Selling Your Charitable Remainder Trust Interest to a Third Party: How the Sale Works, What It Costs After Tax, and Why the Pre-2015 Escape Is Gone

Jurisdiction

Federal, with California fiduciary-law overlay

Primary Statutes

IRC §§ 664, 1001(a), 1001(e), 170, 2055, 2511, 2512, 2522, 4941, 4946, 4947, 7520; Cal. Prob. Code §§ 15300, 15301, 15403, 15404, 15405; Cal. Gov. Code §§ 12591, 12591.1

Key Authorities

Treas. Reg. §§ 1.1001-1(f), 1.1014-5(c), 1.1015-1(b), 1.664-1(d), 1.7520-3(b)(3), 20.2031-7, 1.6011-4(b)(6); Rev. Rul. 72-243, 1972-1 C.B. 233; Rev. Rul. 86-60, 1986-1 C.B. 302; Notice 2008-99, 2008-47 I.R.B. 1194; T.D. 9729 (Aug. 12, 2015); REG-154890-03 (Jan. 16, 2014); Rev. Rul. 2026-11 (June 2026 § 7520 rate, 5.0%); PLRs 200152018, 200739004

Last Reviewed

June 2026

Category

Charitable Planning -- CRT Income-Interest Sales

At a Glance

The pitch you will hear. Your charitable remainder trust is irrevocable, but your income interest is a capital asset. A small group of firms will buy that interest, or arrange a buyer, and hand you cash today instead of payments stretched over your life or a term of years. The pitch is accurate as far as it goes. The income interest is property, and it can be sold.

The part the pitch usually understates. Selling the income interest does not let you escape the capital gain that has accumulated, untaxed, inside the trust. It forces that gain into a single tax year, and it does so under a basis rule that is unusually harsh. In the most common structure, a stand-alone sale of the income interest, IRC § 1001(e)(1) disregards your allocable basis. The amount you realize, net of selling costs, is gain.

The structure that used to promise an escape is dead. Until 2015, some promoters arranged a simultaneous sale of both the income interest and the charity's remainder interest to one buyer, invoked the § 1001(e)(3) entire-interest exception, and claimed a high basis derived from the assets the trust had bought after selling the original appreciated property tax-free. The result claimed was little or no taxable gain. The IRS flagged the structure as a reportable "transaction of interest" in Notice 2008-99 and then closed it by regulation in T.D. 9729. Neither structure escapes the trust's untaxed appreciation now.

The discount is real and the market is thin. A buyer of a life-contingent income stream prices in mortality risk, illiquidity, and profit. The cash offer is a discounted present value, not the trust's asset value. Few institutional buyers exist, and the intermediaries who arrange these sales are compensated on closing.

The honest comparison. For a beneficiary who genuinely needs cash and has modeled the after-tax number, a third-party sale can be the right answer. For a beneficiary who no longer wants the income, a gift of the income interest to the charitable remainderman produces a § 170 deduction and avoids handing a discount and a tax bill to a stranger. The sale is one tool. It is rarely the first one to reach for.

Four things that govern whether a sale even works: the trust's spendthrift language and California assignment law; whether the buyer is a disqualified person under § 4941; the § 1001(e) basis rule that drives the after-tax result; and the actuarial valuation under § 7520, which sets both the price and, in a terminal-illness case, an adjusted value under Treas. Reg. § 1.7520-3(b)(3).

Executive Summary

A charitable remainder trust is irrevocable, and many income beneficiaries assume that irrevocability means they are locked in for the duration of the income term. That assumption is wrong. The income beneficiary's interest in a CRT is a property interest, treated as a capital asset for federal tax purposes since Rev. Rul. 72-243. A capital asset can be sold. A small secondary market exists for exactly this purpose, run by firms that buy CRT income interests or arrange third-party buyers and that market the transaction as a way to convert future payments into present cash, simplify a beneficiary's affairs, or move value to children.

The mechanics are straightforward. The harder questions are the tax consequence, the price, and whether the sale is the right move at all. This briefing addresses each in sequence.

