If you’re a business owner sitting on a highly appreciated asset, you’re probably staring down the barrel of a massive capital gains tax bill. But what if you could sell your business, avoid capital gains tax, generate lifetime income, leave a legacy to charity, and still pass on a tax-free inheritance to your heirs? Enter the powerful one-two punch of a Charitable Remainder Trust paired with an Irrevocable Life Insurance Trust (ILIT).

A CRUT or Charitable Remainder Unitrust to be specific, is a special kind of irrevocable trust that lets you donate an appreciated asset—like a business or real estate—when you sell your business or real estate inside the trust it does not trigger capital gains taxes, you receive annual income for life or a fixed term, and can leave what’s left to a charity or donor-advised fund.

On the other side, an ILIT is a separate irrevocable trust designed to own life insurance outside your estate. When it’s structured properly, it provides a tax-free death benefit to your heirs, keeps those proceeds out of your taxable estate, and makes sure your family still receives an inheritance—even though the remainder of your CRUT goes to charity. To learn more about ILITs, check out our article “Using an ILIT to Protect Your Wealth Now”

Benefits of Using a Charitable Remainder Trust in Business Sales

Here’s how the strategy comes together. First, you transfer your business interest to the CRUT—before any sale agreement is signed. The CRUT then sells the business without triggering capital gains taxes. All the proceeds stay inside the CRUT and are invested. The CRUT pays you a percentage of its value each year (recalculated annually). With a portion of that income, you fund a life insurance policy that’s owned by your ILIT. When you pass away, your heirs receive a tax-free death benefit from the ILIT, and the remainder of the CRUT goes to the charity of your choice.

The IRS has a few rules around CRUT income. You’ll receive a fixed percentage—typically between 5% and 8%—of the trust’s value, and it must fall between 5% and 50%. This income is taxed in a specific order: first as ordinary income, then capital gains, followed by tax-free return of principal, and finally, corpus (which is rare). You’ll report your share of the income each year using a Form K-1. You can choose between a standard CRUT that pays a fixed percentage annually, or a NIMCRUT (Net Income with Make-Up CRUT), which only pays the trust’s earned income and has the ability to “make up” prior shortfalls in future high-income years.

When it comes to the ILIT, ownership is critical. The trust—not you—must be the owner and beneficiary of the life insurance policy. If you own the policy yourself, the death benefit could end up included in your taxable estate. Instead, you use the income you receive from the CRUT to pay premiums into the ILIT, which ensures the policy is outside of your estate and passes income tax-free to your heirs.

Timing is everything with this strategy. The CRUT must be funded before any letter of intent or sale agreement is in place. If you wait until after the sale is in motion, you lose the tax benefits. Ideally, the ILIT should be set up around the same time as the CRUT. The sooner you can begin underwriting the life insurance policy, the better, especially to protect against the risk of passing away before the plan is fully implemented.

Speaking of dying early—this is one of the key risks. If you pass away shortly after setting up the CRUT, the remainder goes entirely to charity. Your heirs receive nothing from the CRUT. That’s why the ILIT is so essential. It serves as a wealth replacement vehicle, ensuring your family receives a significant, tax-free inheritance even if the CRUT’s value is lost to early death.

As for what happens to the sale proceeds, the CRUT trustee—who can be you or a third-party—invests the funds in a diversified portfolio. This might include stocks, bonds, or private investments. The goal is to generate enough income to satisfy your annual payouts while preserving or growing the trust over time. One important rule to keep in mind: CRUTs are not allowed to own life insurance policies on the donor’s life.

The Cost of Setting Up a Charitable Remainder Trust

Now let’s talk cost. Setting up a CRUT is not cheap. It generally runs between $3,000 and $10,000 depending on complexity. ILIT drafting and life insurance setup typically cost another $2,000 to $5,000, not including insurance premiums. You’ll also need a valuation or appraisal of your business, which can run $3,000 or more. If you outsource trust management, expect to pay 0.5% to 1.5% of assets under management annually. All of the setup combined can be extremely costly and may not be feasible for you. If you want to learn a strategy that may be more powerful and a better fit for you personally, check out our business exit maximization.

Obviously the tax benefits of setting up a charitable remainder trust are compelling. First, you avoid the immediate capital gains tax that would normally hit you upon selling your business. You also receive a charitable deduction based on the projected remainder gift to charity. Because the asset is no longer in your estate, you reduce or avoid estate taxes. And finally, your ILIT ensures your family receives a tax-free inheritance.

Of course, there are risks. If you die too soon and haven’t fully funded the ILIT, your heirs may get little or nothing. Market volatility can affect the trust’s income and value. Once you transfer the asset to the CRUT, it’s irrevocable—you can’t pull it back. And the whole structure must comply with strict IRS regulations to keep its tax-advantaged status.

In the end, a CRUT combined with an ILIT is one of the most powerful strategies out there for business owners, real estate investors, and high-net-worth individuals. It allows you to sell tax-free, receive income, support a cause you care about, and leave a legacy for your family.

Just don’t wait until it’s too late. This is not a do-it-yourself solution. It takes legal, tax, insurance, and investment coordination—and it has to happen before the sale of your business.

Key Benefits:

• Defer or eliminate capital gains tax on the sale of a business or appreciated asset
• Receive a lifetime income stream based on a fixed percentage of the trust’s value
• Claim a charitable tax deduction at the time of the transfer
• Reduce or eliminate estate taxes
• Replace the value going to charity with a tax-free life insurance benefit for your heirs
• Maintain investment control or delegate to a trustee

Key Risks:

• If you die early, the CRUT remainder goes to charity—your heirs receive nothing without an ILIT in place
• Market volatility can impact your income stream and trust value.
• The structure is irrevocable—you cannot reverse the decision
• Requires careful IRS compliance and legal coordination

A Better Solution Without The Complexity or Cost

For business owners looking for something more streamlined, you may want to consider our Business Exit Strategy Maximization. This alternative strategy can help you create a tax-free income stream—without the need for complex trust structures or large legal fees. While it doesn’t offer the same charitable component, it’s simpler, faster to implement, and still gives you powerful tax-free growth, protection, and legacy options. If you’re not quite ready for a CRUT and ILIT, this could be the ideal next step toward tax-free retirement and wealth preservation.

If you’re interested in learning more about business planning and our strategies, you can check out other articles:

• Structuring your Business for Maximum Tax Efficiency
• Reduce Capital Gains with an Installment Sale
• The Three Tax Buckets: A Guide to Tax Free Savings