What Is A Charitable Trust?

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Comparing Charitable Lead Trusts Charitable Remainder Trusts

One of the primary purposes of estate planning is, of course, to provide your family with financial security after your death. Beyond that essential goal, however, you may have other objectives, such as continuing to support a cause that is meaningful to you, shielding assets from creditors, or minimizing taxes. Charitable trusts may offer all of those advantages and more.

What is a Charitable Lead Trust?

As the name suggests, a charitable trust is a legal entity that allows a donor (also known as a grantor) to donate assets for the benefit of a qualifying charity—one that meets the requirements for tax-exempt status under section 501(c)(3) of the Internal Revenue Code. Assets in the trust are managed by a trustee and income is distributed to beneficiaries.

One type of charitable trust is the charitable lead trust, or CLT. With a CLT, the grantor transfers assets to the trust, either during their lifetime or through their will after their death. The trust is irrevocable, meaning that it cannot be revoked by the grantor after it is created, nor can funds transferred to the trust be reclaimed.

When the trust is created, the grantor establishes the term of the trust, also known as the “lead period.” The term may be a specified period of time (such as 20 years), or for the life of one or more individuals (say, the grantor and their spouse). During the term of the trust, the charity has the “lead interest;” it receives payments from income generated by the trust. After the expiration of the term, the remaining assets in the trust are distributed to non-charitable beneficiaries—often surviving family members of the grantor.

Advantages of a Charitable Lead Trust

A charitable lead trust offers many benefits to donors and beneficiaries, including:

  • The opportunity to make a significant and immediate contribution to a valued cause. If the donor creates and funds the trust during their lifetime, they get to witness the difference that their gift makes for the charity and those it helps.

  • The donor can receive an income tax deduction for the value of the trust assets transferred into the trust in a given year.

  • A CLT can also offer gift and estate tax savings. If a donor places assets in the trust and those assets appreciate in value over the lead period, the increase in value is not subject to gift or estate tax when, at the end of the lead period, the assets pass to the non-charitable beneficiaries. In other words, the remainder beneficiaries get the benefit of the growth without the burden of additional taxes.

  • Through a CLT, a donor can pass to family members not only the remaining assets in the trust, but their own philanthropic values.

  • As with any trust, a CLT passes assets to heirs without the need for a potentially complicated probate process.

A charitable lead trust can be an excellent estate planning option for charitable-minded high-net worth individuals, especially those with assets that are likely to appreciate significantly in the near term.

What is a Charitable Remainder Trust?

Like a CLT, a charitable remainder trust, or CRT, allows a donor to support a charity through the creation of an irrevocable trust. However, with a charitable remainder trust, the non-charitable beneficiaries (income beneficiaries) receive distributions from the trust during the lead period. At the expiration of the trust term, assets in the trust are distributed to the remainder beneficiary, the donor’s chosen charity or charities.

The term of a CRT may be for a certain number of years, but it is often for the life of one or more individuals. For instance, the donor may receive payments of income during their lifetime, with the trust assets going to the charity after their death. Another common scenario is for the CRT’s term to end upon the death of the donor’s last surviving child or grandchild.

There are two types of charitable remainder trusts: Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs). With a CRAT, the income beneficiaries receive an annuity payment which is usually a fixed percentage of the initial value of the trust assets. With a CRUT, the income beneficiaries also receive an annual payment, but this payment is variable; it is based on a fixed percentage of the trust’s assets as they are revalued each year.

Advantages of a Charitable Remainder Trust

Like a charitable lead trust, a charitable remainder trust has numerous advantages, including:

  • The knowledge that loved ones will have financial security and that a cause that is meaningful to the donor will receive needed support.

  • When assets are transferred to a CRT, the donor receives an immediate income tax deduction for the year in which the transfer was made

  • If the donor transfers highly-appreciated assets to a CRT, they can diversify their portfolio without triggering capital gains tax; the trust can sell the appreciated assets and reinvest the proceeds.

  • Because the trust is irrevocable, assets in a CRT are removed from the donor’s estate, potentially reducing estate tax liability. Assets that remain in the trust go to the charitable beneficiary and are not subject to estate tax.

  • As with all trusts, distributions from a CRT are made directly from the trust to beneficiaries and do not need to go through probate.

Charitable remainder trusts are a good choice for individuals with highly appreciated assets who wish to provide an income stream for themselves or loved ones, but who want to make a significant impact for a favored charity.

Charitable Lead Trust vs. Charitable Remainder Trust: Which is Right for You?

Whether you should choose a charitable remainder trust or charitable lead trust as an estate planning tool depends on your unique circumstances. If you want to see an immediate benefit to the charities that matter to you or provide a charity with a fixed annual payment, a charitable lead trust might be better for your needs. If you want an income stream for yourself or loved ones with the assurance that your preferred charities will ultimately benefit, you might want a charitable remainder trust.

Weighing the benefits of a charitable remainder trust vs. charitable lead trust calls for the insight of an experienced estate planning professional, as does setting up a charitable trust.

To learn more about charitable trusts and other forms of charitable planning, speak with a knowledgeable attorney who regularly plans for high net worth individuals. The skilled attorneys at Barron, Rosenberg, Mayoras & Mayoras work with clients who want to provide for their families and benefit their communities. Schedule a consultation today by calling (248) 213-9514 in Michigan or (941) 222-2199 in Florida to learn how we can assist you. You can also use our simple online contact form.