A client came to our Manhattan office with a classic New York problem. Her parents had bought a small apartment building in the West Village in the 1970s. Decades later, she inherited it. The building was now worth a hundred times its original purchase price, and managing it had become a burden. She wanted to sell, but the projected capital gains tax—both federal and state—was staggering. It felt like the tax bill would consume a huge portion of her family’s legacy before she could even decide how to use it.
For families holding highly appreciated assets—real estate, a business, or a concentrated stock portfolio—the capital gains tax is a significant hurdle. It forces a difficult choice: hold an asset you no longer want, or lose a substantial part of its value to taxes. A properly structured trust, however, can provide a third path.
Understanding the Tax Burden on Appreciated Assets
When you sell an asset for more than your “basis”—essentially what you paid for it—the profit is a capital gain. For assets held more than a year, this gain is subject to long-term capital gains tax. In New York, this means you face both the federal rate, which can be up to 20% plus a 3.8% net investment income tax for higher earners, and the New York State income tax.
When an asset is placed in a trust and then sold, the trust itself may owe the tax. The challenge is that trusts operate on a compressed tax schedule. They hit the highest federal tax brackets at a much lower income level than an individual does. In 2024, a trust reaches the top 37% ordinary income tax bracket at just over $15,000 of income. This structure can make the tax situation worse, not better, if not planned with intent.
The goal is not simply to move an asset into any trust. It is to use a specific type of trust, established with a clear objective, to change the timing and nature of the tax event. Stewardship.
How Certain Trusts Can Defer or Mitigate Capital Gains
The strategy uses a particular type of irrevocable trust. You, the grantor, contribute the appreciated asset to the trust before a sale occurs. Because the trust is a separate legal and tax entity, it becomes the seller. This single step creates several advantages.
One common vehicle for this is a Charitable Remainder Trust (CRT). In this structure, you transfer the asset to the trust, which then sells it. Because the CRT is a tax-exempt entity, it pays no immediate capital gains tax. The full proceeds of the sale can then be reinvested within the trust to generate income. The trust pays you or other beneficiaries an income stream for a set term or for life. When the trust term ends, the remaining assets pass to a charity you designated. You get an income stream, a current charitable deduction, and the capital gain is bypassed entirely.
Other, non-charitable trust structures can achieve tax deferral, effectively turning the immediate tax bill into an installment sale. These are more complex and involve careful drafting to align with the Internal Revenue Code, but the principle is similar—the trust, not the individual, executes the sale and manages the proceeds according to the trust document. This is a deliberate, intentional act of planning, not an accounting trick.
The Trustee’s Duty—More Than Just Paperwork
Executing a strategy like this places an immense responsibility on the trustee. A trustee is a fiduciary, legally bound to act in the best interests of the beneficiaries. This duty is not passive; it requires prudent management of the trust’s assets.
In New York, a trustee’s investment and management functions are governed by the Prudent Investor Act, codified in Estates, Powers and Trusts Law (EPTL) § 11-2.3. This law requires a trustee to “exercise reasonable care, skill and caution” in managing trust property. This includes a duty to be tax-aware. A prudent trustee must consider the tax consequences of investment decisions, including the decision to sell a major asset. Simply selling and paying a massive tax bill without exploring alternatives could be seen as failing to meet that standard.
When we serve as trustees—or advise clients who are appointing one—we emphasize that this role is about active stewardship. It requires analyzing the asset mix, understanding the beneficiaries’ needs, and managing distributions and tax obligations with diligence. Using a trust to manage capital gains is a direct expression of that fiduciary duty.
Is This Strategy Right for Your Family?
These strategies are powerful, but they are not a universal fit. The trusts involved are irrevocable, meaning once you transfer an asset, you generally cannot take it back. You are giving up direct control in exchange for tax benefits and other planning outcomes. This is a significant decision that must align with your family’s long-term goals.
This approach is typically most effective for assets with a very low basis and a high market value, where the potential tax liability is substantial enough to justify the complexity and cost of establishing and administering the trust. It is a tool for generational wealth transfer and legacy planning, not for managing a standard investment portfolio.
The key is to act before a sale is imminent. Once you have a signed purchase and sale agreement, it is often too late to implement a trust-based strategy. Prudent planning requires foresight.
If you hold a highly appreciated asset and are concerned about the tax impact of a future sale, the logical first step is to quantify the potential liability. We can begin with a cost basis analysis to understand the numbers and then discuss whether a trust strategy is a prudent path for your family.
