Funding a Charitable Remainder Unitrust With a Company or an Interest in a Company: The C Corporation Baseline, the S Corporation Problem, and the LLC/Partnership UBTI Screen

Jurisdiction: Federal, with a California overlay for income tax conformity, marital property, charity oversight, documentary transfer tax, and property tax reassessment

Primary Statutes: IRC §§ 170, 311(b), 512, 514, 664, 751, 1011(b), 1045, 1060, 1202, 1361 to 1367, 1374, 4941, 4943, 4944, 4946, 4947; Treas. Reg. §§ 1.170A-16, 1.170A-17, 1.337(d)-4, 1.664-1, 1.664-3, 53.4941(d)-3, 53.4947-2; Cal. Rev. & Tax. Code §§ 64, 11911, 17755; Cal. Fam. Code §§ 760, 852

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); Rev. Rul. 78-197, 1978-1 C.B. 83; 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; Keefer v. United States (N.D. Tex. 2022); Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998); Norwalk v. Commissioner, T.C. Memo. 1998-279; Bross Trucking, Inc. v. Commissioner, T.C. Memo. 2014-107; Howard v. United States, 448 F. App'x 752 (9th Cir. 2011); Rev. Rul. 92-48, 1992-1 C.B. 301; Rev. Rul. 2008-18; PLR 9340043; PLR 200203034; PLR 200644013; T.D. 10051, 91 Fed. Reg. 42,353 (July 9, 2026)

Last Reviewed: July 2026 (reflecting the One Big Beautiful Bill Act of 2025 and T.D. 10051)

Category: Charitable Planning -- Funding a CRT With a Business Interest

In brief. A business owner preparing for an exit can fund a charitable remainder unitrust with a company interest, but the analysis turns almost entirely on entity classification and on when the contribution occurs relative to the sale process. C corporation stock is the clean, code-contemplated case. S corporation stock can never go into a CRUT directly -- the transfer terminates the S election, and even the counterfactual holding would be confiscated by the 100% unrelated business taxable income excise -- so practitioners must reach for one of four workarounds, each defensible but gray. LLC and partnership interests face no eligibility bar at all, yet they are often functionally blocked by UBTI, debt-financed income, hot assets, and bargain-sale exposure. Across every route, Estate of Hoensheid now supplies the timing test, the qualified appraisal rules are an independent deduction-killer, and California adds a nonconforming overlay that can push the combined tax on a structural mistake above 100% of the income itself.

At a Glance

Route	Status	Bottom line
C corporation stock to the donor's CRUT	GREEN	Settled. Usually the best entity-interest CRUT asset when timing is clean, substantiation is exact, trustee discretion is real, and self-dealing is controlled.
S corporation stock directly to a CRUT	RED	Settled no. The CRUT is an ineligible shareholder; the transfer terminates the S election, and § 512(e) would make every dollar UBTI subject to the 100% excise anyway.
S corporation as donor to a term-of-years CRUT	YELLOW	Defensible but structure-dependent. Supported by statutory text and favorable private letter rulings, but fragile: the corporation must be the sole recipient and must survive the term.
Fractional asset interest, co-seller structure	YELLOW	Defensible but gray, and frequently oversold. Works only with careful asset screening, genuine trustee discretion, and a true vertical slice of the interest.
Personal goodwill to the shareholder's CRUT	YELLOW	Defensible but intensely factual. Strong where the goodwill never became a corporate asset; defeated by an employment agreement or covenant not to compete.
LLC or partnership interest to a CRUT	YELLOW	Eligible in the abstract, but often economically poor unless the entity is passive, unlevered, and sale-ready. UBTI, debt, liabilities, and hot assets dominate.

Executive Summary

If the client owns C corporation stock, a CRUT is often a clean pre-sale charitable planning vehicle. The donor deducts the actuarial present value of the charitable remainder, the trust takes a carryover basis and sells without current income tax, and the gain is carried out to the donor over the payout years through the four-tier ordering system of § 664(b). The major litigation risk is not whether the trust may hold the stock; it is when the stock was contributed relative to the sale process. Under the anticipatory assignment of income cases, the gift must occur while the trustee still receives a real property interest carrying meaningful discretion, not a fixed or practically certain right to sale proceeds.

If the client owns S corporation stock, the direct route fails categorically. A CRUT is not an eligible S shareholder, the transfer terminates the S election as of the transfer date, and § 512(e) treats all flow-through items plus any gain on the sale of the stock as UBTI, which a CRT absorbs at a 100% excise rate under § 664(c)(2). The real practitioner work therefore lies in the workaround menu: the corporation as donor, fractional asset-interest co-sales, personal goodwill separations, and F-reorganization sequencing into a disregarded LLC. Each is possible on the right facts; none is as clean as the C stock baseline.

If the client owns an LLC or partnership interest, the trust may hold it, but the operative screen is UBTI. Under § 512(c), a CRT that is a partner is treated as directly earning its share of partnership trade or business income; under § 514, leverage taints otherwise passive income as debt-financed income; and liabilities inside the entity or on the contributed interest trigger bargain-sale gain to the donor under § 1011(b). Hot assets under § 751 degrade both the deduction and the distribution character. In practice, partnership interests are good CRUT funding assets only when the entity is passive, unlevered, and close to a sale that will not generate UBTI during the holding period.

