When helping clients decide on a charitable planning vehicle, their level of philanthropic interest is key to determining the best option. For those with a strong desire to give back, charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) are two attractive choices.
Charitable Remainder Trust (CRT)
A charitable remainder trust allows a donor to place property, cash or other assets into an irrevocable trust that benefits both non-charity beneficiaries and a charity. Here’s how it works:
- The trust pays income to a non-charity beneficiary (such as a family member) for a set period or for the beneficiary’s lifetime.
- Once the term ends or the beneficiary passes away, the remainder of the trust is given to a charity of the grantor’s choice.
- The grantor enjoys tax deduction benefits for contributing to the trust.
There are two types of CRTs:
- Annuity Trust: The beneficiary is paid a fixed amount or percentage (at least 5 percent) of the initial trust assets each year. No additional contributions can be made after the initial funding.
- Unitrust: The beneficiary receives a variable amount based on a percentage (at least 5 percent) of the trust’s current value each year. Additional contributions can be made after the initial donation.
Charitable Lead Trust (CLT)
In contrast to a CRT, a charitable lead trust distributes income to charities first, before the beneficiaries. Here’s how it works:
- The trust makes payments to specific charities for a set number of years.
- After the set term, the remaining assets are passed on to non-charity beneficiaries.
- Payments can be structured similarly to CRTs—through an annuity trust or a unitrust—but there is no minimum 5 percent requirement.
Key Differences and Considerations
- CRTs are more common and appeal to individuals who want to provide for family or other beneficiaries first while leaving a lasting gift to charity later.
- CLTs are ideal for those who want to prioritize charitable giving upfront while still providing for beneficiaries in the future.
- Both options come with tax incentives, making them excellent choices for highly philanthropic individuals.
Ultimately, the decision between a CRT and a CLT comes down to personal preference and how the client wants to balance charitable giving with support for their beneficiaries.
For more guidance on incorporating charitable trusts into your estate plan, contact Deka Law Group at info@dekalaw.com or call 626.765.6272.
