Donors can use charitable trusts to fulfill philanthropic goals while reaping financial benefits with careful planning and consultation with a trustworthy advisor. These irrevocable trusts can hold cash and bank accounts, stocks and bonds, real estate, life insurance policies, and other valuables.
A trustee holds and manages the assets in the trust. Beneficiaries named by the donor receive periodic payments.
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Types of Charitable Trusts
Charitable trusts offer a way to combine estate planning with charitable giving. High-net-worth individuals often use them but may also be a good fit for a middle-class business owner who wants to transfer assets tax-efficiently.
A CRT provides a flow of income to you or your beneficiaries for a set period and then distributes the remaining assets to the charity or nonprofit organization named in the trust. In exchange for the gift to charity, you receive a partial income tax deduction.
To create a CRT, you transfer assets, such as stock, real estate, or cash, into the trust. A trustee administers the trust’s assets, investing any proceeds from sales into income-producing property as needed. A trustee will also handle the administration and reporting obligations for the trust.
You can establish two CRT types: a charitable lead annuity trust and a charitable lead unit trust. The lead annuity trust allows you to receive a fixed dollar amount each year for the trust’s duration. The lead unitrust pays you a percentage of the trust assets revalued yearly.
If you have highly appreciated assets, such as stock that has increased in value, a CRUT allows you to donate them to the trust and avoid paying capital gains taxes. The trust will sell the assets, preserving their total fair market value.
Split-Interest Trust
Like other trusts, a charitable trust can hold assets and distribute them based on your instructions both during your lifetime and after your death. The trustee of a charitable trust must pay taxes and manage the assets it holds. The trustee can be a charity or another financial institution. However, a charitable trust can do something that most other entities cannot: manage charitable giving.
This type of trust is a popular choice for individuals with highly appreciated long-term assets subject to substantial capital gains tax if sold. Donating the asset in-kind to a CRT can avoid this tax and preserve the total fair market value of the asset. The donor can also receive a partial income tax charitable deduction when funding the trust.
The trust can be established for a specific amount of time (similar to a GRAT) or the life of a designated beneficiary. The trust can also make annual payments to beneficiaries in the form of a predetermined monetary amount or a percentage of the fair market value of the assets. The trusts that provide annuity payments are called charitable remainder annuity trusts (CRATs), and the ones that make payments a percentage of the fair market value are known as charitable remainder unitrusts (CRUTs).
If you’re interested in a split-interest gift or any other estate planning tool, it’s best to ask a qualified attorney for help. An estate planning attorney can advise you on the best charity trust for your situation and suggest additional strategies to carry out your plans.
Charitable Lead Trust
Like charitable remainder trusts, the charitable lead trust offers donors a way to support their favorite charities and pass assets on to loved ones. The trust pays a fixed amount annually to the charity or charities for several years, the lifetime of one or more individuals, or a combination of both. This allows the donor to take a current income tax deduction for the present value of the payments made by the trust.
As with the non-grantor trust, the trustee can pay an income interest guaranteed at the outset or a unitrust interest based on a percentage of the annually revalued trust principal. The advantage of the grantor CLT, however, is that it enables the donor to take an immediate income tax deduction for the present value of the future charitable payments, subject to applicable deduction limitations.
As with the non-grantor CLT, the principal remaining in the trust at the end of its term can be distributed to a non-charitable beneficiary (usually a family member). This allows the donor to minimize gift and estate taxes on appreciated assets that ultimately pass to their beneficiaries. This type of trust can be particularly attractive at low applicable federal rates.
Charitable Remainder Trust
A charitable remainder trust (CRT) is an irrevocable trust that allows you to receive a stream of income based on the value of assets inside the trust. When the CRT ends, whether when you die or after a predetermined number of years, any remaining funds are transferred directly to your chosen charities.
You are eligible for an instant income tax charitable deduction equal to the current value of the charity’s remaining interest when you establish a CRT, calculated by using the percentage payout stated in the trust, the life expectancy of the income beneficiary(ies), and an interest assumption based on the federal applicable marginal rate.
In addition to an income tax charitable deduction, CRTs allow you to avoid capital gains taxes when the trust sells appreciated assets. Depending on the type of CRT you choose, you may be able to have the trustee purchase life insurance to cover any death benefit shortfall and ensure that proceeds are paid to your heirs free from estate taxes. For example, a charitable remainder unitrust (CRUT) may allow you to take a variable annual income payout based on a percentage of the trust’s value, revalued each year, or even a flip unitrust that lets the payout increase or decrease with market performance.