Two 2025 and 2026 developments frame every version of this analysis. The One Big Beautiful Bill Act imposed a 0.5% of AGI floor on itemized charitable deductions and a 35% benefit cap for top-bracket taxpayers, and it rebuilt the qualified small business stock regime of § 1202 in ways that change the "just sell it" comparison for C corporation founders. And T.D. 10051, finalized July 9, 2026, made the abusive CRAT-SPIA scheme a listed transaction -- a designation that leaves ordinary CRUTs untouched but signals a sharpened enforcement climate for CRT-based gain avoidance. California, finally, does not conform on several decisive points, including a UBTI regime that stacks a 13.3% state tax on top of the 100% federal excise.

C Corporation Stock: The Baseline Case

Eligibility, contribution mechanics, and deduction quality

No shareholder-eligibility bar exists for C corporation stock; a CRUT may hold it indefinitely. Because a C corporation is a separate taxpayer under Subchapter C, its operations do not flow through to shareholders, which insulates the trustee from trade or business income while the stock is held. The donor's income tax deduction equals the actuarial present value of the remainder interest under the § 7520 rules, tested against the 10% minimum remainder requirement of § 664(d)(2)(D). For long-term appreciated stock contributed to a CRUT whose remainder class is restricted to public charities described in § 170(b)(1)(A) -- including a donor-advised fund sponsor -- the deduction is based on fair market value, subject to the 30% of AGI limit of § 170(b)(1)(C) with a five-year carryforward.

One drafting trap decides deduction quality before any valuation work begins. Under § 170(e)(1)(B)(ii), if the governing instrument permits a private foundation in the remainder class, the deduction for closely held stock drops to the donor's adjusted basis. The "qualified appreciated stock" escape of § 170(e)(5) is limited to stock with market quotations readily available on an established securities market; restricted and closely held shares do not qualify. Restrict the remainder class to public charities if fair market value deduction quality matters.

Effective for tax years beginning after December 31, 2025, the One Big Beautiful Bill Act adds a 0.5% of AGI floor for individual itemizers -- a donor with $1,000,000 of AGI loses the first $5,000 of itemized charitable contributions -- and caps the tax benefit of itemized deductions at 35% for taxpayers in the 37% bracket. Both belong in the deduction model, not in a footnote.

Substantiation is a merits issue, not housekeeping. For nonpublicly traded stock, a qualified appraisal from a qualified appraiser is required once the claimed deduction exceeds $10,000 (between $5,000 and $10,000, a partially completed Form 8283 appraisal summary suffices), and for deductions exceeding $500,000 the qualified appraisal itself must be attached to the return for the contribution year and any carryover year. The appraisal must be dated no earlier than 60 days before the contribution and no later than the return due date, including extensions (Treas. Reg. § 1.170A-17). Estate of Hoensheid, discussed below, shows what noncompliance costs.

Anticipatory assignment of income and the timing zones

The central risk when funding a CRUT in anticipation of a sale is the anticipatory assignment of income doctrine, rooted in Lucas v. Earl and Helvering v. Horst: income is taxed to the person whose right to it has ripened, and a donor cannot deflect a ripened gain by deeding the asset to a trust on the courthouse steps. The governing authorities form a spectrum. In Palmer v. Commissioner, the Tax Court respected a gift followed by a prearranged-in-fact redemption because the donee was under no legal obligation to sell, and the IRS adopted that standard in Rev. Rul. 78-197: the Service will attribute the proceeds to the donor only where the donee is legally bound, or can be compelled, to surrender the shares. Rauenhorst then held the IRS to its own ruling, rejecting an attempt to substitute a looser "practical certainty" test where warrants were gifted before any binding agreement.

The taxpayer-favorable line narrowed from there. Ferguson found the gain had ripened where a tender offer had crossed the 50% threshold before the gift, looking to the realities and substance of the transaction rather than contract formalities. And Estate of Hoensheid, the current leading synthesis, declined to treat Rev. Rul. 78-197 as a safe harbor on facts not substantially the same, and applied a multi-factor "practically certain to occur" test: any legal obligation of the donee to sell, the actions already taken to effect the transaction, the unresolved contingencies, and the status of corporate formalities. The donor there lost because, by the gift date two days before signing, the company had already paid transaction bonuses and stripped working capital, all substantive terms were negotiated, and shareholder approval was a foregone conclusion. The court's operative sentence is the planning standard: the donor must bear real risk, at the time of contribution, that the sale will not close.

The zones deserve one elaboration each. In the green zone, before a letter of intent, no buyer is finalized and material terms are unnegotiated; the deferral is settled. In the yellow zone, after a signed LOI but before a definitive agreement, the transaction is defensible under Rev. Rul. 78-197 and Rauenhorst, provided the trustee retains independent legal and economic authority to reject the deal -- and the IRS's best counterargument is that the buyer's track record, the absence of realistic alternatives, and the economic integration of the business make that discretion a hollow formality. In the red zone, after a definitive agreement or locked shareholder approval, the gain has ripened and a contribution merely adds a charitable deduction dispute to a recognized gain.

PLANNING NOTE -- BEAR REAL RISK OF NON-CLOSING. The synthesized rule after Hoensheid: the absence of a legal obligation on the donee is necessary but not sufficient. Contribute at or before the nonbinding LOI stage, document the trustee's genuine power to refuse or restructure, and avoid the Hoensheid markers -- pre-closing dividend strips, transaction bonuses, resolved contingencies -- that tell a court the deal was already baked.