The tax consequence is the center of the analysis, and it is unforgiving. A sale of the income interest is a realization event under § 1001, not a § 664(b) trust distribution. The character of the gain is capital. The basis treatment depends on how the transaction is structured. In a stand-alone sale of the income interest, the one most beneficiaries actually do, IRC § 1001(e)(1) disregards the seller's allocable basis, and the amount realized, net of selling expenses, is gain. In a simultaneous sale of the entire trust interest (income plus remainder) to a single buyer, the § 1001(e)(3) exception turns off § 1001(e)(1), and the seller computes gain under § 1001(a) using an actuarial share of the trust's uniform basis. That sounds better, and before 2015 it was the basis for an aggressive planning structure that claimed to wash out the deferred gain. The IRS identified the structure as a reportable transaction of interest in Notice 2008-99 and eliminated it in the final regulations at T.D. 9729, which require the seller's actuarial share of uniform basis to be reduced, but not below zero, by the seller's actuarial share of the trust's undistributed net ordinary income and undistributed net capital gain. After that reduction, the seller's basis is the actuarial share of the trust's basis in excess of those untaxed amounts. For a CRT funded with low-basis property, that residual is small; for a trust with significant remaining basis, it can be meaningful. What it is not, in any case, is the full-basis washout the pre-2015 structure claimed. The deferred appreciation is taxed now, in the year of sale.

The price is a discount. A buyer purchasing a stream of payments contingent on a seller's life accepts mortality risk and illiquidity and expects a profit. The offer is a present value reduced for all of that, below the § 7520 actuarial value of the interest. The market is small. The firms that arrange these transactions are paid when they close, which is worth naming plainly, the same way one would name a donor-advised-fund sponsor's incentive in a different context.

Whether the sale is the right move depends on the reason for the exit. A beneficiary who needs liquidity, has modeled the after-tax retention, and finds it sufficient may proceed. A beneficiary who simply no longer wants the income is usually better served by gifting the income interest to the charitable remainderman, which produces a current § 170 charitable deduction and does not surrender a discount and a tax bill to a third party. A beneficiary focused on moving value to heirs has a different set of structures to weigh, including a so-called CRT rollover into a new trust for children, which carries its own § 1001(e) acceleration and gift-tax consequences and is not a tax-free maneuver either.

The practical takeaway is that the sale of a CRT income interest to a third party is real, legal, and occasionally the best available answer, but it is the option most often oversold and least often modeled before the conversation turns to mechanics. The number that decides it is the after-tax cash retained compared against the alternatives.

Governing Framework

A charitable remainder trust is a split-interest trust qualified under IRC § 664. The income beneficiary receives an annuity amount under § 664(d)(1) (a CRAT) or a unitrust amount under § 664(d)(2) (a CRUT), for life or for a term of years not exceeding twenty. The charitable remainderman receives the trust principal when the income term ends. A qualified CRT is generally exempt from income tax under § 664(c)(1), which is what allows the trustee to sell a contributed appreciated asset without the trust paying immediate capital gains tax. The gain is not eliminated. It is carried out to the income beneficiary over the payout years through the four-tier ordering system of § 664(b): ordinary income first, then capital gain, then other income, then tax-free return of corpus. The trust keeps running tallies of these undistributed categories. Those tallies matter enormously when an income interest is sold, for reasons developed below.

The income beneficiary's interest in the trust is a capital asset. Rev. Rul. 72-243 is the foundation for that treatment, having treated a life tenant's sale of the entire trust interest to the remainderman as the sale of a capital asset, and the IRS has applied the principle in CRT contexts, including PLR 200739004, which treated the sale of a CRT income interest as the disposition of a capital asset producing long-term capital gain where the holding period is met, with the seller's allocable basis disregarded. Because the interest is property, it can be assigned, gifted, or sold, subject to the trust instrument, applicable state law, and the federal tax rules that govern those dispositions.

Two provisions of § 1001(e) control the basis treatment on a sale, and the difference between them is the difference between two transaction structures.

IRC § 1001(e)(1) provides that, in determining gain or loss from the sale of a term interest in property, the portion of the adjusted basis that would otherwise be allocable to the term interest under the uniform basis rules of §§ 1014, 1015, or 1041 is disregarded. Section 1001(e)(2) defines a term interest to include an income interest in a trust, so the income beneficiary's interest in a CRT falls within the rule. The consequence is blunt. In the usual donor or beneficiary case, the seller's basis in the income interest is a portion of the trust's uniform basis determined under § 1015 (or § 1014 or § 1041), and § 1001(e)(1) disregards it, so the seller's amount realized, generally the price net of properly taken selling expenses, is gain. The implementing regulation is Treas. Reg. § 1.1001-1(f).

