For those who are philanthropically minded, estate planning often involves carving out a portion of your estate to be donated to charity. Whether it is your church or multiple not-for-profit entities, the use of charitable trusts allows you to accomplish your philanthropic objectives while also providing for your family.

Below we will discuss the two primary types of charitable trusts: charitable remainder trusts and charitable lead trusts.

  1. Charitable Remainder Trusts (CRT). As the name implies, the charity of your choosing is the remainder beneficiary, meaning they receive the trust assets upon your passing. During your lifetime, however, you and your spouse will receive an annuity of the income generated by the trust assets. This annuity can either be a fixed percentage of the trust assets calculated annually via a charitable remainder unitrust (CRUT), or a fixed annuity amount each year via a charitable remainder annuity trust (CRAT).

    CRTs are a tax efficient means of providing a lifetime income stream while reducing your tax burden. To maximize the benefit, appreciated assets are transferred to the trust. The trustee will often sell the investments and avoid paying the capital gains tax, since the trust is exempt from income tax. Additionally, you will receive a partial tax deduction for contributing the assets into the trust, based upon the future remaining value of the investment.

    Annual distributions to you will be taxable. The amount and character of the taxable income will depend on the annual income generated by the trust and any accumulated income in the trust. The benefit of avoiding the capital gain upon transferring the assets into the trust is that it provides for a larger investment pool than if the gain were incurred by you personally and the net after-tax proceeds invested. CRTs are irrevocable and, as such, the assets of the trust are excluded from your estate.

  1. Charitable Lead Trusts (CLT). Also an irrevocable trust, a CLT provides a stream of revenue to a charity of your choosing for your lifetime or a designated number of years. Here, too, that revenue stream can either be in the form of a predetermined fixed annuity via a charitable lead annuity trust (CLAT), or an annually calculated percentage of the trust assets via a charitable lead unitrust (CLUT). Upon your passing, or the expiration of the term, the remaining trust principal is returned to you or your designated beneficiaries.

    How the trust is structured determines the taxation of the annual income and charitable deduction. The trust can be structured as a grantor trust or a non-grantor trust. As a grantor trust, you would be taxed annually on the income generated by the trust including the income paid to the charity. Upon the initial transfer of the assets to the trust, the grantor would receive a charitable donation for the present value of the revenue stream to be paid to the beneficiary charity. As such, there is no annual charitable deduction since that deduction was taken at the onset. Upon the termination of the trust term, the remaining assets are returned to the grantor.

    As a non-grantor trust, the trust would pay tax on the annual income generated by the investments and receive a deduction for the amounts paid to the charities. The non-grantor structure does not provide an upfront charitable income tax deduction. The CLAT does, however, provide a large gift or estate tax deduction since the transfer to the trust is a gift for gift tax purposes. The value of the gift is the present value of the remainder of the trust principal at the end of the trust term. Those remaining assets are then distributed to your family, as the remainder beneficiaries, free of gift or estate tax.

Charitable trusts can be a solid option to donate money to a charity of your choice in a tax-advantaged way. However, they can be challenging to navigate. Kreischer Miller’s Tax Strategies team can help you assess your estate planning and philanthropic goals and determine the best way to achieve your objectives.

Richard J. Nelson can be reached at Email or 215.441.4600.
Jeffrey W. Clark can be reached at Email or 215.441.4600.

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