Charitable Remainder Trusts vs. Charitable Leads Trust
Charitable trusts are popular tool used in estate planning that allow you to plan for and execute your philanthropic goals while also benefiting your family members. The two most common charitable trusts are charitable remainder trusts and charitable leads trust. Both of these charitable trusts can be useful, but it’s important to know the differences and advantages of each of them to choose which trust is best for you.
Charitable Remainder Trusts
A charitable remainder trust (CRT) is an irrevocable trust designed to generate an income stream for you and/or other non-charitable beneficiaries of your choosing for a fixed term, with the remainder of your donated assets distribute to one or more charitable beneficiaries. The fixed term of the trust can either be a set number of years, no more than 20, or for the life one or more non-charitable beneficiaries.
There are two main types of CRTs: Charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). A CRAT allows the non-charitable beneficiary(ies) to receive an annuity in either a set amount or a fixed percentage of the value of the assets contributed to the trust. The annuity is based on the fair market value of the assets when they are initially donated to the trust and it becomes fixed at that time. Additional contributions to CRATs are not allowed. With a CRAT, the amount distributed to a non-charitable beneficiary remains constant for the duration of their distribution period, regardless of whether the values of the assets in the trust fluctuate over time. CRATs are best used if the assets placed in the trust are expected to lose value.
A CRUT requires that the annual distributions be made to the non-charitable beneficiary(ies) based on a fixed percentage of the value of the assets in the trust, as revalued each year. Since the values of the assets in the trust generally fluctuate from year to year, so does the annual payment to the non-charitable beneficiary(ies). CRUTs are best used if the assets placed in the trust are expected to appreciate in value.
Almost any type of property can be donated to a CRT aside from S-Corporation Stock and mortgaged property. Generally, you would receive the greatest tax benefit by donating appreciated property, since the capital gains tax on the sale of the appreciated property is avoided. Upon donation, the Grantor is entitled to an income tax deduction for the actuarial value of the remainder interest that will eventually be donated to charity, even though the charity does not receive its interest immediately.
CRTs are considered tax-exempt entities for income tax purposes. Due to this, the trust is not subject to income tax on gains from the sale of a contributed asset or from its investments. It is important to note that CRTs are still subject to certain excise taxes and other restrictions that generally apply to private foundations.
Overall, CRTs are useful if you are wanting to set up a charitable trust that reduces your taxes, provides a continuous stream of income based on your assets, and prevents irresponsible family members or creditors from accessing your charitable trust’s remainder. On the other hand, it is important to note that CRTs are unamendable, require complex and sometimes expensive administration, and might not be the best trust for you if you are wanting the remainder of your assets to go to your heirs.
Charitable Leads Trusts
A charitable leads trust (CLT) is an irrevocable trust designed to provide financial support to one or more charities for a set period of time, with the remainder eventually going to one or more non-charitable beneficiaries. You can think of a CLT as the inverse of a CRT. CLTs operate for the life of one or more person and payment are made to designated charitable beneficiaries for that time period.
Payments from the CLT are made to the selected charitable beneficiary(ies) as either a fixed annuity payment or a percentage of the trust. With a CLT, you must provide payment to the charitable beneficiary(ies) on at least an annual basis for a fixed number of years or for the lifespan of a person. Unlike CRTs, CLTs are not subject to a 20-year time limit. There’s also no required minimum or maximum payment needed to be paid to the charitable beneficiary(ies) so long as they are made annually.
CLTs are useful to support charitable causes that are important to you while also preserving a legacy of wealth for future generation. They can also help minimize estate taxes for your heirs. It is important to note that this type of trust is irrevocable, costly to set up and maintain, and the assets for your non-charitable beneficiaries may be diminished over time.
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