IRC § 1001(e)(3) is an exception. The disregard rule of § 1001(e)(1) does not apply to a transaction in which the entire interest in the property is transferred to a third party. When the income beneficiary and the charitable remainderman sell both of their interests to a single buyer in one transaction, the entire interest in the trust changes hands, § 1001(e)(3) turns off § 1001(e)(1), and the income beneficiary computes gain under the general rule of § 1001(a) using an actuarial share of the trust's adjusted uniform basis. The actuarial share is determined under the factors in Treas. Reg. § 20.2031-7, the same factors used to value the interests for § 7520 purposes.

The actuarial framework throughout is § 7520. The rate is published monthly at 120% of the applicable federal mid-term rate, rounded to the nearest two-tenths of one percent. The June 2026 rate is 5.0% (Rev. Rul. 2026-11). The rate sets the present value of the income interest, which is both what a rational buyer will reference and what governs valuation in the structures discussed below. Treas. Reg. § 1.7520-3(b)(3) overrides the standard mortality tables where the measuring life has an incurable illness with at least a 50% probability of death within one year, a point that cuts directly against a beneficiary in poor health who is contemplating a sale.

Why a Beneficiary Considers Selling: The Secondary Market and Its Framing

A working secondary market exists for CRT income interests. The firms in it have reviewed thousands of trusts over two decades, and their core observation is accurate: most income beneficiaries do not know their interest can be sold, because they assume an irrevocable trust admits no exit. The recurring reasons a beneficiary is presented for a sale track a short list.

The beneficiary wants cash now rather than payments spread across a long horizon. The beneficiary wants to simplify, ending the annual administration, the Form 5227, and the trustee relationship. The beneficiary established the trust ten or more years ago and the original plan no longer fits. The beneficiary wants to move value to children, which the steady income stream does not accomplish directly. Each is a genuine reason, and each occasionally points to a sale.

What the marketing materials tend to compress is the after-tax arithmetic and the comparison to the non-sale alternatives. That is not a knock on the firms so much as a structural feature of how the option is sold. An intermediary compensated on closing a sale has a limited incentive to lead with "a gift of your income interest to the charity gives you a deduction and avoids the discount and the tax bill entirely." A donor-advised-fund sponsor has a parallel incentive to not recommend funding a CRT first, for the same kind of reason. Naming the incentive is not an accusation. It is the reason a beneficiary should run the comparison with someone whose fee does not depend on the transaction happening.

The Two Ways the Sale Is Structured, and Why It Matters

Structure 1: Stand-Alone Sale of the Income Interest

The income beneficiary sells the income interest to a third-party buyer for cash. The charity keeps its remainder interest. The trust continues to operate. The buyer becomes the assignee of the beneficiary's payout right. The trust's terms and its original measuring life or term are unchanged, so the buyer of a life interest receives payments only until the original measuring life ends, not until the buyer's own death. At the original termination date, the charity receives the remainder as planned.

This is the cleaner transaction structurally. It does not require the charity to do anything, it does not require court approval, and it does not require any particular language in the trust instrument beyond the absence of an assignment bar. It is also the structure that most secondary-market sales actually use.

It is, however, the structure that carries the harshest basis rule. Because only the term interest is sold, § 1001(e)(1) applies in full and the seller's allocable uniform basis is disregarded. In the usual case the seller's amount realized, net of selling expenses, is gain, with no offset for the original cost of the contributed asset and no offset for the trust's basis, generally taxed as long-term capital gain under the principle of Rev. Rul. 72-243. The number the seller keeps is the price reduced by federal capital gains tax, the 3.8% net investment income tax, and state income tax.

Structure 2: Simultaneous Sale of the Entire Interest

The income beneficiary and the charitable remainderman sell both interests to a single buyer in one transaction. The entire beneficial interest in the trust passes to the buyer, who can then collapse the trust by merger of the interests. Because the entire interest is transferred, § 1001(e)(3) turns off § 1001(e)(1), and the income beneficiary uses an actuarial share of the trust's uniform basis rather than a zero basis.

On its face, this looks better for the seller, and that appearance is exactly what drove the abusive planning the IRS shut down. The history is worth understanding, because it explains why the apparent advantage, while real, is now far smaller than it once was.

The Pre-2015 Structure, Notice 2008-99, and the Regulations That Closed It

The planning structure ran as follows. A donor contributed a highly appreciated, low-basis asset to a CRT and claimed a § 170 deduction for the present value of the remainder. The trust sold the appreciated asset, paying no tax under § 664(c)(1), and reinvested the proceeds in new assets. The trust's basis in those new assets equaled their purchase price, a high basis. The donor and the charity then sold all their interests to a third party, invoked § 1001(e)(3), and claimed that the donor's actuarial share of the trust's now-high uniform basis sheltered most or all of the gain. The deferred capital gain that the four-tier system was supposed to deliver to the income beneficiary over time appeared to vanish.

