Charitable remainder trusts and donor-advised funds before you sell

Why does timing decide everything?

The whole strategy rests on one idea: a charity does not pay capital gains tax. If you give a charity or a charitable trust a piece of your practice before it is sold, the charity sells that piece as part of the deal and keeps all of the proceeds, while you deduct the value of what you gave. If you sell first and give cash afterward, you pay tax on the gain first and give what is left. On a piece worth $1 million with zero basis, the difference is the tax you would have paid on that $1 million, which for a California seller can exceed a third of it.

The IRS understands this, and the tax law has a rule to stop people from giving away a sale that has already happened in substance. The rule is called anticipatory assignment of income. Under it, if the sale was practically certain when you made the gift, the court treats you as having sold your interest and then donated the cash, so the gain is taxed to you even though the charity received the money. Whether your gift works or fails comes down to how far along the deal was on the day you gave.

What do the cases say?

Three authorities set the boundaries, and they are easier to follow than most tax law.

Rev. Rul. 78-197: the starting point

In Rev. Rul. 78-197, the IRS said that a gift of stock to a charity, followed by the corporation buying that stock back from the charity, would be respected as a gift if the charity was not legally bound to sell. The charity had to be free to keep the shares. That standard, whether the donee is obligated to sell, has been the anchor for every case since.

Dickinson (2020): the donor won

In Dickinson v. Commissioner, T.C. Memo 2020-128, a donor gave shares of his company to a donor-advised fund, and the fund later had the shares redeemed. The IRS argued assignment of income. The Tax Court sided with the donor because the fund was not obligated to redeem the shares. It was free to hold them. The gift was a real gift of property, and the later redemption was the charity's own decision.

Estate of Hoensheid (2023): the donor lost twice

Estate of Hoensheid v. Commissioner, T.C. Memo 2023-34, is the case every seller should read before signing anything. The donor gave shares of his family company to a donor-advised fund two days before the sale of the company closed. By then, the buyer had been chosen, the price was set, and the transaction documents were essentially final. The Tax Court held that the sale was practically certain when the gift was made, so the gain on the gifted shares was taxed to the donor. The court weighed whether the donee was obligated to sell, what steps toward the sale had already been taken, whether meaningful contingencies remained, and whether corporate formalities were observed. On the facts, the answer went against him.

Then the court went further. It denied his entire charitable deduction of about $3.3 million because he had not obtained a qualified appraisal as Section 170(f)(11) requires for gifts of this kind, reported on Form 8283. He had relied on a valuation that did not meet the rules. So he paid tax on gain from shares he no longer owned and received no deduction for giving them away.

How does a donor-advised fund gift work?

A donor-advised fund, or DAF, is a charitable account sponsored by a public charity. You give assets to the fund, take your deduction in the year of the gift, and then recommend grants from the account to charities over the following years. For a practice sale, the gift is an interest in the entity being sold. The fund becomes a small owner of your holding company or LLC, participates in the sale like any other owner, receives its share of the cash, and pays no tax on the gain.

Your deduction is the fair market value of the interest you gave, as long as you held it for more than one year, which is almost always true for a practice you built. Gifts of appreciated property to a public charity are deductible up to 30 percent of your adjusted gross income in the year of the gift. In a sale year your income is very large, so that limit is usually not binding. Any excess carries forward for five years.

The DAF sponsor must be willing to accept a closely held interest, and not all will. Larger sponsors have units that handle this routinely. They will want to see the entity documents, confirm that the fund has no obligation to sell, and understand the deal timeline. Their willingness to take the gift is itself a signal about whether the timing is defensible; a sponsor that hesitates because the deal is too far along is doing you a favor.

How does a charitable remainder trust work?

A charitable remainder trust, or CRT, is a trust created under Section 664 that pays you (or you and your spouse) an income stream for life or for a fixed term of years, and then gives what remains to charity. You fund the trust with an appreciated asset, the trust sells the asset, and because the trust is tax-exempt, it pays no capital gains tax on the sale. The full proceeds stay in the trust and are invested to make your payments.

There are two main types. A charitable remainder annuity trust, or CRAT, pays you a fixed dollar amount each year set at the start. A charitable remainder unitrust, or CRUT, pays you a fixed percentage of the trust's value as recalculated each year, so the payment rises and falls with the investments. The payout rate for either must be at least 5 percent and no more than 50 percent per year, and the value of the remainder projected to reach charity must be at least 10 percent of what you put in. A variation called a NIMCRUT (net income with makeup) pays only the trust's actual income up to the stated percentage and lets shortfalls be made up in later years, which can be useful when the trust holds an asset that will not produce cash for a while.

You receive a deduction in the year of funding for the present value of the charity's remainder interest. Your annual payments are taxed to you as they arrive, in a set order that generally pulls ordinary income out first, then capital gain. So the CRT does not erase the capital gains tax on the sale; it spreads it over the years of payments and lets the untaxed amount stay invested in the meantime, with a deduction on top.

Cautions that apply to a medical practice

Two problems make CRTs harder for physicians than for founders of other businesses, and the research behind this page describes them qualitatively rather than with specific figures.