Post-contribution redemption: the Palmer bailout and self-dealing

Where the issuing corporation redeems the CRUT's shares after contribution, the income tax side is governed by Palmer and Rev. Rul. 78-197, and the excise tax side by the self-dealing rules, because the corporation is typically a disqualified person under § 4946. Section 4941(d)(2)(F) supplies the "corporate adjustment" exception: the redemption is not self-dealing if it occurs pursuant to a liquidation, merger, redemption, recapitalization, or similar adjustment; all securities of the same class are subject to the same terms under an offer made on a uniform basis; and the trust receives no less than fair market value. The trust should receive cash rather than corporate promissory notes, which would constitute a prohibited extension of credit under § 4941(d)(1)(B), and a selective or specially priced redemption forfeits the exception. Federal Circuit authority in the Deluxe Check Printers line permits excluding officer and director insiders from the offer without violating the same-terms requirement.

The QSBS overlay after OBBBA

For stock acquired after July 4, 2025, the One Big Beautiful Bill Act rebuilt § 1202. The flat five-year rule became a tiered schedule; the per-issuer cap rose from $10 million to $15 million and the aggregate gross-assets ceiling from $50 million to $75 million, both indexed after 2026. Stock acquired on or before July 4, 2025 remains under the old regime.

Holding period	Pre-enactment QSBS (acquired on or before July 4, 2025)	Post-enactment QSBS (acquired after July 4, 2025)
At least 3, under 4 years	0% exclusion	50% exclusion
At least 4, under 5 years	0% exclusion	75% exclusion
5 years or more	100% exclusion	100% exclusion

The unexcluded portion of a three- or four-year sale is taxed at a 28% capital gain rate rather than the usual 15% or 20%, so the partial tiers carry a rate cost the full five-year exclusion does not. A gift of QSBS to a CRUT does not break the original-issuance requirement under § 1202(h)(2)(A); the trust tacks the donor's holding period and takes a carryover basis.

Inside the trust, the exclusion is largely beside the point: the CRUT is already exempt under § 664(c)(1) when it sells. The unsettled question is whether gain distributed through the § 664(b) tiers carries the § 1202 exclusion out to the unitrust recipient. The IRS position is that the exclusion belongs to the taxpayer that realized the gain -- the exempt trust -- so the recipient cannot claim it on Tier 2 distributions. Treat that as the conservative planning assumption. What OBBBA really changed is the comparison: a founder who can hold post-enactment QSBS five years may capture the gain tax-free in a straight personal sale, without an irrevocable split-interest trust. The CRUT still wins where the gain exceeds the $15 million per-issuer cap, where the QSBS tests fail, where the client wants the income stream and remainder philanthropy -- and, decisively for this practice, for California residents, because California does not conform to §§ 1202 or 1045 and taxes QSBS gain in full at rates up to 13.3%.

Annual valuation of unmarketable assets

Closely held stock is an unmarketable asset under Treas. Reg. § 1.664-1(a)(7). While the trust holds it, every required valuation must be performed exclusively by an independent trustee -- one who is not the grantor, a noncharitable beneficiary, or a related or subordinate party within the meaning of § 672(c) -- or supported by a current qualified appraisal from a qualified appraiser. If the donor or a family member serves as trustee, budget for an annual appraisal, or appoint an independent special trustee with valuation authority. The trustee-selection analysis, including why donor-as-trustee is most dangerous precisely for closely held business assets, is developed in the discussion of whether you should be the trustee of your own CRT.

S Corporation Stock: The Central Problem

The shareholder prohibition and immediate termination

A CRT is not an eligible S corporation shareholder. Section 1361(b)(1)(B) limits shareholders to individuals, estates, and the trusts described in § 1361(c)(2); § 1361(e)(1)(B)(iii) expressly excludes charitable remainder annuity trusts and unitrusts from electing small business trust status; and Rev. Rul. 92-48 confirms a CRT cannot be a qualified subchapter S trust, since it is a split-interest trust with noncharitable payouts. The consequence is immediate: the transfer of S stock to a CRUT terminates the S election under § 1362(d)(2) as of the transfer date, converting the company to a C corporation and creating double-tax exposure for every shareholder. Inadvertent-termination relief under § 1362(f) exists, but the IRS conditions relief on removing the stock from the CRT promptly; it is a rescue doctrine for mistakes, not a planning technique, and a deliberate contribution is not "inadvertent."

The counterfactual UBTI trap

Even if the eligibility bar vanished, the structure would still fail economically. Under § 512(e), an S corporation interest held by a tax-exempt shareholder is treated as an interest in an unrelated trade or business: all § 1366 flow-through items and any gain on the sale of the stock itself are UBTI, regardless of what the corporation actually does. And under § 664(c)(2), a CRT pays an excise tax equal to 100% of its UBTI. Before 2007, UBTI stripped the trust of its exemption for the year; the Tax Relief and Health Care Act of 2006 replaced that rule with the current confiscatory excise. The S stock route is therefore doubly foreclosed: it kills the S election and would surrender every dollar of the income anyway.

The deduction-side penalty

Separately, any gift of S stock -- including an outright gift to an eligible charity -- carries a look-through haircut. Section 170(e)(1) applies rules similar to § 751: the deduction is reduced by the donor's pro rata share of the gain that would have been ordinary if the corporation had sold its assets, which sweeps in cash-method receivables, inventory, and § 1245 depreciation recapture. S stock with hot assets inside yields a less-than-fair-market-value deduction even where the transfer itself is permitted.