The IRS identified this as a reportable transaction of interest in Notice 2008-99, requiring disclosure by participants and material advisors under Treas. Reg. § 1.6011-4(b)(6). The Service was explicit that creating and funding a CRT with appreciated assets, and the trust's reinvestment of the proceeds, were not the problem. The problem was the manipulation of the uniform basis rules to wash out gain on the eventual sale of the interests.

The IRS then closed the structure by regulation. T.D. 9729, finalizing rules proposed in 2014 (REG-154890-03), amended Treas. Reg. § 1.1014-5 to require that, in a § 1001(e)(3) sale of an entire CRT interest, the seller's actuarial share of the trust's adjusted uniform basis be reduced, but not below zero, by the seller's actuarial share of two amounts: the trust's undistributed net ordinary income and its undistributed net capital gain, each determined under § 664(b) and Treas. Reg. § 1.664-1(d). The reduction uses the same § 20.2031-7 actuarial factors used to allocate the basis in the first place. The rules apply to sales occurring on or after January 16, 2014, except for sales made under a binding commitment entered into before that date, and transactions structured under the final rules after that date are no longer transactions of interest.

The regulation's own examples make the effect concrete. In one, a CRUT funded with low-basis stock sold it for $100x tax-free, churned through reinvestments, and ended holding stock with a $110x basis and $100x of undistributed net capital gain. On a simultaneous sale of the entire interest, the grantor's actuarial share of the $110x uniform basis is reduced by the same actuarial share of the $100x of undistributed gain, leaving the grantor's actuarial share of the residual $10x, not zero. The point of the example is that a residual basis survives, equal to the actuarial share of the trust's basis in excess of its untaxed income and gain.

The lesson is direct. The § 1001(e)(3) entire-interest structure no longer offers an escape from the deferred appreciation. Post-2015, the seller's basis is the actuarial share of the trust's adjusted uniform basis reduced by the actuarial share of undistributed ordinary income and undistributed capital gain. That leaves a residual basis equal to the actuarial share of the trust's basis in excess of those untaxed amounts. For a CRT funded with low-basis property, the residual is modest; for a trust holding significant remaining basis or one that has already distributed much of its gain, it can be meaningful. What it is not, in any case, is the full-basis washout the pre-2015 structure claimed. Whichever structure is used, stand-alone or entire-interest, current capital gain is recognized in the year of sale.

THE CENTRAL POINT -- A SALE FORCES CURRENT GAIN; IT DOES NOT TURN UNTAXED APPRECIATION INTO TAX-FREE CASH. Technically, the seller recognizes capital gain on the sale of the income interest under § 1001, not a § 664(b) distribution; the trust's undistributed income and gain tiers remain in the trust and follow the buyer's future payments. Practically, the sale forces immediate gain recognition and forecloses any path by which the beneficiary could have received the trust's untaxed appreciation as low-rate or tax-free distributions over time. In the common stand-alone structure, the seller's allocable basis is disregarded under § 1001(e)(1), so the amount realized, net of selling expenses, is gain. A beneficiary who funded a CRT with very low-basis property and is told a sale "cashes them out" should understand that a large share of the cash will be consumed by tax.

Pricing: The Discount and the Thin Market

A third-party buyer of an income interest is buying a stream of payments that ends at the seller's death (for a life interest) or at the end of the term (for a term interest). For a life interest, the buyer takes mortality risk: if the seller dies early, the buyer's payments stop early. The buyer also takes the illiquidity of an asset that cannot be resold easily, and the buyer expects a profit. The offer reflects all of that. The offer is typically below the § 7520 actuarial value of the interest, and well below the trust's asset value, because a market buyer prices in mortality underwriting, illiquidity, tax drag, transaction costs, and profit.

The pool of buyers is small. This is not a deep, liquid market with competing bids on every interest. A handful of institutional buyers and intermediaries operate in it, and the absence of competition is itself a pricing factor. A beneficiary should not assume that a single offer represents a market-clearing price, and should be prepared to test it against the alternatives rather than against a second bid that may not materialize.

