This is an archived article that was published on sltrib.com in 2013, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

By the time you retire, even if you live a simple life, you may have a huge gain in a stock that you acquired many years ago. Time works wonders.

Such is the case for "Elaine," a reader whose identifying characteristics I've changed. Through the years, she had delayed selling a certain stock to avoid capital gains taxes. Now, it has grown into her largest asset by far, worth an astounding $2.5 million, most of which was gain.

If Elaine sold the stock in order to diversify and create income for life, the tax impact would be substantial, explained attorney Stephen J. Silverberg of Roslyn Heights, N.Y. For example, the combined federal and state tax on the sale for a Connecticut resident might be 30 percent, explained attorney David Lehn of Withers Bergman of Greenwich, Conn. (20 percent capital gains tax plus 3.8 percent Affordable Care Act plus a state tax of 6.5 percent).

There is another way, however. Elaine is charitably inclined, as are most affluent families. Ninety-five percent of high-net-worth households donate to charity, according to Marion Schmeelk, U.S. Trust managing director and market executive for Fairfield County, Conn., citing the 2012 Bank of America Study of High Net Worth Philanthropy. And indeed, Elaine donates to charity every year and intends to leave her estate to charity.

One vehicle that accomplishes all of her goals and more is a charitable remainder unitrust, or CRUT.

Here is how a CRUT works:

Elaine retains a lawyer to draft CRUT documentation, which sets out terms that meet Elaine's need for lifelong income. Elaine is the donor, the income beneficiary and the trustee with the power to make investment decisions.

The CRUT also names a charity as the remainder beneficiary — the charity that receives the assets that remain in the CRUT after Elaine's death. Elaine is not locked in to the charity. She can change the charity beneficiary during her lifetime.

After the documentation is finalized and a Tax Identification Number is obtained from the Internal Revenue Service, Elaine sets up a brokerage account in the name of the CRUT. Then, she transfers the stock to the CRUT's brokerage account.

Now the CRUT owns the stock. The CRUT can sell all of the stock without triggering a capital gains tax. In fact, the CRUT pays no tax of any sort. All investment activity — sales, buys, dividend reinvestments and so on — are done by the CRUT and are tax-free to the CRUT.

The IRS doesn't forgo all taxes, however. Taxes are payable by Elaine when the CRUT pays money to her.

According to Silverberg, there is a three-tiered income tax. Each payment is part capital gain, part ordinary income and part return of principal.

Say the annual payout to Elaine is $125,000. How that payout is taxed will depend on the type of income accumulated by the CRUT, said Lehn.

If the CRUT has ordinary income, then the payout is taxable as ordinary income — but only to the amount of the CRUT's ordinary income, Lehn said. If the payout was $125,000, and the CRUT had $125,000 or more of ordinary income, the entire payout would be taxed as ordinary income.

However, if the CRUT earned $50,000 of ordinary income, only $50,000 of the $125,000 payout would be ordinary income, explained Lehn. The balance of the payout COULD be capital gain. In this case, with the CRUT selling the stock for a $2.5 million capital gain, any portion of the payout not taxed as ordinary income would be taxed as capital gain (at least for several years).

If the CRUT each year earns ordinary income at least equal to the annual payout, then the capital gain is NEVER subject to tax, explained Lehn. But in most cases, that is unrealistic, and the payout exceeds the ordinary income.

In determining what type of CRUT income is "allocated" to payout, it is a "worst income first" scenario, from the taxpayer's perspective, said Lehn. First, ordinary income, then capital gain, then tax-exempt income, then return of capital.

Julie Jason, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments at readers@juliejason.com