If you are fortunate enough to have significant assets that you would like to use to benefit a favorite charity, you may be considering establishing a trust for that purpose. It's likely that you also want to benefit yourself or your loved ones. With a charitable lead trust or a charitable remainder trust, you can do both.
What are the differences between the two types of trusts? Is one better than the other? Depending on your needs and estate planning goals, one type of charitable trust might be preferable. Let's take a look at the mechanics of charitable lead trusts and charitable remainder trusts, and their respective advantages and disadvantages.
Charitable lead trusts (CLT) and charitable remainder trusts (CRT) both involve a valuable asset or assets being placed in trust, with an income stream going to one or more parties during the existence of the trust, and the assets remaining in the trust being distributed to one or more parties at the end of the trust's term. The trust's term, of course, is established by you and your estate planning attorney when creating the trust document that governs the trust.
With a charitable lead trust, the charity gets the first slice of pie, so to speak: the "lead" interest. At the end of the trust's term, remaining assets are distributed to the creator of the trust (grantor trust) or to other selected beneficiaries (non-grantor trust).
With a charitable remainder trust, income from the trust is paid to the grantor or other beneficiaries until the trust terminates, which may be after a specified term of years (but no more than 20) or after one or more lifetimes. When the trust ends, the assets remaining in the trust (the "remainder") are distributed to the charity or charities provided for in the trust document.
Both CLTs and CRTs may be either annuity trusts or unitrusts. With an annuity trust, a fixed amount (chosen by the grantor when they create the trust) is paid to the income beneficiary each year. With a unitrust, the annual payment is variable depending on the value of the assets in the trust.
A charitable lead trust offers many benefits, but it is not for everyone. One benefit of a CLT is that appreciation of trust assets will not be subject to estate tax or gift tax when those assets are distributed to trust beneficiaries at the conclusion of the charity's interest. The grantor's estate can also take deductions from federal estate and gift tax in the amount of the total of payments the charity received. If the trust is a non-grantor trust, there may also be income tax deductions available. A CLT may be a good option for assets that produce significant income on an ongoing basis.
Furthermore, for donors who prefer not to be burdened with managing trust assets, a management company can usually oversee and administer the trust. Larger charities may have their own management teams for this purpose.
One of the reasons CLTs are not for everyone is that they are irrevocable trusts, meaning that once assets are placed in the trust, they cannot be removed by the grantor. Thus, the grantor must be certain they can afford to give up ownership of the asset. Also, assets transferred to beneficiaries when the charity's interest ends are taxable as gifts. In addition, if the value of assets in the trust decreases during the charity's term, the beneficiaries may not receive as much as the grantor intended.
Like CLTs, CRTs are irrevocable. A charitable remainder trust may be a good choice for an asset, such as stocks, or a farm or other real estate, that has appreciated significantly but provide little income. If you were to sell those assets while they were in your name, you would be hit with federal and state capital gains taxes. If you were to hang onto the assets until death, they would increase your taxable estate for estate tax purposes. Donating the assets would avoid these outcomes, but deprive you of income from the assets as well.
The solution may be to place the assets into a CRT. The CRT, having favorable tax status, can sell the asset without paying tax. It can then pay you or your chosen beneficiaries an income stream ranging from 5% up to 50% of the value of the assets in the trust. At the end of the trust term, your chosen charity receives the remaining assets in the trust.
Depending on your circumstances and needs, you may benefit most from a charitable lead annuity trust, a charitable lead unitrust, a charitable remainder annuity trust, or a charitable remainder unitrust. Because all of these trusts are irrevocable, it's essential to work with an experienced estate planning attorney who has extensive background in planned giving and estate planning for significant and complex assets before committing your assets to a charitable trust.
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