The seller's health is a quiet but decisive variable. A buyer of a life interest underwrites the seller's life expectancy. A seller in poor health is worth less to a buyer than the standard tables suggest, and Treas. Reg. § 1.7520-3(b)(3) formalizes the point for valuation: where the measuring life has an incurable illness with at least a 50% probability of death within one year, the standard tables may not be used and the actual mortality circumstances govern. The regulation also supplies an 18-month presumption: if the measuring life survives at least 18 months after the valuation date, the individual is presumed not to have been terminally ill on that date unless the contrary is established by clear and convincing evidence. A seriously ill beneficiary is the worst-positioned seller, receiving a low price for a life interest precisely when the interest's standard-table value overstates what a buyer will pay. That is the scenario in which a sale is least attractive and a gift of the interest to charity, or simply allowing the trust to run to its natural termination, often dominates.

State-Law Assignment Limits: Spendthrift Provisions and California

A sale requires that the income interest be assignable. A spendthrift provision in the trust instrument can bar the beneficiary from transferring the interest, by sale or by gift, and where it applies it stops the transaction at the threshold.

California does not impose a spendthrift restraint by default. Cal. Prob. Code § 15300 enforces a restraint on the transfer of a beneficiary's right to income, and § 15301 does the same for principal, only where the trust instrument so provides. Absent express spendthrift language, the restraint does not exist by operation of law, and the income interest is assignable. Counsel must read the instrument. A CRT drafted with boilerplate spendthrift language, common in trust forms, may have inadvertently restricted the very flexibility the beneficiary now wants.

Where a valid restraint blocks assignment, the remaining paths may include a court petition under Cal. Prob. Code § 15403, which requires the consent of all beneficiaries and turns on whether continuance is necessary to carry out a material purpose of the trust; a nonjudicial modification under § 15404, which permits modification or termination on the written consent of the settlor and all beneficiaries, without court approval, where the settlor is available and all required parties consent; or a structure the trustee, rather than the beneficiary, executes. Because a CRT has a charitable beneficiary, the California Attorney General represents the charitable interest, and notice to the Attorney General is generally required for any modification or termination that affects the charitable interest (Cal. Prob. Code § 15405; Cal. Gov. Code §§ 12591, 12591.1). Any modification must also preserve the trust's § 664 qualification.

Related-Party Buyers Require a Separate § 4941 and Gift-Tax Analysis

A CRT is treated as a split-interest trust under IRC § 4947(a)(2), and the self-dealing rules of § 4941 apply to it as if it were a private foundation. Disqualified persons under § 4946 include the donor, the donor's spouse, the donor's ancestors and descendants, and entities those persons substantially control.

In a stand-alone sale of the income interest to an unrelated third party, the trust itself is generally not a party to the sale, and an unrelated buyer is not a disqualified person, so § 4941 is generally not implicated by the sale itself. A sale to children or a family-controlled entity is a different matter, and it is not the clean version of this transaction. Even where the trust is not technically a party to a stand-alone assignment, the arrangement should be screened for indirect self-dealing, for any assignment restriction in the instrument, for trustee participation, and for bargain-sale gift exposure. A sale to a related party below fair market value is a part-sale, part-gift under §§ 2511 and 2512, with the bargain element treated as a taxable gift. If the trust, the trustee, or the charitable remainderman is a party to the transaction, the § 4941 risk increases sharply. The clean version of a sale is to an unrelated buyer at an arm's-length price. The family-transfer objective is better pursued through a deliberately structured rollover, discussed below, than through a discounted intra-family sale.

What the Sale Does Not Change

Two points are frequently misunderstood and worth stating plainly.

The original charitable income tax deduction is not clawed back. The donor's § 170 deduction was earned when the remainder interest was irrevocably committed to charity at funding. Selling the income interest later does not disturb that deduction, because the remainder remains destined for charity (in a stand-alone sale, the charity still takes the remainder; in an entire-interest sale, the charity has been paid for its remainder). The deduction stands.

The trust's qualification is not the seller's problem in a stand-alone sale. The trust continues to operate as a § 664 trust, now paying the assignee rather than the original beneficiary, on unchanged terms and measured by the original life or term. The buyer takes the payments and the charity takes the remainder at termination. The seller exits cleanly. (In an entire-interest sale, the buyer who acquires both interests will typically collapse the trust, which ends its existence rather than disqualifying it.)

The Alternatives a Sale Should Be Measured Against

A sale is one of several ways out, and it is rarely the best one unless the beneficiary specifically needs cash from an unrelated party. The realistic comparators are these.

