The Concentrated Stock and the Charitable Remainder Trust
A client holds $8M in a single stock (cost basis $600K) that represents 62% of her $12.9M portfolio. She is 58, plans to retire at 65, and has a moderate risk tolerance. Her advisor proposes a charitable remainder unitrust (CRUT) for $3M of the shares: she gets a 5% income stream for life, the remainder goes to her alma mater. The advisor also suggests using an exchange fund for another $2M. The client is charitably inclined but wants to know whether these tools actually solve her concentration problem or just move it around. Her marginal tax rate is 37%, and the stock pays a 0.5% dividend.
1. Evaluate whether the CRUT and exchange fund together meaningfully reduce the client's concentration, and identify what remains.
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CRUT ($3M): This is a genuine disposition of the shares - the trust sells them tax-free inside the trust, and the client's economic exposure to the stock ends (she holds a fixed 5% unitrust interest, not the stock). So $3M of the $8M is truly de-concentrated. Her charitable deduction is based on the present value of the remainder interest; she keeps an income stream but no equity risk in that sleeve.
Exchange fund ($2M): This is not a disposition - it is a diversification of exposure with a deferred tax bill. She contributes shares, receives fund units, and her return now tracks a diversified index. Economically she is diversified, but she still has a locked-in low-basis position, illiquidity (typically 7-year lock), and the deferred gain is still hers. It solves risk but not the tax or liquidity problem.
What remains: $8M − $3M (CRUT) − $2M (exchange fund) = $3M of the stock directly held, still ~23% of the portfolio. That is still a concentrated position for a moderate-risk retiree.
So the tools together cut direct exposure from 62% to ~23%, which is progress but not a solution. The client should hear this plainly: the CRUT genuinely removes exposure; the exchange fund swaps concentration risk for illiquidity and deferred tax; and a residual $3M still needs a plan (staged sales into a donor-advised fund, gifting, or continued diversification).
2. The client asks whether she should instead just sell the shares and pay the tax. Compare the after-tax economics of an outright sale of the full $8M against the proposed combination, and state the trade-offs.
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Outright sale of $8M: Gain = $8M − $600K = $7.4M. At 37% (she is high-income; assume no NIIT for simplicity, note it would add 3.8% on the gain), tax ≈ $2.74M, leaving ~$5.26M to reinvest. She is fully diversified, fully liquid, no lock-up, no charitable commitment. The cost is a large, certain tax bill and the loss of the charitable and deferral benefits.
Proposed combination:
- CRUT: she avoids immediate capital gains on $3M of shares and gets a charitable deduction (roughly 25–35% of the contribution for a 58-year-old, so perhaps $750K–$1M deduction), plus a 5% lifetime income stream. But she permanently gives up the remainder - the alma mater gets what's left. The tax benefit is real but the principal is gone.
- Exchange fund: $2M diversified with no current tax, but locked up ~7 years and the gain is deferred, not eliminated.
- Residual $3M sold outright: gain ≈ $2.78M, tax ≈ $1.03M.
Trade-offs: The outright sale maximizes liquidity and simplicity and minimizes complexity/illiquidity risk. The combination reduces the immediate tax bill and serves charitable goals, but trades liquidity (exchange fund lock-up), complexity (CRUT administration, trustee fees), and irrevocable charitable commitment for the tax savings. For a client who is genuinely charitably inclined, the CRUT is efficient; for one who is not, it is an expensive way to defer tax. The exchange fund is justified only if she can tolerate 7 years of illiquidity. There is no free lunch: the combination is a preference decision, not a strictly dominant one.