What Is a Charitable Trust?

What is a charitable trust? Maybe you’ve heard of them but don’t know what they do. Or maybe you’ve never heard of them, but you want to learn more. Regardless of which side of the aisle you’re on, you’re in the right place to have those questions answered. A charitable trust is a valuable estate planning tool that allows donors to support one or more philanthropic organizations while benefiting from tax advantages. The assets within the trust are held and managed by a charity. There are two types of charitable trusts that you should know about.

Charitable Remainder Trust

With a charitable remainder trust (CRT), an organization receives assets for a specific period of time. This can last anywhere from a few years to beyond the donor’s death. The charity receives all of the assets within the trust as well as any interest or profits that have been generated.

“The CRT is best used when the owner has appreciated property.”

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Bob Carlson, Retirement Watch

Because the remainder of the trust goes to the charity, the owner receives a charitable contribution deduction based on the property’s fair market value. The deduction becomes higher the older the donor gets. A CRT also allows the donor to sell assets without incurring a capital gain. There are two subtypes of charitable remainder trust. These include:

• Charitable Remainder Annuity Trust (CRAT): Pays a fixed annuity amount to the beneficiary each year
• Charitable Remainder Unitrust (CRUT): Pays the beneficiary a fixed percentage of the trust assets each year.

Charitable Lead Trusts

In practice, charitable lead trusts (CLT) are fairly similar to CRTs. Like CRTs, charitable lead trusts are established for a specified period (usually 10-20 years), and the charities named within the trust receive interest payments from the principal annually.

With a charitable lead trust, the donor never fully relinquishes control over their assets. They also maintain the right to manage their assets throughout the duration of the trust. At the end of the specified period of time, the assets within the trust no longer go to the charity, but to the beneficiaries of the grantor’s choosing. Like with the CRT, there are two subtypes of charitable lead trust:

• Charitable Lead Annuity Trust (CLAT): Pays a fixed annuity amount to the charity each year.
• Charitable Lead Unitrust (CLUT): Pays the charity a fixed percentage of the trust assets each year.

Additional structure options include:

• Donor-Advised Fund: Allows you to donate and then recommend grants to charities you choose over time.
• Community Foundation: Serves a specific geographic area and supports a variety of philanthropic causes.
• Private Foundation: Typically funded with a large donation and managed by a board of directors.

How Do Charitable Trusts Work?

To understand a charitable trust, you must first understand the three primary roles. The donor is the individual who establishes and funds the trust. The trustee (typically a financial or legal professional) is the independent third party appointed to manage the trust. The beneficiary is the charity or charities who benefit from the assets in the trust.

Here’s a quick rundown of how both trust types work:

How a charitable remainder trust works

In a CTR:

• The donor transfers cash, securities, or other assets to the trust.
• The trust pays income to at least ONE living beneficiary.
• These payments continue for a specific term, usually up to 20 years or the life of one or more of the beneficiaries.
• At the end of the payment term, the remaining assets in the trust are donated to one or more qualified charities. The amount donated to charity must be at least 10% of the trust’s initial value.

Note: Charitable remainder trusts are irrevocable. This means that once they’re established, they can’t be changed or terminated without the permission of the designated charitable beneficiaries.

How a charitable lead trust works

In a CLT:

• Payments are donated from the trust to a charity for a set amount of time, which could be a specific number of years or the life span of one or more people.
• After that period expires, the remainder of the trust is paid to the noncharitable beneficiary. This could be the original fund donor or someone else, often a family member.

Note: CLTs can be structured as either “reversionary” or “non-reversionary.” Reversionary is when funds are reverted to the person who set up the trust (the donor). Non-reversionary is when the balance of the trust goes to someone other than the donor.

Is a Charitable Trust Right For Me?

Charitable trusts are for the financially wise. They are best utilized by investors who can afford to give back and gamble some money at the same time. They’re great for wanting to support a specific cause. Make sure you consult with an experienced financial advisor or estate planning attorney before establishing a charitable trust. They can help you determine if one is right for you and your situation.

Here are some questions you might want to ask yourself when considering this type of trust.

Do you…

• Have significant assets with high capital gains potential that could benefit from tax-free selling within a trust? 
• Want to minimize estate taxes on your assets?
• Want to support specific charities with ongoing donations over time? 
• Require a consistent income stream from the trust during your lifetime? 

If you’ve answered “yes” to any of those questions, a charitable trust could be right for you! Make sure you understand the tax implications, disadvantages, and benefits before you sign any documents. Charitable trusts can be a powerful tool in estate planning—but they’re not right for every individual and their situation!

Click here to learn about estate planning.

Photos: CatLane, Getty Images | Shutterstock

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