A gift of the income interest to the charitable remainderman. The beneficiary assigns the income interest to the charity, the split interests merge under state law, and the trust collapses to the charity. The beneficiary takes a current § 170 charitable income tax deduction equal to the actuarial value of the surrendered interest, valued under § 7520, with the two-month look-back election generally available because a charitable contribution is involved. Rev. Rul. 86-60 supports the deduction where a life beneficiary donates a retained annuity interest to the charitable remainderman, and later rulings apply similar reasoning in the unitrust context. The deduction is not automatic in amount or usability: it is subject to the § 170 percentage-of-AGI limits, the substantiation and qualified-appraisal rules where applicable, the donee's public-charity or private-foundation status, any § 170(e) reduction, and the release or exercise of any retained power to change the charitable remainderman. This is the right answer for a beneficiary who no longer wants or needs the income. It produces a tax benefit rather than a tax bill, and it avoids the discount a buyer would impose. It does not produce cash.

A commutation, meaning a division of the trust assets between the beneficiary and the charity based on § 7520 actuarial values. This produces cash to the beneficiary without an unrelated buyer, but it carries the same § 1001(e) gain on the amount received, has thinner published-authority support than a charitable gift, and is high-risk under § 4941 where the remainderman is a related private foundation. It requires the charity's cooperation and usually court approval.

A CRT rollover into a new trust for heirs. The beneficiary disposes of the existing income interest and a new CRT is established for the benefit of children or grandchildren. This is marketed as a way to get more value to heirs than the income stream would. It is not a tax-free maneuver. The disposition of the existing income interest is a § 1001(e) realization event with the same acceleration of gain. The new CRT may generate an income-tax charitable deduction under § 170 and a gift-tax charitable deduction under § 2522 for its charitable remainder, but the noncharitable income interest transferred to children or grandchildren is a taxable gift valued under §§ 2511, 2512, and 7520. The rollover can be the right structure for a family-transfer objective, but it should be modeled on its full tax cost, not presented as a costless reshuffle.

Doing nothing. Allowing the trust to run to its natural termination keeps the income flowing, recognizes the deferred gain gradually through the § 664 tiers at the lowest applicable rates, and delivers the remainder to charity as planned. For a beneficiary without a pressing need for cash, this is frequently the best after-tax outcome, and it is the baseline against which any proposed sale should be measured.

A Worked Illustration

The figures below are illustrative and use round numbers and a schematic actuarial share to show the mechanics. Actual valuations require the § 20.2031-7 factors for the beneficiary's age and the applicable § 7520 rate (5.0% for June 2026), and actual after-tax results depend on the beneficiary's bracket and state of residence.

A donor funded a 5% CRUT with stock having a $200,000 basis and a $1,000,000 value. The trust sold the stock tax-free under § 664(c)(1) and reinvested. Assume the trust was funded recently, with negligible distributions to date, so its adjusted uniform basis approximates its current $1,000,000 value, its undistributed net capital gain approximates the $800,000 built-in gain realized on the tax-free sale, and its undistributed net ordinary income is $0. The donor, age 70, wants cash. Assume the income interest represents 60% of the trust on an actuarial basis, so its § 7520 actuarial value is roughly $600,000. The donor is offered a price for the income interest.

Item	Stand-Alone Sale (§ 1001(e)(1))	Entire-Interest Sale (§ 1001(e)(3), post-T.D. 9729)
What is sold	Income interest only; charity keeps remainder	Income interest and remainder, both, to one buyer
Illustrative amount realized for the income interest	$600,000 (≈ § 7520 actuarial value; a stand-alone buyer would discount below this)	$600,000 (the remainder is paid for separately)
Basis offset	None; allocable uniform basis disregarded	60% × ($1,000,000 basis − $800,000 undistributed gain − $0 ordinary income) = $120,000
Taxable gain	$600,000	$480,000
Character	Long-term capital gain	Long-term capital gain
Illustrative combined rate (top federal LTCG + 3.8% NIIT + 13.3% CA)	~37%	~37%
Illustrative tax	~$222,000	~$177,600
Illustrative after-tax cash	~$378,000	~$422,400

The point of the table is not the precision of any single figure. It is twofold. First, the two structures do not fully converge after 2015: the entire-interest sale preserves a residual basis (here $120,000, the income interest's actuarial share of the trust's $200,000 of basis in excess of its undistributed gain), so it produces less taxable gain than the zero-basis stand-alone sale. Second, neither structure recovers the pre-2015 washout; both tax the bulk of the deferred appreciation now. Two cautions on reading the cash figures: the income beneficiary owns only the income interest, valued here at roughly $600,000, not the trust's full $1,000,000, so the net cash is roughly 63% to 70% of the income interest's value and a smaller fraction of the trust; and a real stand-alone offer would be discounted below the $600,000 actuarial value for mortality risk and illiquidity, reducing the stand-alone net further, while an entire-interest buyer who collapses the trust immediately bears no mortality risk and can pay closer to the actuarial allocation.