Four Workarounds, Ranked by Structure

Workaround A: the corporation as donor

Rather than the shareholder contributing stock, the S corporation itself contributes appreciated assets to a term-of-years CRUT with the corporation as the unitrust recipient. The statutory footing is direct: § 664(d)(2)(A) permits payment to "one or more persons," § 7701(a)(1) defines "person" to include a corporation, and because a corporation has no measuring life, the trust must run for a term of years not exceeding 20. PLR 9340043 squarely approved the structure -- an S corporation contributed a partnership interest to a 20-year CRUT with itself as sole recipient, with no constructive dividend to the shareholder -- and PLR 200644013 approved a recently converted S corporation's contribution of appreciated real estate to a FLIP-NIMCRUT on the same architecture. Both are nonprecedential under § 6110(k)(3), but they are the map.

CRITICAL DISTINCTION -- THE CORPORATION MUST BE THE SOLE RECIPIENT. PLR 200203034 is the fatal contrast case. There, the S corporation was to receive payments for 19 years, followed by the individual shareholders for life. The IRS treated the arrangement as having two grantors sharing joint investment profits, held it was not classifiable as a trust at all, and disqualified it under § 664. Mixing a corporate term interest with individual life interests destroys the structure. Draft the corporation as the only noncharitable recipient for the entire term.

The pass-through mechanics are the reason shareholders like this structure. The corporation's charitable deduction passes through pro rata under § 1366 and keeps its donee character; under the second sentence of § 1367(a)(2), the shareholder deducts a pro rata share of fair market value but reduces stock basis only by the pro rata share of the corporation's adjusted basis in the contributed property -- a mismatch enacted by the Pension Protection Act of 2006 and made permanent by the PATH Act. Shareholder-level AGI limits then apply. The contribution itself should not trigger corporate gain: § 311(b) taxes distributions of appreciated property to shareholders, and a bona fide charitable contribution with the corporation as sole recipient is not such a distribution. Label the § 311(b) position gray, though -- the favorable answer rests on negative implication plus a nonprecedential ruling, and the IRS's best counterargument is that the transfer runs, in substance, for the shareholders' benefit, which is exactly the recharacterization that sank PLR 200203034.

Two structural constraints do the real gating. First, Treas. Reg. § 1.337(d)-4 forces a corporation that transfers all or substantially all of its assets to a tax-exempt entity to recognize gain as if the assets were sold at fair market value; the reorganization benchmarks of 70% of gross or 90% of net assets are the usual reference points, and conservative planners keep corporate-level contributions below 50% of gross asset value. Second, the corporation must survive the full trust term to receive the payments. Liquidating early converts the remaining unitrust interest into a § 336 distribution of an appreciated intangible, triggering corporate gain that passes through under § 1366 and neutralizes the deferral. A plan to contribute, sell, and promptly liquidate is not this workaround; it is the government's exhibit A.

Workaround B: the fractional-interest co-seller

Here the corporation distributes an undivided fractional interest in selected business assets -- ideally goodwill, going-concern value, or land -- to the shareholders or contributes it directly, the CRUT receives the slice before any binding agreement, and the corporation and trustee then sell as co-sellers under one asset purchase agreement with a consistent § 1060 allocation. Three screens govern.

Asset class. Receivables, inventory, and recapture-heavy § 1245 property must stay out of the charitable slice; § 170(e)(1) reduces the deduction dollar for dollar by ordinary-income content. Holding-period UBTI. If the contributed interest participates in an operating business for any material period before closing, the trust's share of the operating income is § 512 UBTI subject to the 100% excise; the asset must be passive or the sale must close nearly immediately. Genuine discretion. Because an undivided slice of enterprise goodwill has no standalone market, the IRS argues the trustee's power to refuse the unified sale is hollow -- the Hoensheid realities-and-substance framework gives that argument teeth, even though Rauenhorst and Keefer vindicate contributions made at the nonbinding LOI stage.

RED FLAG -- THE KEEFER CARVE-OUT TRAP. In Keefer v. United States, the donor's early timing survived -- the court held a 4% limited partnership interest gifted at the nonbinding LOI stage was not "practically certain" to be sold -- but the deduction died anyway, because the donor carved out rights to certain distributions and therefore did not give the entire interest. The contributed fraction must be a true vertical slice of every attribute of the interest, not a repackaged right to sale proceeds. Keefer also denied the deduction on a defective donor-advised fund acknowledgment under § 170(f)(18)(B); substantiation traps travel in packs.

Workaround C: personal goodwill

Where the enterprise's value rests on the founder's relationships, reputation, and skill, the tax law recognizes personal goodwill as an asset of the individual, distinct from the corporation. Martin Ice Cream is the cornerstone: a shareholder's relationships are not corporate assets where no employment agreement or covenant not to compete ever transferred them to the entity. Norwalk and Bross Trucking reaffirm the principle. The founder contributes the personal goodwill -- a capital asset under § 1221 -- to a lifetime CRUT before any binding sale, a valuation professional performs an allocation study separating personal from enterprise goodwill, and the buyer signs two purchase agreements: one with the corporation for the enterprise assets, one with the trustee for the personal goodwill. Because the goodwill was never a corporate asset, the route also sidesteps § 1374 built-in gains exposure and the § 751-style deduction haircut.

The failure mode is Howard v. United States. A dentist who had signed an employment agreement and covenant not to compete with his own professional corporation in 1980 could not sell "personal" goodwill in 2002; the covenant had long since conveyed the economic value of his patient relationships to the corporation, and the Ninth Circuit recharacterized the goodwill allocation as a corporate asset and a dividend. The factual predicates are therefore nonnegotiable: no active employment agreement or non-compete capturing the relationships (terminate or let them lapse well before transaction planning); a credentialed allocation appraisal; buyer cooperation in the bifurcated purchase, typically with a new consulting and non-compete agreement running to the buyer; and planning that begins years, not weeks, before the exit.

