Types of Charitable Trusts for Financial Planning - SmartAsset

Charitable lead trusts (CLTs) and charitable remainder trusts (CRTs) are two types of charitable trusts that could benefit your financial plans for your estate. They provide tax-advantaged income to you and your beneficiaries during or at the end of the term of the trusts along with allowing you to make donations to your favorite charities. These trusts help you minimize your tax liability on investment income, estate taxes and gift taxes. Trusts and estate planning can be complicated, and a financial advisor may be able to help. Try using SmartAsset’s free advisor matching tool to find advisors that serve your area.

What Is a Charitable Lead Trust (CLT)?

A CLT is used by financial planners as one type of estate planning. Your beneficiaries can receive tax-advantaged proceeds available from the trust at the end of its term. If you establish a CLT, you and possibly your family will donate assets to the trust. Then, those assets will provide an income stream to one or more charities that you, as the owner of the trust, designate. At the end of the term of the trust, typically 10 or more years, the remainder of the trust funds are distributed to either you or your beneficiaries.

CLTs are irrevocable trusts. An irrevocable trust is one that cannot be changed by the creator or owner of the trust once it is established. An irrevocable trust can help you lower estate taxes and can possibly bypass personal creditors since you no longer own the assets in the trust.

Benefits of a CLT

A CLT is a financial vehicle used to make donations to the charities of your choice and to still provide tax-free funds for beneficiaries at the end of the term of the trust. If you are the owner of the trust, and the donor, you can take an income tax deduction in the first year of the trust. The funds that are left over at the end of the term of the trust do not qualify for the annual gift tax exclusion rate.

There are other benefits to establishing a CLT. You provide a stream of income to your chosen charities while providing tax-free income to your heirs at the end of the trust. The biggest advantage of a CLT is that it can substantially reduce estate taxes. The only downside is that you will incur annual administrative fees.

Tax Implications for CLTs

The gift tax on CLTs is calculated at the beginning of the term of the trust. If the present value of the estimated remainder interest is less than the annual gift tax exemption, the lifetime value of your estate will not be impacted. The annual gift tax exemption is $16,000 in 2022 with a lifetime estate tax exemption of $12.06 million.

You may have to pay income tax on the investment income from the CLT, but your beneficiaries will not have to pay tax since it is a gift. You may be able to take a charitable deduction for the present value of the income payments to the charities you designate. Much of the benefit from a charitable lead trust is found in the tax deductions you can take.

What Is a Charitable Remainder Trust (CRT)?

A CRT is the opposite of a CLT. When the end of the term of the trust arrives, the remainder of the money in the trust belongs to the charity that you designated when you set up the trust. A CRT allows you to avoid the high capital gains tax that comes with an asset that has appreciated in value during the term of the trust since the asset is turned into cash when it is deposited into the trust. The asset is placed in the trust at the beginning of the term. During the life of the CRT, you receive either annuity payments from it or percentage payments, depending on how it is set up. The tax incentives are the reason for the CRT to be set up.

Benefits of a CRT

The benefits of a CRT are lower estate taxes and lower capital gains taxes or possibly no estate or capital gains taxes. The donor also receives continued income from the asset used to set up the trust. Another benefit is at the end of the term of the CRT. The money then goes to the charity that you designated. A CRT is also an irrevocable trust.

Tax Implications for CRTs

When you set up a CRT, you may be able to take a charitable deduction for the estimated present value of the remainder interest. If you or your spouse are beneficiaries, the CRT will not impact the lifetime value of your estate or gift tax. If neither of you is a beneficiary, you have to consider the gift tax. You must calculate the estimated present value of the income stream to the beneficiaries. They may owe gift tax. However, the investment income from a CRT is exempt from income taxes.

CRTs also reduce or eliminate estate taxes. They impact capital gains taxes since your property is turned into cash when it is deposited in the CRT. Most of the benefits of a CRT are to the beneficiaries.

Bottom Line

A charitable lead trust is designed to allow you to make tax-advantaged charitable deductions while providing for your beneficiaries at the end of the term of the trust. A charitable remainder trust allows you to donate to the charity of your choice while still receiving income from the trust that is tax advantaged.

Tips on Estate Planning

Estate planning is complicated. To be sure that you make the right decisions for your situation, it’s important to consult a financial advisor who can see the big picture regarding your financial affairs. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Life insurance is another important part of estate planning that shouldn’t be left untended to. If you’re wondering how much life insurance you need, use SmartAsset’s life insurance planning tool to help you make that decision.