PLANNING NOTE -- MODEL THE NUMBER BEFORE THE MECHANICS. The decision turns on after-tax cash retained compared against the alternatives. Run three figures side by side: the after-tax cash from a sale; the § 170 deduction value from gifting the interest to charity; and the after-tax value of simply holding the trust to termination. A beneficiary who needs a specific dollar amount of cash, and finds the sale delivers it after tax, has a reason to sell. A beneficiary who is selling on the impression that they are "unlocking" the trust's full value, without seeing the discount and the tax stacked against that value, is making the decision on the wrong number.

Summary Table: Issue, Rule, and Practical Consequence

Issue	Governing Rule	Practical Consequence
Is the interest sellable	Rev. Rul. 72-243; Cal. Prob. Code §§ 15300-15301	Yes, as a capital asset, unless a spendthrift provision in the instrument bars assignment
Basis on a stand-alone income-interest sale	IRC § 1001(e)(1)-(2); Treas. Reg. § 1.1001-1(f)	Allocable uniform basis disregarded; amount realized, net of selling expenses, taxed as long-term capital gain
Basis on an entire-interest sale	IRC § 1001(e)(3); Treas. Reg. § 1.1014-5(c) (T.D. 9729)	Actuarial share of uniform basis, reduced by actuarial share of undistributed ordinary income and capital gain; small for a low-basis CRT, possibly meaningful otherwise; not the pre-2015 washout
The pre-2015 gain-avoidance structure	Notice 2008-99; Treas. Reg. § 1.6011-4(b)(6)	Was a reportable transaction of interest; closed by regulation; no longer works
Character of the gain	Rev. Rul. 72-243; PLR 200739004	Long-term capital gain where holding period met
Buyer identity	IRC §§ 4941, 4946, 4947(a)(2)	Unrelated buyer in a stand-alone sale generally clears § 4941; related-party or below-market sale needs separate self-dealing and gift-tax analysis
Valuation and pricing	IRC § 7520; Treas. Reg. §§ 20.2031-7, 1.7520-3(b)(3)	Offer is below § 7520 actuarial value; terminal illness lowers value and forbids standard tables, subject to the 18-month presumption
Original charitable deduction	IRC § 170	Not clawed back by a later sale of the income interest
Cleaner alternative when cash is not the goal	IRC § 170; Rev. Rul. 86-60	Gift of the income interest to charity yields a deduction instead of a tax bill, subject to the usual § 170 limits

Strategic Implications for Practice

A sale converts deferred gain into present gain; it does not avoid it. The post-2015 regulatory landscape removed the version of this transaction that promised to wash out the embedded gain. Whichever structure is used, current capital gain is recognized in the year of sale, and the entire-interest structure now leaves only a residual basis rather than the full-basis escape it once claimed. For a CRT funded with low-basis property, that is the dominant tax fact, and it should be the first thing on the table.

The stand-alone sale is the common structure and the harshest on basis. Because § 1001(e)(1) disregards the allocable basis, the amount realized is gain. This is counterintuitive to clients who expect some offset for the original cost of the contributed asset, and it should be stated explicitly before any offer is evaluated.

The discount and the thin market are real costs, not friction. The price is a discounted present value set in a market with few buyers and intermediaries paid on closing. A single offer is not a market. The beneficiary's leverage comes from a credible willingness to choose an alternative.

For a beneficiary who no longer wants the income, a charitable gift of the interest dominates a sale. It produces a § 170 deduction rather than a capital gains bill and surrenders no discount to a buyer. The sale earns its place only when the beneficiary specifically needs cash from a third party and has accepted the after-tax retention.

The family-transfer instinct should not become a discounted intra-family sale. Selling to one's own children invites self-dealing and bargain-sale gift problems. The objective is better served by a deliberately structured rollover, modeled on its full § 1001(e) and gift-tax cost.

Practice Notes

Read the instrument for spendthrift language first. Before any analysis of price or tax, confirm that the income interest is assignable. A boilerplate spendthrift clause can defeat the entire plan, and in California the restraint exists only where the instrument provides it (Cal. Prob. Code §§ 15300-15301).