Workaround D: the F-reorganization sequence

Lower-middle-market sales, especially to private equity, already use the F-reorganization architecture of Rev. Rul. 2008-18, and it dovetails with CRUT planning because it converts the S stock problem into an LLC interest fact pattern. The sequence is precise, and order matters.

Shareholders form a new S corporation holding company, contribute the operating company's stock to it, and elect qualified subchapter S subsidiary status for the operating company -- a tax-free F reorganization under § 368(a)(1)(F) that carries the S election to Holdco. The operating company then converts under state law to a single-member LLC, still disregarded. Before any binding sale agreement, Holdco gifts a portion of the LLC interests to the CRUT. Two sequencing rules protect the reorganization itself: the QSub election should be effective the day after the stock contribution, and the LLC conversion at least a day after the election, because the entity must be a corporation when the election is made. And one tax moment defines the risk: the instant the CRUT becomes a second member, the LLC ceases to be disregarded and is reclassified as a partnership under Treas. Reg. § 301.7701-3. From that instant, the trust bears its share of operating income as § 512(c) UBTI, subject to the 100% excise. The contribution and the unified asset sale should therefore close on the same business day, or operating income should be neutralized by distributions before the transfer. The escape from the shareholder-eligibility bar is real; the price is stepping into the partnership UBTI regime with a stopwatch running.

Built-In Gains and the Contrast Case

Section 1374 for recent C-to-S converts

If the company converted from C to S status within the five-year recognition period (permanent after the PATH Act), a sale of assets held at conversion triggers corporate-level built-in gains tax at 21%. PLR 200644013 maps the interaction with a corporate-donor CRUT: the contribution of built-in-gain real estate to the trust was not a disposition triggering § 1374, and neither was the trust's later sale -- but the corporation did recognize built-in gain on unitrust amounts received during the recognition period to the extent they carried out Tier 2 capital gain from the trust's sale of that property. The workaround defers the entity-level hit; it does not erase it. Model § 1374 exposure before choosing any workaround that involves asset-level sales.

The contrast case: an outright gift of S stock to a public charity or DAF

Unlike a CRT, a public charity or donor-advised fund sponsor is an eligible S shareholder under § 1361(c)(6). The owner can gift the S stock outright; the charity absorbs the § 512(e) UBIT on flow-through items and sale gain at regular trust or corporate rates -- painful, but nothing like a 100% excise -- and typically discounts the gift's value by 10% to 30% to price that liability. This path dominates the CRT workarounds when the client wants a large current deduction and immediate divestiture and does not need an income stream. The CRT workarounds win when the client wants the retained income interest and multi-year deferral. The choice is an objectives question, not a cleverness contest.

LLC and Partnership Interests

No eligibility bar; UBTI is the screen

No shareholder-eligibility analog blocks a CRUT from holding a multi-member LLC or partnership interest. The binding constraints are economic. Under § 512(c), the trust includes its distributive share of the entity's trade or business income in UBTI; under § 514, debt-financed property converts even passive rents and sale gain into unrelated debt-financed income; and § 664(c)(2) confiscates every UBTI dollar at 100%. An LLC holding portfolio securities or a passive, unlevered, sale-ready asset is a workable CRUT holding. An operating business or a mortgaged building is not. Where an active or leveraged interest must be held, the classic mitigation is a wholly owned C corporation blocker beneath the trust (PLR 200252096), which converts UBTI into dividends at the cost of entity-level corporate tax.

Encumbered interests: the bargain-sale trap

Liabilities convert the gift into a part-sale. Under § 1011(b), Treas. Reg. § 1.1011-2, and Rev. Rul. 75-194, the donor's relief from a pro rata share of entity liabilities under § 752 is an amount realized on a deemed sale of part of the interest; basis is apportioned between the sale and gift portions by the ratio of the liabilities to fair market value; and the donor recognizes gain on the spread -- before the trust's own § 514 problem even begins. Debt-encumbered interests should be cleaned up (debt repaid, property refinanced out) before contribution, or the CRUT conversation should end.

Hot assets, disregarded wrappers, and timing

Section 751 look-through applies twice. At contribution, § 170(e)(1) cuts the deduction by the ordinary-income component attributable to unrealized receivables, inventory, and recapture. At the trust's later sale, the § 751 ordinary component enters Tier 1 of the § 664(b) ordering rules, so the recipient pays ordinary rates on that slice of every distribution until it is exhausted. A single-member LLC, by contrast, is a clean wrapper: contributing 100% of a disregarded LLC is a contribution of the underlying assets, with all the usual timing, appraisal, and UBTI analysis attaching to those assets -- but contributing less than 100% creates a partnership at that moment and activates the full flow-through regime. On timing, no published authority extends the Rev. Rul. 78-197 "legally bound" formulation to partnership-interest sales, which are typically structured as § 1060 asset deals rather than redemptions; the Ferguson and Hoensheid practical-certainty analysis governs, with Keefer's entire-interest requirement as an independent trap.

Self-dealing with disqualified co-owners

Where the donor, family members, or their controlled entities are co-owners of the entity, § 4941 (imported by § 4947(a)(2)) limits the trust's operational room. Leases, loans, and licensing between the entity and a disqualified person are indirect self-dealing where the trust holds a controlling interest; and critically, the § 4941(d)(2)(F) redemption exception applies only to corporations -- a partnership's redemption of the CRUT's interest, or a family member's buyout of it, is self-dealing unless it fits the narrow estate-administration exception. Eliminate disqualified-person dealings before funding, not after.

