Charitable Trusts- An Effective Estate Planning and Tax Mitigation Tool
Charitable trusts are a valuable tool for charitable giving, allowing individuals to make a meaningful impact while also receiving certain tax benefits. Generally speaking, a trust is a legal arrangement in which a person (the “grantor”) transfers assets to a trustee, who manages those assets for the benefit of a third party (the “beneficiary”). Trusts can be established for a variety of purposes, including charitable giving. In a charitable trust, the assets are held and managed by the trustee, with the income or principal of the trust potentially being distributed to individual beneficiaries and charitable organizations.
One of the primary benefits of using trusts for charitable giving is the ability to receive tax benefits. Charitable trusts can be structured in a way that allows the donor to receive an income tax deduction for the value of the charitable contribution. In addition, when assets are transferred to a charitable trust, they may be removed from the donor’s estate for estate tax purposes, potentially reducing tax liability for beneficiaries and heirs.
Charitable Remainder Trusts and Charitable Lead Trusts
There are two main types of charitable trusts: charitable remainder trusts and charitable lead trusts.
A charitable remainder trust (CRT) allows the donor to receive an income stream from the trust for a specified period, with the remaining assets going to charity upon the conclusion of a fixed period of time or the donor’s death. There are two types of CRTs: charitable remainder unitrusts (CRUTs) and charitable remainder annuity trusts (CRATs). In a CRUT, the donor’s retained income stream is a fixed percentage of the trust’s assets, the value of which is calculated annually. In CRAT, the donor’s retained income stream is a fixed dollar amount, determined at the time the CRAT is established. The donor may receive an income tax deduction in the year of the gift to the CRT for the present value of the charitable remainder interest, despite the remaining assets in the CRT not being distributed to the charitable reminder beneficiary until the end of the donor’s retained income stream (which may be several years).
A charitable lead trust (CLT) is the reverse of a CRT. In a CLT, the charity receives an income stream for a specified period, with the remaining assets going to the donor or the donor’s beneficiaries upon the donor’s death. There are two types of CLTs: charitable lead annuity trusts and charitable lead unitrusts. In a lead annuity trust, the charity receives a fixed dollar amount each year. In a lead unitrust, the charity receives a fixed percentage of the trust’s assets, the value of which is calculated annually.
Both CRTs and CLTs offer the donor flexibility in terms of how the trust is structured and managed. For example, the donor can choose the length of the trust term, the charity to receive the funds, and the investments used to generate income. In addition to tax benefits, using a trust for charitable giving can also provide the donor with a sense of control over how their assets are used for charitable purposes. With a trust, the donor can ensure that their assets are used for a specific charitable purpose or to support a specific organization.
Other Means to Achieve Charitable Giving in Estate Planning
CRTs and CLTs are not the only ways to incorporate charitable giving into an estate plan. For example, a donor can establish a family foundation or donor-advised fund, which allows family members to participate in the grant-making process. This can help instill a sense of philanthropy and community involvement in future generations. Another example is naming charitable entities as specific devisees or remainder beneficiaries to a donor’s estate plan that do not take effect until the donor’s passing.
Don’t Try This At Home
Creating a charitable trust involves significant legal and financial considerations. Working with an experienced attorney and financial advisor is critical to ensuring that the trust is structured in a way that meets the donor’s goals and objectives, while also complying with legal and tax requirements.
Trusts are a powerful tool for charitable giving, potentially providing donors with flexibility, control, and tax benefits. Whether through a charitable remainder trust or a charitable lead trust, donors can make a meaningful impact on the causes they care about while also leaving a lasting legacy. However, creating a charitable trust requires careful planning and consideration, and should only be done with the guidance of experienced professionals.
Charlotte-based attorney Christian Perrin is a North Carolina Bar Board Certified Specialist in Estate Planning and Probate Law. Based in Charlotte, Christian and his team serve clients throughout North Carolina and South Carolina.
Disclaimer: This information is intended to stimulate thought and discussion and to provide readers with useful ideas in the area of estate planning. However, this information does not constitute and should not be treated as legal advice or tax advice regarding the use of any particular estate planning technique, device or suggestion. Our law firm does not assume any responsibility for any individual’s reliance on the information presented. Each reader should verify independently all statements made before applying them to a particular fact pattern and should determine independently the legal and tax and other consequences of using any particular device, technique or suggestion.