Charitable Trusts: The Two Main Types and How to Use Them
Charitable Trusts: The Two Main Types and How to Use Them
I’m willing to bet there is a cause that you care about, one that impacts you emotionally more than any other. Although we may wish we could donate to every good cause that’s out there, this is not realistic. But what we can do is put our focus on the charity that is doing work we care most about. I happen to love dogs, so I give to charities that help them, rescue them and find them good homes. What about you? What difference would you like to make?
Although you want to give, you also need to make sure you and your loved ones are taken care of too. The great news is that there are tools that allow you to both take of yourself and your family, and give to a charity of your choice. These tools are called Charitable Trusts.
There are two main types of Charitable Trusts: The Charitable Remainder Trust (CRT) and the Charitable Lead Trust (CLT). Though both allow donors to support charitable causes and enjoy tax advantages, they operate in fundamentally different ways.
What Is a Charitable Remainder Trust (CRT)?
The functionality is in the name itself. In this type of trust, the charity gets the remainder of the assets after a certain period of time (usually 20 years), or after the donor passes. So, you put money into the trust to fund it. Then, you pull an income (or a % of the assets) from the trust to help pay for life.
After that period of time ends, the charity you chose anxiously awaits the check for whatever assets remain in the trust. You first, the charity later.
What Is a Charitable Lead Trust (CLT)?
The opposite of the above, the charity will get the payments first, and then whatever is left in the trust will pass to your heirs. So you put money into the trust to fund it, and then the charity begins receiving their payments from it (and they’re hoping you live as long as possible).
When you pass, whatever is left in the trust then goes to your heirs. Charity first, your heirs later.
Why not just use your money from your bank account and give a donation to a charity in your will? Or why not just give donations now to a charity and leave the rest of your money to your heirs? Why in the world do we need a trust for this?
Well, you don’t need a trust. But it does have advantages, and that advantage comes down to your favorite topic: taxes.
Charitable Remainder Trust (CRT):
Income tax deduction: Donors could receive an immediate income tax deduction based on the present value of the charitable remainder interest
Avoids capital gains tax: Highly appreciated assets can be donated to a CRT, sold by the trust without triggering capital gains tax, and used to provide income to the donor.
Estate tax reduction: The value of the remainder interest going to charity is excluded from the donor’s estate.
Charitable Lead Trust (CLT):
Gift and estate tax reduction: Assets transferred to heirs after the charitable lead period can do so at a significantly reduced or even zero gift/estate tax cost.
Potential income tax deduction (for grantor CLTs): In some cases, donors may take an upfront deduction for the present value of the charitable lead payments.
Growth passes tax-free: If the trust’s assets outperform the IRS assumed rate (Section 7520 rate), the excess growth can pass to heirs free of additional tax.
Which One Is Right for You?
Choose a CRT if you want a stream of income now and want to leave the remainder to your favorite charity.
Choose a CLT if you want to support a charity now, but ultimately want to pass the remaining assets to your heirs in a tax-efficient way.
Main Takeaway:
There is a cause you care about and you want to support a charity that helps that cause. You also care about doing this in a tax efficient way (and if you don’t, you should). That’s where charitable remainder trusts come in.
Both CRTs and CLTs can be incredibly effective when integrated into a broader estate and tax planning strategy. They allow high-net-worth individuals to support the causes they care about while potentially saving on income, capital gains, and estate taxes.
However, these trusts are complex and should be set up with the guidance of experienced legal and tax professionals to ensure alignment with your financial and philanthropic goals.
To see how one of these tools could fit into your overall financial plan, reach out to me.
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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