Cross-Cutting Layers

Split-interest trust rules: why the CRUT can hold the business at all

A CRUT is a split-interest trust under § 4947(a)(2), which imports the private foundation excise regimes. Self-dealing under § 4941 always applies, as do the taxable-expenditure rules. But under § 4947(b)(3)(B), the excess business holdings rules of § 4943 and the jeopardizing-investment rules of § 4944 do not apply where a deduction was allowed for the full remainder and no income interest is charitable -- the ordinary CRUT. The trust may therefore hold a concentrated closely held position for the entire term without the five-year divestiture clock that binds a private foundation or, under § 4943(e), a donor-advised fund. That carve-out is the structural reason the entire subject of this briefing exists, and it is worth explaining to referral sources. The exemption is lost where a charity holds an income interest, and it ends when the income interests expire and the trust becomes wholly charitable.

Trust design: the FLIP-NIMCRUT

Because closely held interests are illiquid and rarely produce dependable annual cash, the vehicle of choice is a FLIP-NIMCRUT. During the holding phase the trust pays the lesser of the unitrust percentage or actual net fiduciary accounting income, with a makeup account for shortfalls. The trust instrument specifies a triggering event outside the control of the trustee or any person -- the sale of unmarketable assets such as closely held stock or entity interests is the expressly permitted, objective trigger under Treas. Reg. § 1.664-3(a)(1)(i)(d) -- and on January 1 of the year following the trigger the trust converts permanently to a standard CRUT, forfeiting the makeup account. The design must clear the 10% minimum remainder test of § 664(d)(2)(D) at the chosen payout rate and § 7520 rate (use the three-month lookback election), with the payout between 5% and 50% and any term of years capped at 20. The CRUT Deduction Calculator tests the remainder value at the actual numbers before the drafting conversation. The parallel analysis for real property, where the same FLIP architecture and many of the same traps appear, is in the real estate funding briefing.

Substantiation: the Hoensheid warning

Estate of Hoensheid cost the taxpayer twice, and the second loss is the one practitioners forget. Independent of the assignment-of-income holding, the Tax Court disallowed the entire charitable deduction -- more than $3 million -- solely for failure of the qualified appraisal rules. The taxpayer had used the investment banker who negotiated the sale to write a gratis valuation letter; the banker held no appraisal credentials, did not hold himself out as an appraiser, and prepared valuations only to solicit business. The court rejected the substantial-compliance defense. A perfectly timed gift with a defective appraisal package still produces a zero deduction.

T.D. 10051 and the enforcement climate

On July 9, 2026, Treasury finalized T.D. 10051, designating the abusive CRAT-SPIA scheme -- fund a purported CRAT with appreciated property, sell tax-free, buy a single premium immediate annuity, and misreport the annuity as mostly tax-free return of investment -- as a listed transaction. The scope note matters: the rule targets that specific CRAT structure, and ordinary CRUTs funded with appreciated property and invested in securities are expressly outside the definition, with charitable remaindermen excluded from participant status. But the finalization, done through full notice-and-comment to survive APA challenge, signals the Service's appetite for CRT-based permanent-gain-avoidance enforcement. Keep structures inside the ordinary-CRUT safe zone and substantiate rigorously. The full analysis is in the T.D. 10051 briefing.

The California overlay

UBTI at 113.3%. California conformed to the federal CRT exemption in 2014 (AB 2754, enacting Rev. & Tax. Code § 17755), but with a twist: for California purposes the 100% federal excise of § 664(c)(2) does not apply, and the trust's UBTI is instead taxed at regular fiduciary rates reaching 13.3%. The two regimes stack. A California CRUT that generates a dollar of UBTI -- a stub-period partnership allocation, a debt-financed rent -- faces the 100% federal excise plus up to 13.3% California income tax on the same dollar: a combined drag of up to 113.3%, more than the income itself. Pre-liquidity screening for debt and active business income is not optional for California clients.

QSBS nonconformity. California does not conform to §§ 1202 or 1045. Gain that is wholly excluded federally is fully taxable in California at rates up to 13.3%, which is a persistent thumb on the scale toward the CRUT's deferral for California founders.

Community property. Property acquired during marriage while domiciled in California is presumptively community property (Fam. Code § 760), and any transmutation requires a written express declaration under Fam. Code § 852. A founder contributing separate-property stock to a joint-life CRUT, or community stock without documented spousal consent, can create an accidental transmutation or an incomplete file. The marital-property workup belongs alongside the federal memorandum, not after it.

Property tax and transfer tax. If the entity holds California real property, a transfer of entity interests that gives any person -- including a CRUT -- more than 50% of the voting stock or of capital and profits is a change in control under Rev. & Tax. Code § 64, triggering full Proposition 13 reassessment (the revocable-trust exclusions do not apply to an irrevocable CRUT) and requiring a BOE-100-B filing within 90 days. Since 926 North Ardmore Avenue, LLC v. County of Los Angeles, 3 Cal. 5th 319 (2017), documentary transfer tax can apply to entity-interest transfers effecting a change in ownership even without a recorded deed.

Attorney General oversight. The California Attorney General has jurisdiction over charitable interests under Gov. Code § 12580 et seq. Registration and reporting obligations for a split-interest trust depend on the trust's circumstances and typically mature with the charitable interest; confirm the current Registry requirements as part of the administration plan rather than assuming either exemption or a filing duty.

