committed shares in a company-run tender or secondary sale? (Those shares follow the acquisition framework, not the IPO framework.)

• Are there transfer restrictions, rights of first refusal, drag-along provisions, or stockholder agreement obligations affecting the contributed stock?

• Does the donor hold any warrants, options, or convertible securities related to the issuer? (Warrants and options have their own contribution analysis and should generally not be included in the initial CRT contribution.)

• Is the stock community property or separate property under California law?

• What is the donor's expected AGI for the contribution year and the five subsequent years, for percentage-limitation and carryforward purposes?

Drafting Checklist

• CRUT instrument drafted as a FLIP-NIMCRUT with triggering event tied to sale or disposition of the contributed shares, per Treas. Reg. § 1.664-3(a)(1)(i)(c)-(d)

• Payout rate selected to satisfy the 10 percent minimum remainder interest test of § 664(d)(2)(D) at the § 7520 rate applicable at funding

• Income beneficiary structure (single life, joint and survivor, term of years) selected with attention to the actuarial test, gift tax, and estate inclusion implications (see companion piece on income beneficiary selection)

• Trustee identified, with attention to the unmarketable assets valuation requirement and the independent special trustee option for the valuation function

• Trust instrument language confirming trustee discretion over any subsequent sale; absence of any commitment to participate in a specific transaction

• Charitable remainder beneficiary identified (or trust instrument incorporating the open-charity provisions discussed in the companion post on naming charities at inception)

• Qualified appraisal engaged with effective date at the contribution date and signed within the § 1.170A-17 window

• Form 8283 Section B prepared, signed by appraiser and donee, attached to the donor's return

• Appraisal attached to the return if claimed deduction exceeds $500,000

• Trustee minutes accepting the contribution, reciting fiduciary duty, and confirming absence of prearranged commitment

• Issuer consent obtained where required by stockholder agreement; transfer restrictions, and any underwriter lockup terms, confirmed and documented

Red Flags

• Contribution executed within days of a known closing date

• LOI containing binding obligations on the donee to participate in any subsequent sale

• Side letter, voting agreement, support agreement, or tender commitment binding the trust trustee

• Donor-trustee personally signing sale documents for shares held by the trust

• Pre-closing dividends, bonuses, or asset stripping in anticipation of a known transaction

• Qualified appraisal effective date that does not match the contribution date

• Appraisal prepared by a party related to the donor, the donee, or the issuer

• Form 8283 Section B not signed by the appraiser or the donee

• CRUT funded with closely held stock without a FLIP-NIMCRUT structure, resulting in forced distributions from an illiquid asset

• Donor-trustee performing annual valuation of unmarketable assets without obtaining a qualified appraisal

• QSBS screening not run before the CRT recommendation

• Structure assumed rather than confirmed before the timing decision

• Treating a pending IPO as a closing window and rushing a pre-IPO contribution that absorbs full marketability and minority discounts when a post-IPO contribution would have produced a larger deduction with the same gain deferral

• Assuming a post-IPO charitable transfer is permitted without reading the underwriter lockup

• Treating an affiliate's CRT as free to liquidate the post-IPO position without running the Rule 144 volume and aggregation analysis

• Promising a meaningful § 1202 result on a large soon-to-be-public position without running the per-issuer cap (greater of the dollar cap or ten times basis), which usually limits the exclusion to a fraction of a megacap gain even where the stock validly qualifies

This briefing is provided for educational purposes and reflects federal and California law as of May 2026. It does not constitute legal or tax advice. The contribution of private company stock to a charitable remainder trust involves overlapping income tax, gift tax, charitable contribution, securities law, and fiduciary analyses, and the defensible course depends on specific facts not addressed in this general treatment. Consult qualified legal and tax counsel before contributing private company stock to a charitable remainder trust.

Considering a CRT funded with private company stock? The timing decision, the structure analysis (including the IPO and § 368 questions), and the QSBS screen all need to be run before the trust is drafted, and the qualified appraisal needs to be engaged well before the contribution date. For a consultation that integrates the doctrinal timing analysis, the structure variable, and the QSBS overlay, schedule a call.

About CalCRUT. CalCRUT is the charitable remainder trust practice of Klaus Gottlieb, Esq. -- JD, MS, MBA -- serving the California Central Coast and California statewide.