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We are going to discuss below three types of Charitable Trust: Charitable Remainder Trust, Charitable Remainder Annuity Trust and Charitable Lead Trust, which were created by an Act of Congress in 1969. These Charitable Trusts can help your favorite charity and give you a tax benefit at the same time. They are considered “split interest” Trusts as the assets are split between charitable and non-charitable beneficiaries.
Charitable Trusts must have enough assets to cover expenses and be able to provide benefit for beneficiaries. For a Charitable Remainder Trust you need at least $100,000 and for a Charitable Lead Trust you need at least $250,000 to $500,000.
A Charitable Remainder Unitrust (CRUT) allows Grantor to donate appreciated assets to charity to avoid capital gains. In return, the Grantor receives annuity payments. The payment is tied to the percentage of fair market value of the donated assets. At passing, the remains of the Trust go to the charity you have set forth in the Trust. However, a Charitable Remainder Unitrust is irrevocable. The recipient must be a charity to get the tax exemption. If the market goes down, so does the payment.
A Charitable Remainder Annuity Trust (CRAT) also allows Grantor to donate appreciated assets to charity to avoid capital gains. In return, the Grantor receives fixed annuity payments. The payment is tied to a percentage of the fair market value of the donated assets at the time of the creation of the Trust. At passing, the remains of the Trust goes to charity. However, a Charitable Remainder Annuity Trust is irrevocable. The payment is not subject to change and may lose purchasing power. You also have no access to principal if you need more income in the future. This Trust requires at least $100,000. In addition, to qualify for the tax exempt status, the annuity payments must last at least 20 years or for the life of the Grantor. The non-profit charity named in the Trust must have a recognized benefit and receive at least 10% of the initial fair market value of the assets when the Trust was created.
A Charitable Lead Trust (CLT) is set up by the Grantor with assets. The charity receives earnings for a specific period of time and the Grantor gets the remaining assets at the end of that time period. This reduces the income to the Grantor and provides tax deductions. However, a Charitable Lead Trust is irrevocable. Grantor has no access to the funds and cannot change anything if Grantor needs the funds in the future. Grantor needs at least $250,000 to $500,000 to create the Trust. With the current rates for deductions ($12,000 per person and $11.2 million at the federal level) there is less incentive to utilize this type of Trust as a way to save inheritance taxes.
Charitable Trusts are complicated and should be done with legal assistance in conjunction with an accountant to ensure the Trust is prepare correctly and will yield the benefits you are seeking.