Master Comparison Table

Metric	C corp stock	S corp stock (direct)	S corp as donor	Fractional asset interest	Personal goodwill	LLC / partnership interest
Can the CRUT hold it?	Yes. Settled.	No. Terminates the S election (§ 1362(d)(2)).	Trust holds the contributed asset, not S stock. Defensible.	Depends on the asset selected. Gray.	Yes, if the goodwill is truly personal. Factual.	Yes in the abstract; UBTI decides whether it is wise.
Contribution-date consequences	FMV deduction, 30% AGI limit; qualified appraisal	S election dies; UBTI trap	Deduction passes through (§ 1366); basis reduced only by inside basis (§ 1367(a)(2)); § 311(b) gray	Deduction reduced by ordinary-income assets (§ 170(e)(1))	FMV deduction if truly personal; fails under Howard if a non-compete exists	Bargain-sale gain if encumbered; § 751 haircut
Holding-period UBTI exposure	None from holding the stock	§ 512(e): everything is UBTI; 100% excise	Low if contributed assets are passive	High if operations continue	Low (sold promptly)	Core risk: § 512(c) and § 514
Sale mechanics	Trust sells; redemption possible under § 4941(d)(2)(F)	N/A	Trust sells; § 664(b) character; § 1374 can bite through distributions	Co-sale under one agreement; § 1060 allocation; hollow-discretion risk	Bifurcated purchase agreements; buyer cooperation	§ 751 recharacterization; Keefer timing and entire-interest rules
Deduction quality	High (FMV, public-charity class)	Poor and moot	FMV pass-through with basis-limited reduction	FMV of the slice, less ordinary-income taint	Excellent if the facts hold	FMV less hot assets and liability effects
Capital gains deferral captured	Full	None	Deferral on contributed portion, over a term of 20 years or less	Deferral on the contributed slice; litigation risk can erase it	Full on the personal portion	Often weakened by UBTI or bargain-sale gain
Typical recommendation	GREEN -- the baseline	RED -- never direct	YELLOW -- viable where corporate-term economics genuinely fit	YELLOW -- reserve for curated facts; early timing	YELLOW -- only absent a non-compete, with strong valuation	YELLOW -- passive, unlevered, sale-ready only; consider a blocker

Strategic Implications

Entity type is destiny. The first intake question is "C, S, or LLC?" A C corporation is the clean case; an S corporation forces a workaround; an LLC or partnership shifts the whole analysis to UBTI management. Nothing downstream matters until this is answered from the actual tax filings, not the client's recollection.

For S corporations, sequence beats cleverness. In a sale context, the most robust S corporation path is usually the F-reorganization architecture already common in private equity deals, with an LLC interest slice contributed to a FLIP-CRUT before any binding agreement and a same-day closing. The corporation-as-donor route works on the right facts but is fragile: sole-recipient drafting, the § 311(b) gray zone, the substantially-all trap, and the survival requirement all have to hold at once.

Timing is the deduction. Contribute at or before the nonbinding LOI. After a definitive agreement or shareholder approval, assume the gain has ripened. The donor must bear real risk that the sale will not close, and the file must show it.

The § 4943 carve-out is why the CRUT can hold the business at all. Because § 4947(b)(3)(B) exempts a standard CRUT from excess business holdings, the trust need not divest a closely held interest on the five-year clock that binds private foundations and donor-advised funds. That is a genuine structural advantage worth explaining to CPAs and exit planners.

OBBBA reset the "just sell it" comparison. With post-enactment QSBS reaching a 100% exclusion at five years and a $15 million per-issuer cap, a C corporation founder may prefer a straight sale. The CRUT wins on gain above the cap, on income and deferral objectives, on failed QSBS tests, and, for California residents, on the state's total nonconformity to §§ 1202 and 1045.

The Service is watching CRT gain avoidance. T.D. 10051 targets a specific CRAT abuse and leaves ordinary CRUTs untouched, but the enforcement signal is unmistakable. Stay inside the ordinary-CRUT safe zone, avoid annuity overlays, and treat the appraisal package as a litigation document.

Practice Notes

Intake questions.

1. Entity classification today (C corporation, S corporation, partnership, disregarded LLC)? If S, the date of any C-to-S conversion and remaining § 1374 recognition period?

2. Deal stage: LOI signed? Binding or nonbinding? Draft definitive agreement circulated? Board or shareholder approval? Any pre-closing distributions, dividend strips, or transaction bonuses?

3. Cap table: co-owners who are disqualified persons under § 4946? Any leases, loans, or buy-sell arrangements between the entity and the owner or family?

4. Inside assets: receivables, inventory, recapture property (§ 751 exposure)? Debt or encumbrances (§ 1011(b) and § 514 exposure)?

5. Does the entity own California real property (Proposition 13 and documentary transfer tax workup)?

6. Is there an employment agreement or covenant not to compete between the owner and the company (which blocks the personal goodwill route)?

7. QSBS status of any C stock: acquisition date relative to July 4, 2025, holding period, gross-assets test?

8. The client's actual objective: retained income and deferral (CRT), or maximum current deduction and immediate divestiture (outright gift or DAF)?

9. Marital-property characterization of the interest, and is spousal consent or a transmutation agreement needed?

10. Who will serve as trustee, and is an independent special trustee needed for annual valuation under § 672(c)?

Drafting checklist.

• FLIP-NIMCRUT with an objective trigger tied to the sale of the unmarketable interest per Treas. Reg. § 1.664-3(a)(1)(i)(d); no discretionary trigger.

• Payout between 5% and 50%; run the 10% remainder test at the chosen § 7520 rate with the three-month lookback election.

• Restrict the remainder class to § 170(b)(1)(A) public charities to preserve fair market value deduction quality for closely held stock.

