Charitable trusts are irrevocable trusts frequently used by charitably inclined grantors for estate or gift tax planning purposes. These trusts can be established during the grantor’s lifetime or as part of their testamentary wishes (created by will).

Different ways of structuring charitable trusts achieve different tax planning benefits, but most can be divided into two primary categories; Charitable Lead Trusts and Charitable Remainder Trusts.

• Charitable Lead Trust (CLT): Charitable lead trusts operate for a set term, which could be the life of one or more individuals, and payments are made to one or more designated charitable beneficiaries for that time period. After the end of the trust term, the remainder of the trust is distributed to non-charitable beneficiaries—such as family members. Options with CLTs include:
  • Charitable Lead Annuity Trust (CLAT): Fixed payments are made.
  • Charitable Lead Unitrust (CLUT): Specific percentages of the principal are paid.
• Charitable Remainder Trust (CRT): Usually tax-exempt, CRTs generate income for beneficiaries during their term, with the remaining assets allocated to the charity once all beneficiaries have received their distributions. CRT options include:
  • Charitable Remainder Annuity Trust (CRAT): Fixed payments are made.
  • Charitable Remainder Unitrust (CRUT): Specific percentages of the principal are distributed.

Charitable Lead Trusts can be thought of as the inverse of Charitable Remainder Trusts. Charitable Lead Trusts have a defined duration, which may be tied to the lifespan of one or more individuals, and during that period, payments are directed to specific charitable beneficiaries. Once the trust term concludes, the remaining assets are distributed to non-charitable beneficiaries, typically family members. On the other hand, a Charitable Remainder Trust offers a different structure. Charitable Remainder Trust can provide income for family members throughout the trust’s term, and only after that period do the remaining assets move to one or more charitable organizations as beneficiaries.

Benefits of Charitable Trusts

• Excellent Planning Opportunities for Income, Gift and Estate Tax: Provided the trust and charity meet IRS 501(c) entity requirements, donations from individuals or corporations may qualify for tax deductions. Depending on the chosen type of charitable lead trust, donors may claim deductions for charitable income, gift, or estate taxes.
• Capital Gains Tax Planning: In a charitable remainder trust, selling appreciated assets to diversify the portfolio generally avoids immediate capital gains tax.
• Providing for Family and Charitable Giving: Charitable remainder unitrusts are often employed as a strategic component in retirement planning due to their flexibility for income distribution.

Important Considerations for Charitable Trusts

• Tax Rules Vary Between Each Type of Charitable Trust: Donations to non-grantor charitable lead trusts usually do not provide income tax deductions but serve to diminish the donor’s estate value for future estate tax considerations.
• Some Trusts Offer More Flexibility than Others: Charitable remainder annuity trusts offer less flexibility but may be suitable when donors fund the trust with marketable securities or cash without considering inflation’s effects on income distribution.
• Charitable Trusts are Complex, Use Skilled Counsel: If you are considering making charitable giving part of your estate plan, consult with your tax and estate planning advisor to determine the best vehicle and strategy for your situation. Charitable Trusts are highly complicated and require an intimate understanding of complex IRS regulations, so employing highly skilled specialists in this area is critical to ensuring the success of any plan involving the use of a Charitable Trust.

To learn more about Charitable Remainder Trusts, see our article Charitable Remainder Trusts & IRAs: A Strategy for Taxation of Retirement Assets after Loss of “Stretch”

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Note: The information provided here is for general educational and informational purposes only. It is not legal advice and should not be interpreted as such. For a thorough understanding of these topics relevant to your specific circumstances, we recommend consulting a qualified estate planning attorney. Peak Trust Company cannot provide legal advice; however, we can serve as an informational resource and provide referrals to highly skilled attorneys who can offer legal and tax guidance tailored to your specific needs.