What are the implications of using Donor-Advised Funds (DAFs) or Charitable Remainder Trusts (CRTs) in conjunction with a Section 453 installment sale for philanthropic exit strategies?

Question

Tyler Smith · Accepted Answer

Integrating **Donor-Advised Funds (DAFs)** or **Charitable Remainder Trusts (CRTs)** with a Section 453 installment sale can be a powerful strategy for sellers with significant philanthropic goals. When appreciated assets are sold through an installment sale, the capital gains tax is deferred. If the sale involves highly appreciated assets, directly donating those assets *prior to sale* to a CRT or DAF can yield substantial tax benefits.

Specifically, if an *appreciated asset* (like business stock) is contributed to a CRT before its sale, the CRT can then sell the asset, often avoiding capital gains tax on the sale entirely. The CRT then pays an income stream to the donor (or other non-charitable beneficiary) for a period of years or life, and the remainder goes to charity. The donor receives a significant charitable income tax deduction in the year of contribution. For DAFs, similarly, donating appreciated assets before sale allows the donor to claim an immediate tax deduction while the DAF sells the asset tax-free. Combining this with a **Section 453 installment sale** typically means structuring the initial sale to the CRT or DAF as the installment transaction itself, or having the CRT/DAF be a recipient of the installment note, allowing the deferral of gain while simultaneously benefiting from charitable giving deductions. This complex interplay requires meticulous planning to ensure compliance with both IRS charitable giving rules and Section 453 regulations.