Charitable trusts are effective estate planning tools for providing benefits to charitable and non-charitable beneficiaries. Because the benefits of charitable trusts are split between these two types of beneficiaries, they are referred to as “split interest trusts.” There are two primary types of charitable trusts, remainder trusts and lead trusts. Charitable Remainder Trusts (CRTs) provide an income stream to non-charitable beneficiaries, such as the Grantor or his/her family, and then distributes the remainder of the trust to charity when the trust terminates. Charitable Lead Trusts (CLTs) do the same thing, only they provide an income stream to charity, with the remainder going to non-charitable beneficiaries when the trust terminates.
CRTs and CLTs
CRTs are useful for stretching out gain on appreciated assets because the trust can sell an appreciated asset without recognizing the gain at the time of sale. Instead, the gain is recognized by the non-charitable beneficiary when a distribution from the trust is received.
There are two primary types of charitable trusts, remainder trusts and lead trusts.CLTs are useful when assets are continuing to appreciate, in order to remove the asset and ongoing appreciation out of the Grantor’s estate and to leverage the gift to the non-charitable beneficiary. The gift to the non-charitable beneficiary is valued at the time the trust is created. Any additional appreciation during the term of the trust is passed to the non-charitable remainder beneficiaries without any additional gift tax consequences.
Both types of charitable trusts are irrevocable and reduce estate taxes by removing assets from the Grantor’s estate. Both types of charitable trusts allow the Grantor to be the trustee. Both types of charitable trusts provide a charitable deduction for the Grantor’s income tax purposes.
CRTs must distribute between 5-50% of the asset value each year to the non-charitable beneficiary as either a fixed dollar amount or a fixed percentage of the trust assets. The remainder interest must be at least 10% of the value of the assets contributed. A CRT can pay out over the lifetime of a beneficiary or for a term of years not to exceed 20 years, determined at the time the trust is established.
CLTs do not have a minimum or maximum distribution rate or a maximum term of years. CLTs pay income tax, but they have an unlimited charitable deductions. CLTs make their distributions to the charitable lead beneficiary at a fixed dollar amount or a fixed percentage determined at the time the trust is established.
The charitable deduction for the contribution to a CRT equals the present value of the remainder interest going to charity. The remainder interest of a CLT is valued similarly. Both calculations are based on IRS life expectancy tables or the term of the trust, the IRS interest rate at the time the trust is established, and the chosen distribution amount or percentage.