• If a corporation is the recipient: term of years of 20 or fewer, and the corporation as the sole noncharitable recipient for the entire term (the PLR 200203034 lesson), with corporate-survival covenants.

• Independent special trustee with valuation authority, or a mandate for annual qualified appraisals under Treas. Reg. § 1.664-1(a)(7).

• Prohibit the trustee from accepting corporate promissory notes in any § 4941(d)(2)(F) redemption.

• Sale-process documentation proving the trustee was neither bound nor compellable, and a memorandum explaining why the chosen workaround is not a disguised transfer of S stock to an ineligible shareholder.

• For DAF remaindermen, the § 170(f)(18)(B) exclusive-legal-control acknowledgment.

• Where California real property sits in the entity: the Proposition 13, BOE-100-B, and documentary transfer tax workup alongside the federal memo.

Red flags.

• A gift dated after the deal is effectively baked, whatever the documents call themselves -- dividend strips, cleared working capital, and paid transaction bonuses are the Hoensheid tells.

• A carve-out of sale proceeds rather than a true vertical slice of the entire interest (Keefer).

• S stock proposed to go directly into the CRUT. Stop; the S election dies at transfer.

• A gratis appraisal from the client's investment banker, M&A advisor, or CPA without appraisal credentials -- complete disallowance under Hoensheid, independent of timing.

• An employment agreement or non-compete with the company in a "personal goodwill" plan (Howard).

• Active operations or mortgaged property inside the entity while the CRUT holds it -- 100% federal excise, plus California's 13.3% on top.

• A corporation-as-donor structure that also pays individuals for life (the dual-grantor classification failure).

• Any single-premium annuity overlay or CRAT-based return-of-investment claim -- a listed transaction under T.D. 10051.

Frequently Asked Questions

Can a charitable remainder trust hold S corporation stock?

No. A CRT is not an eligible S corporation shareholder, and transferring S stock to a CRUT immediately terminates the S election under § 1362(d)(2), converting the company to a C corporation. Even if the trust could hold the stock, § 512(e) would treat all flow-through income and any sale gain as unrelated business taxable income, which a CRT pays over at a 100% excise rate. Planning for S corporation owners uses workarounds: the corporation as donor, a fractional asset interest, personal goodwill, or an F-reorganization into a disregarded LLC.

What is the best business asset to fund a CRUT?

C corporation stock is the baseline and usually the best entity-interest funding asset. The trust may hold it indefinitely, the donor deducts the actuarial value of the remainder at fair market value when the remainder class is restricted to public charities, and the trust sells without current tax. The decisive requirements are timing (contribute before the sale is practically certain) and substantiation (a qualified appraisal, attached to the return for deductions over $500,000).

When must the business interest be contributed relative to the sale?

Before the sale is practically certain to occur. Under Estate of Hoensheid, the donor must bear real risk at the time of contribution that the sale will not close. The safe window is at or before a nonbinding letter of intent; after a definitive agreement or shareholder approval, the gain has ripened and the donor will be taxed on the trust's sale.

Can an LLC or partnership interest fund a CRUT?

Legally yes -- no shareholder-eligibility rule blocks it. Practically, the interest works only if the entity is passive, unlevered, and close to sale. Active trade or business income flows to the trust as UBTI subject to a 100% federal excise (plus California tax), debt inside the entity triggers bargain-sale gain to the donor and debt-financed income to the trust, and hot assets reduce the deduction and force ordinary income through the distribution tiers.

What is personal goodwill, and when can it fund a CRUT?

Personal goodwill is enterprise value that belongs to the founder personally -- relationships, reputation, and skill that were never transferred to the corporation by an employment agreement or covenant not to compete. Where it genuinely exists (Martin Ice Cream), the founder can contribute it to a lifetime CRUT before the sale and the buyer purchases it under a separate agreement. A pre-existing non-compete with the company defeats the structure (Howard).

Did the 2025 QSBS changes make CRUTs less attractive for founders?

They changed the comparison rather than the answer. Post-enactment qualified small business stock can reach a 100% federal exclusion at a five-year hold with a $15 million per-issuer cap, so a straight sale may beat a CRUT for a patient founder within the cap. The CRUT still wins for gain above the cap, for stock that fails the QSBS tests, for clients who want the income stream, and for California residents, because California taxes QSBS gain in full.

Is funding a CRUT with a business interest a listed transaction?

No. T.D. 10051, effective July 9, 2026, lists only the abusive CRAT-SPIA structure -- a charitable remainder annuity trust whose proceeds buy a single premium immediate annuity misreported as tax-free return of investment. Ordinary CRUTs funded with appreciated property and invested in securities are expressly outside the listed-transaction definition, and organizations whose only role is charitable remainderman are not treated as participants.

This briefing is provided for educational purposes and reflects federal and California law as of July 2026, including the One Big Beautiful Bill Act of 2025 and T.D. 10051. It does not constitute legal or tax advice. Private letter rulings are nonprecedential and may not be relied upon by other taxpayers under IRC § 6110(k)(3). Funding a charitable remainder trust with a business interest involves overlapping income tax, excise tax, corporate, partnership, marital-property, and property tax considerations; consult qualified legal and tax counsel before contributing any entity interest to a CRT.

About CalCRUT. CalCRUT is the charitable remainder trust practice of Klaus Gottlieb, Esq. -- JD, MS, MBA -- serving the California Central Coast and California statewide. If you are a business owner weighing an exit, the productive next step is a short conversation about your entity type, your deal timeline, and whether a CRT fits your objectives at all -- the CRT Fit Assessment is a good first screen. Schedule a call.