• A CRT cannot hold S corporation stock. A charitable remainder trust is not a permitted S corporation shareholder, so transferring shares of your S corporation professional corporation to one would terminate the S election for the entire company. Since most physician practices are S corporations, the stock itself is usually not a candidate.
• Operating business income inside a CRT is a problem. If the trust owns an interest in an operating business or an LLC taxed as a partnership that runs a business, the trust's share of that income is unrelated business taxable income, and a CRT that receives such income is taxed on it at a punishing rate. Holding an interest in an active practice inside the trust for any length of time is therefore something to avoid.

Because of these two rules, the planning usually contributes an interest in the holding company or LLC that is created as part of the sale structure, immediately before the sale, so that the trust holds it only briefly and sells right away, or uses a blocker entity. This has to be coordinated with the F-reorganization steps that the buyer's counsel is running at the same time, and with the timing rules above. It is not something to attempt without counsel who has done it in a deal context.

What do the 2026 Section 7520 rates mean for the choice?

The deduction for a CRT depends on the Section 7520 rate, an interest rate the IRS publishes monthly that is used to value the charity's remainder. For 2026, the rate was 4.6 percent in January and February, 4.8 percent in March, 4.6 percent in April, 5.0 percent in May and June, and 5.2 percent in July and August. You may use the rate for the month you fund the trust or for either of the two months before it, whichever is more favorable.

Higher rates favor the annuity form. When the 7520 rate is higher, a CRAT's fixed payments to you are assumed to consume less of the trust, so the projected remainder to charity is larger and your deduction is larger. The same higher rates work against strategies that depend on assets outgrowing the rate, such as grantor retained annuity trusts and charitable lead annuity trusts. With rates in the 5 percent range through the summer of 2026, a physician who wants a predictable payment and a larger deduction may find the CRAT more attractive than it was when rates were low, and the choice between CRAT and CRUT is worth modeling with the actual month's rate.

How did the 2026 law change the deduction?

The One Big Beautiful Bill Act made two changes that apply to charitable deductions beginning in 2026, and both reduce the benefit for high earners without eliminating it.

First, there is now a floor. Itemized charitable deductions are reduced by 0.5 percent of your adjusted gross income. In a sale year, when your AGI might be $5 million, the floor is $25,000; only gifts above that amount produce a deduction.

Second, the value of itemized deductions is capped at 35 percent for taxpayers in the 37 percent bracket. Before 2026, a dollar of deduction saved a top-bracket taxpayer 37 cents. Now it saves 35 cents.

The Journal of Accountancy illustrated the combined effect: a taxpayer with $1 million of AGI who gives $100,000 loses $5,000 to the floor, deducts $95,000, and saves $33,250 in federal tax rather than the $37,000 the same gift would have saved before. The pre-sale gift still avoids capital gains tax on the gifted piece entirely, which is unaffected by these rules and is the larger benefit. The deduction is a little smaller than it used to be.

Which tool fits which seller?

Who should not do this?

Charitable planning before a sale is presented to physicians more often than it fits them, so it is worth being direct about who should decline.

• People who need every dollar. After the scrape, your income drops. Your rollover equity is illiquid and may be worth nothing. Your seller note depends on the buyer's solvency. If the cash at closing is what funds your retirement, giving part of it away for a partial tax benefit is a mistake regardless of how elegant the structure looks.
• People gifting only for the deduction. Under the 2026 rules, a top-bracket taxpayer who gives $100,000 gets back about a third of it in federal tax savings, and even with the avoided capital gains tax on a pre-sale gift, you always end with less money than if you had kept the asset. The strategy makes giving cheaper. It does not make it profitable.
• People whose letter of intent is signed. Hoensheid was decided on a gift two days before closing, but the court's reasoning about practical certainty reaches back further than that. A signed LOI with a price, a buyer, and exclusivity is the kind of fact pattern the IRS will point to. It is the wrong moment to start.
• People who will not get an appraisal. If the cost or effort of a qualified appraisal seems too much, skip the strategy. Without one, the deduction fails entirely.

The mistakes page lists charitable timing and paperwork among the ten most common errors physicians make in these deals, for good reason.

What to do next

If you already give to charity and you have not yet signed a letter of intent, take three steps now. First, decide how much you would give over the next several years regardless of the sale, and treat that as the ceiling for a pre-sale gift; the tax benefit should shape the form of a gift you were already going to make, not its size. Second, talk to a DAF sponsor or a trusts and estates attorney about whether the interest you would give (S corporation stock, LLC interest, or holding company interest) is something they can accept and how it fits the structure the buyer will propose. Third, engage a qualified appraiser before the gift, not after, and confirm that the appraisal will meet Section 170(f)(11) and be attached to Form 8283. If you are considering personal goodwill as well, raise it in the same conversation, because a personal goodwill interest is another asset that can sometimes be given, and the analysis of what belongs to you and what belongs to the corporation overlaps. Then read the tax pillar page to see where the gift fits in the order of decisions before the LOI.