Identify the structure and the basis rule that follows. Determine whether the contemplated transaction is a stand-alone income-interest sale (§ 1001(e)(1), allocable basis disregarded) or an entire-interest sale (§ 1001(e)(3), uniform-basis share reduced by undistributed income and gain under Treas. Reg. § 1.1014-5(c)). Do not let a marketing description obscure which one is on the table.

Pull the trust's undistributed-income and undistributed-gain tallies. In an entire-interest sale, those § 664(b) figures drive the basis reduction and the size of the surviving residual basis. In every sale, the size of the embedded deferred gain drives the after-tax result. The trustee's accounting and the Form 5227 history are the source.

Model after-tax retention against the alternatives. Place the sale's after-tax cash beside the § 170 deduction value of a charitable gift of the interest and the value of holding to termination. Decide on the number, not the narrative.

Screen the buyer. Confirm the buyer is not a disqualified person under § 4946 and that the price is arm's length. Where the buyer is unrelated and the price is market, § 4941 is generally not implicated by a stand-alone sale; where the buyer is family, reconsider the structure and run the self-dealing and gift-tax analysis.

Account for the seller's health. A beneficiary in poor health is the worst-positioned seller of a life interest, and Treas. Reg. § 1.7520-3(b)(3) formalizes the valuation problem. In that case, a sale is usually the wrong tool.

Get independent advice. The firms that arrange these sales are paid on closing. A beneficiary should run the comparison with counsel or an advisor whose compensation does not depend on the transaction proceeding.

Frequently Asked Questions

Can I sell my charitable remainder trust income interest?

Generally yes. The income interest in a CRT is a capital asset under Rev. Rul. 72-243, and it can be sold unless the trust instrument contains a spendthrift provision that bars assignment. In California, that restraint applies only where the instrument provides it (Cal. Prob. Code §§ 15300-15301). A small secondary market of buyers and intermediaries exists for these interests.

How is the sale taxed?

As long-term capital gain, but the basis treatment is harsh. In a stand-alone sale of the income interest, IRC § 1001(e)(1) disregards your allocable basis, so the amount you realize, net of selling expenses, is gain. In a simultaneous sale of the entire trust interest to one buyer, the § 1001(e)(3) exception lets you use an actuarial share of the trust's basis, but the 2015 regulations (T.D. 9729) reduce that basis by your actuarial share of the trust's undistributed income and gain, leaving only a residual that is small for a low-basis CRT. Either way, current capital gain is recognized in the year of sale, and the trust's untaxed appreciation cannot be converted into tax-free cash.

Didn't people use this to avoid the capital gains tax?

Some tried, before 2015, by selling both interests and claiming a high basis derived from assets the trust bought after selling the original appreciated property tax-free. The IRS flagged the structure as a reportable transaction of interest in Notice 2008-99 and eliminated it with the final regulations in T.D. 9729. The structure no longer works.

Will I get the full value of the trust?

No. The seller owns only the income interest, not the remainder, and a buyer discounts that interest for mortality risk, illiquidity, and profit. After the discount and the capital gains tax, the net cash is well below the trust's total asset value.

Is selling better than giving the income interest to charity?

It depends on whether you need cash. A gift of the income interest to the charitable remainderman produces a current § 170 charitable deduction, subject to the usual percentage and substantiation limits, and surrenders no discount to a buyer, but it produces no cash. A sale produces cash but forces current gain and imposes the buyer's discount. If you do not need cash, the charitable gift is usually the better outcome.

Can I sell to my children?

That is not the clean version of the transaction. A sale to a disqualified person can raise self-dealing concerns under § 4941, and a sale below fair market value is a part-gift under §§ 2511 and 2512. Even a stand-alone assignment to family should be screened for indirect self-dealing, assignment restrictions, and trustee participation. A family-transfer objective is usually better handled through a deliberately structured rollover into a new trust for heirs, modeled on its full tax cost, than through a discounted intra-family sale.

This briefing is provided for educational purposes and reflects federal and California law as of June 2026. It does not constitute legal or tax advice. The sale of a charitable remainder trust income interest involves overlapping income tax, gift tax, excise tax, and state fiduciary-law analyses, and the right course depends on specific facts not addressed in this general treatment. Private letter rulings cited here are nonprecedential under IRC § 6110(k)(3). Consult qualified legal and tax counsel before selling, gifting, or otherwise disposing of a CRT interest.

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 weighing a sale of your CRT income interest, the productive next step is a short conversation that models the after-tax number against the alternatives before any offer is on the table. Schedule a call.